Can Peer-To-Peer Finance Work?

Dotnaught writes "Two companies, Prosper and Zopa, appear to be convinced that social networking can be combined with borrowing and lending. They're intent on using eBay as a model for listing and bidding on loans without the involvement of a bank. Call it peer-to-peer finance. There are already some 800 groups on Prosper ready to loan money to specific causes, such as the Apple User Group, 'a lending group for those wishing to purchase either a Macintosh or Apple iPod.'"

Comments

Existing Finance

[foundme]

I can't imagine how this is able to compete with existing financial providers.

First of all, how many bad debts can these peers handle? Large corporations have enough cash to handle bad or delayed debts.

Unlike other successful P2P services, this model is entering a market where existing businesses are making a living out of it.

Re:Existing Finance

[rvw14]

Peer to Peer financing has been around for decades. It is called a Credit Union.

Re:Existing Finance

[Damathon]

These businesses may be entering a market that's already full of competition but I think the main idea is that regular people can loan small amounts of money, together effectively becoming as large a business as the existing businesses -- although the profits may be smaller, people aren't doing it for a living. Each person is giving a little, but they can effectively compete with large companies. (And losing $100 or so won't hurt the types of people who will invest money into P2P loans).

Although it might not be as large a benefit to investors, it could increase competition in an already competitive market and help borrowers to secure better loan terms. Hopefully, this could also help out people with poor credit ratings as there are more potential businesses to loan them money.

Re:Existing Finance

[DragonWriter]

I can't imagine how this is able to compete with existing financial providers.

If you aren't completely risk-intolerant, it looks far better a place to put money than a bank for a small investor.

For a borrower, I don't see much advantage, though the terms may be slightly better. I think the lenders are what will drive its success, since having the money to lend will, itself, make it attractive to borrowers.

First of all, how many bad debts can these peers handle?

Zopa lets you limit your exposure to any given borrower to as little as 10 pounds, Prosper does something similar with a a minimum of US$50. Automated aggregation allows spreading the risk.

Unlike other successful P2P services, this model is entering a market where existing businesses are making a living out of it.

Successful P2P services have done that, too. "Buying and selling goods" is, after all, something business were making a living at (even using auction models) long before eBay.

In a sense this is an eBay system for buying and selling money, which actually can work far better since its a uniform, fungible commodity that allows spreading the risk. (Its a little bit different, since the auction service here also covers fulfillment, which isn't necessarily the case with eBay, but that's better for users, since it offloads much of the risk of dealing with a difficult person at the other end.)

If only you can book those loans as revenue...

[Anonymous Coward]

that's how Enron worked.

• CEO makes new subsidiary -
• parent and subsidiary loan each other a couple billion - book them as revenue
• profit
• go to jail

Welcome Back

[Camel Racer]

With this announcement, we are now officially in an economic bubble.

credit checks?

[chicken_tonight]

Unless there are credit checks people will use this borrow money when they're desperate. Sounds like a recipe for disaster to me.

Re:credit checks?

[BridgeBum]

I can't speak for Zopa, but I've been looking into Prosper. It's quite interesting actually.

There are indeed credit checks. Users have their credit scores checked, and their 'ebay applications' show their rating, broken down into AA, A, B, C, etc. Users also attach checking/savings account when they create their accounts, and monthly collections are automatic. Obviously that doesn't preclude the possibility of defaulting on the loans, but it helps.

Also, there are affiliated collection agencies for defaulted loans. Just as banks outsource collections to agencies, so can you. I've actually recently signed up as a lender, and will be trying things out with a small amount of money in the next week or so.

Similar to Angel investors vs VCs

[Anonymous Coward]

There are plenty of rich guys willing to study "small" deals that existing financial providers won't deal with.
Two obvious examples are

• Angel Investors that fund many companies that VCs and Investment Banks don't. They make their money because they're willing to study complex opportunities that may be close to their area of expertise, and
• the other obvious example is the mob, who gets higher interest rates and can afford to take on riskier loans because they have a more effective collection agency.
  

And it's hard to underestimate the stupidity of some lenders. I imagine there are plenty of people with a lot of money who will seriously consider lending to a high-school kid to get an XBox in the same way that they consider lending to former Nigerian Royalty to help them get millions out of there.

Re:I wouldn't want

[foundme]

I think this P2P Finance will only work if P2P Muscle is also implemented at the same time.

Imagine if you can log on to BeatTorrent, hook up with a few peers living near your debtor, and get them to show your debtor some muscles.

End-run around anti-discrimination statutes

[Ph33r th3 g(O)at]

Check out the loan requests at prosper.com -- lots of them include the borrower's age, ethnicity, gender, etc. either outright stated or inferable from the accompanying photographs. While Prosper as the lender of record only provides a credit grade based on an objective score from an Equifax report, the individual lenders are no doubt going to make (or not make) loans according to their own personal prejudices. The very fact that this information is available to prospective "loan buyers" (who are the actual lenders in all but name) will very quickly attract the attention of regulators.

Re:Adverse Selection

[Ph33r th3 g(O)at]

The fine print on those credit card offers allows the lender to change the terms for various reasons:

• you're late on a payment with a different lender
• your credit score decreases even if you've made no late payments
• you look at funny
• they just feel like it

So while prosper.com is devoid of teaser rates, I can see why someone with good credit would choose a fixed-rate, fixed-term installment loan from there over a teaser 0% offer that could become 30+% for the cost of a lost piece of mail or one two many credit pulls when shopping for a car loan.

Clueless about what drives p2p

[redelm]

P2P financing is called "disintermediation" and actually has been going on in the finance world for 20+ years as borrowers approach lenders directly, rather than through banks. The commercial paper market. There are problems, mostly around collections and default. Not economically solvable for small loans.

But the very idea ignores what drives P2P: very low costs to the provider of service. Lending money is nothing of the kind -- there's a big default risk. You'd find P2P s3x to be easier!

Re:Okay... right

[DragonWriter]

Initially, I thought "not very", but reading through Prospers agreements (Zopa is based in the UK where my limited knowledge of law is even less applicable), I think its probably competently set up. You aren't legally lending money to the borrowers, you are agreeing to purchase loans Prosper makes, and then having Prosper continue to do the work involved in getting payment, which offloads a lot of the compliance burden, as I understand it, to them. I can't say its for-sure legal, but it passes the sniff test.

Re:Amazing!

[AuMatar]

To be honest, I know well I can trust the main banks

Study history. The ONLY reason you can ay that is because of regulations. Look back at the 30s- respected banks went out of buisness as much as anyone else.

I'm not competent to tell what banks are trustworthy. I'm not competent to tell what food won't give me botulism. I'm not competent to tell what products will do what they're supposed to and what won't. I'm not competent to understand cutting edge medicine. I may be able to pick up 1 of these, but there's a limited number of hours in the day- I need to keep up on my primary profession as well. And I'm at the high end of the intelligence curve, I'm far more capable than the average person. The average man would be completely and utterly fucked.

The government regulations are the only thing that enables me to go down to the store and have faith in my purchases. Without that, the economy falls apart. Government regulations are a good thing. Regulations on banks are a damn good thing, they ensure my life savings are safe. There's a reason why prior to regulation most people kept their money under their mattress or someplace similar- they couldn't trust banks. The world is a better place for these changes.