Peer to Peer Lending

After reading Malcolm Gladwell's book a few years ago I keep seeing 'tipping points' where before I just saw coincidence.

The last few weeks have brought me in touch with more than a half dozen people asking about or doing something with peer-to-peer lending networks.

The concept of a "peer-to-peer-network" is simple. I have a similar position to you on the network (typically Internet-based) and we can both be participants or collaborators but no one up above has complete control over the network or our actions, we each participate as we choose, and generally the more people that participate, the more valuable each person's experience becomes. In peer to peer networks, the original ones music file sharing sites like Napster, there is generally significant value added through scale.

Peer to peer lending should work on similar grounds. Someone at one end is lending, and someone at the other is borrowing. Both are supposed to get some benefit from the network. But do the other rules of peer to peer networks apply here in peer to peer microfinance? If more and more people participate on the network does that change the value proposition for the individual user at either end if each loan is from one person to another single person?

A Bay Area-based organization called Kiva, which means "Agreement" in Swahili has in recent weeks captured significant attention from my friends and colleagues who are getting interested in microfinance back in the States. While I have some concerns about Kiva's model, specifically its approach to scalability and its flexibility to navigate complex regulatory regimes (like India's), the organization has clearly proven itself a pioneer in building the case that there does exist significant demand for peer to peer lending from developed countries to developing ones, or from individually capital-rich lenders to personal borrowers in need of capital. But are these models ones with long-term sustainability and the potential for-profits? (Kiva is avowedly a non-profit organization).

Several other organizations are doing different types of peer to peer lending, a few sites below...
Would love to hear comments here, especially if people have prior experience or opinions on any of these names:

Prosper - Investee of the Omidyar Network (ON), American people-to-people lending marketplace, often used by people trying to consolidate credit card debt or find cheaper capital for entrepreneurship.

Circle Lending - Another investee of ON, focused on helping people manage personal friends and family lending.

Zopa - Similar to Prosper, a British attempt to lower the cost of consumer borrowing but cutting out banks.

MicroPlace - A wholly-owned subsidiary of E-Bay, a start up looking to mobilize capital from individuals and aggregate it for use in targeted debt placements with Microfinance institutions around the world.

Which model seems the most compelling from a business point of view?
More philosophically, should peer to peer lending (particularly to microfinance clients) be done with some profit margin to make the activity more sustainable?

Comments

[Shripriya]

I am reasonably familiar with many of these models (esp. Kiva and eBay for obvious reasons).

Here's what I will say - finding lenders is the hardest part of this. It is customer acquisition on the internet and that is expensive.

That said, I think that the non-profit models (i.e. where the end goal is to give to a charitable cost at low/no interest) work better b/c people want to feel like they are doing good. I don't care about interest rates, but my Kiva loans are being repaid on time and I love the fact that a couple of entrepreneurs have built businesses based on that loan. The money is going to stay in the Kiva system and get recycled to help more entrepreneurs. How cool.

Now, this does not mean that the companies shouldn't be "sustainable". The goal of the giving can be non-profit but the organization enabling the giving (say Kiva) should be sustainable so that the risk that they disappear does not exist.

The issue I struggle with with Zopa and Prosper (both of whom I've dug into a little), is that - who are the people in the world who will spend a lot of time to give out these loans to make just a little bit more than what they could get with a CD? Who has the cash and the time to make it worth their while and is that market big enough? Not sure it is.

Anyway, late here - but wanted to start the conversation... let me know your thoughts.

I'm glad you posted on this. More publicity for Kiva is always a good thing :)

[Mark Straub]

Shripriya,

Thanks for your comment, i think you present a side I hadn't looked at much before, which is what helps you raise capital? Kiva has certainly approached that by being focused on providing a different type of return.

Instead of thinking about what drives people to lend (the stories, the journals, etc.) which Kiva provides lenders as a form of social return, I have often been more focused on the perspective of the MFI.

Linking individual lenders to individual borrowers, and/or gathering the stories of individual lenders would seem expensive and time-consuming for groups whose specialty is credit scoring, and cash/check distribution and collection, rather than personal publishing. But i understand that if the capital is coming at a lower than market rate, these side activities associated with generating a "social return" for the investor are, in fact, part of the cost of funds.

Not sure how specifics of Kiva's model work on the ground, how time and costs are borne "in-country," would love to learn more.

Will continue our correspondance -

Best,
Mark

[Paul]

Shripriva touches on what I believe will be a significant hurdle for each of these organizations, supply (i.e. sufficient volume of lenders). First, I question whether these investment vehicles will actually generate superior risk adjusted returns for investors, particularly as they scale and bring in more borrowers at the margin. (Part of the premise behind Zopa/Prosper is that the Internet removes transaction costs and overhead associated with traditional banks and thus connects lenders and borrowers more efficiently. Perhaps, but banks, though far from perfect, have enormous asset bases, low cost of capital, and a well-refined model for disbursing loans...particularly in developed countries. Improving on this model at scale is no small challenge.)

However, assume for a moment that Zopa/ Prosper, etc., actually deliver slightly superior returns. I still think that most people with capital to invest will discover that the time intensive process of selecting borrowers, doling out many loans of relatively small denominations, and monitoring these loans over time will outweigh the incremental financial return. I can't imagine that most investors with $20K, $50K or $100K to invest in this asset class will decide that a few extra basis points merits the non-trival burden of essentially serving as a loan officer. (Zopa's model of aggregating borrowers into buckets seems more scalable on this count than the pure person-to-person approach of Prosper). Sure, some lenders may just invest a few thousand dollars, but for Zopa/Prosper to scale and become profitable themselves, it is much more cost efficient to acquire lenders who will invest much more. This is not to say that there isn't a place for Zopa and Propser. I just believe that the driving motivation for most lenders over time will be philanthropy. In that regard, Zopa and Propser may actually serve a great role - shift charitable dollars from less efficient, aid-based channels with high overhead to a more efficient channel that directly funds entrepreneurship and business creation. (Though a significant number of loans are taken out for consumer purchases/debt).

Lastly, I'm not sure it matters whether the organization connecting lenders and borrowers is for-profit or not, I would guess the same dynamic applies.

[Shripriya]

Paul, I completely agree with your point re: cost of management. Those people who care about a basis point are probably not the same people who have a ton of money to invest. Exactly!! And when you adjust for risk, those basis points are gone almost immediately.

[shivp]

Like there are different institutional players in the microfinance industry with different financial goals(from Sequoia to Gates foundation), there can be different individuals with different financial expectations. Kiva model caters to one set of lenders. I think there is scope for more models in this field.

Kiva is an innovative model indeed. However, the innovativeness of Kiva stops with Kiva itself. The lynchpin is the field partner and everything depends on how that organization is using the funds and more importantly how much final interest it charges (based on cost of transaction) etc. I think Kiva doesn't have much say in that currently. COO of a MFI told me that giving loan is the easy part now (because of so much new capital available) but giving it cheaply is the crux! I think there is scope for more innovation here.

[Ole Dahl Rasmussen]

Thanks for an interesting discussion. As for the last part, I agree that there is a role for other financing models in microfinance, based on the peer-to-peer model. One role could be to raise commercial funding for the small and medium-sized MFIs who currently lack access to funding. I have sketched some ideas at the BidNetwork and am very interested in hearing your comments: http://www.bidnetwork.org/artefact-47835-en.html

Regards,
Ole

[P2P-Banking.com]

See
http://www.wiseclerk.com/group-news/services/globefunder-globefunder-announces-launch-of-peer-to-peer-lending-in-india/

for claimed first launch of peer to peer lending service in India