Banking without the banks

Peer-to-peer personal loans are now available online through companies from Virgin to Facebook

By Simon van Wyk

With the growth of person-to-person loans and sophisticated online verification and credit checking, peer-to-peer lending is venturing beyond the realm of families, friends and acquaintances to online, bank-free lending and borrowing between strangers.

According to the US Online Banking Report, about million in new person-to-person loans will be issued this year, increasing to as much as billion in 2010.

Of course, people have been borrowing money from each other for generations. Families, friends and neighbours lend among themselves, and, because of their close relationships, trust is not an issue. Now, the emergence of peer-to-peer lending sites means there’s an infrastructure to go with it.

It’s easy to understand why consumers are flocking to peer-to-peer lending sites like Zopa and Prosper and their increasing number of clones.

People are always looking for lower loan interest rates, and the ability to sidestep the banks to achieve their goals is naturally compelling. At the same time, more and more people are moving nominal savings out of low yielding savings accounts and into the person-to-person online market to achieve significantly higher returns. 

Also playing a hand in the person-to-person lending revolution is the fact that young people love social networking. For them, the idea of organised lending through such sites sits very comfortably.

Prosper has something like 330,000 users and has funded $70 million in loans. Meanwhile, Zopa claims to have 150,000 members. They further claim that by bypassing the banks they can offer competitive borrowing and lending rates, with lenders looking at returns of up to 14 per cent and borrowers accessing loans with interest rates as low as 6 per cent.

It’s no surprise then that some real financial muscle has entered the game. In May, Virgin USA, Sir Richard Branson's North American investment group, purchased a majority stake in another peer-to-peer lending company, CircleLending, which has been around since 2001.  

Frances Farrow, CEO of Virgin USA, says, "Financial consumers are increasingly self-directed, empowered and seeking the kinds of innovative alternatives offered by CircleLending. We're delighted that our investment will form the foundation for a major new Virgin-branded financial services offering in the US" 

"Our investment in CircleLending is consistent with Virgin's focus on developing fresh approaches to consumer issues and challenging the status quo."

 Also making news in May was Facebook, the online social network that is rapidly becoming as popular as MySpace, launching its person-to-person lending service through Lending Club. With a view to making peer-to-peer lending more mainstream, Lending Club on Facebook has issued more than ,000 in loans since its launch. The company generates revenue by collecting a one-time processing fee of 0.75 to 2 per cent of the loan amount from borrowers and a processing fee of 1 per cent of the installment amounts from lenders.

Across the globe, seeing the potential size of this market, other players are entering the online peer-to-peer lending space. Earlier this year, Dutch-based Boober.nl launched, promising “no banks, better deals”. It has already made quite an impact, funding loans totalling almost €1 million.

Guus Drijver, Boober's founder, is very forthcoming as to why Boober is better for consumers than the banks. “Boober doesn't work with hidden costs and is completely transparent. We don't sponsor yacht races or soccer teams, and don't have expensive headquarters or pay thousands of people high salaries.” 

Hot on Boober’s heels, but not growing quite as fast, is Germany’s smarva.de, with about 50 loans totalling €150,000. One reason for smarva.de’s slower growth is that about 70 to 80 per cent of all borrower applications are declined because of the strict validation process, which includes calculating if a potential borrower's financial situation will allow repayment of the desired loan.

Online peer-to-peer lending also looks like it’s about to take hold in China, with PPdai about to launch there. In China, loans from family and friends are more commonplace than personal loans from banks, so the website will aim to facilitate loans between family and friends within a more formalised structure. 

Coming soon to Canada, CommunityLend will open its online community later this year, revolutionising the way lending works in the country.

Of course, all that these peer-to-peer lending sites have in common is that they service relatively small personal loans – certainly under $10,000. And with peer-to-peer companies making their money through the fees they charge, which are based on a percentage of the loan value, they are going to have to service a huge number of loans to become profitable.

That said, is it too far-fetched to see the peer-to-peer marketplace expanding and launching services for homeowners to finance purchases or refinances?

Will we see prospective homebuyers logging on to a peer-to-peer lending site to request home loans in the order of $800,000 or more, stating the interest rate that they are willing to pay?  

Maybe that’s for the future. But it’s undeniable that there is a lot happening in the online peer-to-peer lending space that may force wide reaching changes in financial services. As a first step, it will be interesting to see what develops of the Virgin USA acquisition of CircleLending. 

Simon van Wyk is founder and managing director of HotHouse Interactive ­– the company that builds businesses online.