The Bankwatch

Tracking the consumer evolution of financial services

Social lending goes red hot, as FaceBook enters the space with “LendingClub”

After last weeks entre into the space by Virgin, now FaceBook get into the game.

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Hat tip – Wiseclerk

What’s this all about?

By working together, Lending Club members can borrow money at a better rate than they could from a bank, or invest in a pool of loans that carry higher rates than savings accounts. Loans have a 3-year duration.

It seems to operate on a similar method to Zopa, where the risk assessment is taken on by LendingClub.

How It Works

It’s simple. Borrowers apply online and get instant qualification. Their loan applications get listed and selected by lenders. When a loan is fully funded, Lending Club transmits the funds electronically from the lender to the borrower, then withdraws payments back from the borrower every month. Lenders receive loan “portfolio” recommendations based on their preferences, including credit profiles and affinities. Learn more.

The operation does not mention auction anywhere. It seems to operate more like Zopa, in that lenders seek out borrowing classes, or ‘LendingClub Portfolio’s”, A through F. Each portfolio is predicated on borrowers credit risk.

The timing of this announcement today, appears to be to co-oincide with the announcement yesterday of he F8 Facebook application platform. I note the URL reads apps.f8.facebook.com, before you are sent to secure.lendingclub.com.

VentureBeat report on the funding of $2M from angels.

But Lending Club is the first of its kind to integrate its services into a social network.

The social networking angle allows Lending Club to leverage trust. Though not a social network, CircleLending, which Virgin USA just bought, nevertheless positions itself as an intermediary for loans between relatives and friends. Both Zopa, based in the UK, and Prosper, of San Francisco, facilitate loans between complete strangers. Lending Club sits somewhere in between: According to CEO Renaud Laplanche, the goal is not to get friends to lend to friends, but to use the Facebook platform to enable lenders to find borrowers within shared networks, like groups or schools.

The difference between LendingClub and the others in the space, is the integration with FaceBook. This will provide FaceBook greater traction, and monetisation potential.

Then the Facebook platform gives Lending Club a boost: Lending Club uses what it calls “LendingMatch” technology to pair the two parties based on shared connections it finds. While it currently only uses criteria like shared schools or groups or geography, Lending Club plans eventually to link people through friends of friends. It does this without giving lenders direct access to borrowers’ Facebook profiles.

The owners are industry types:

The company has 18 employees, including former executives from Mastercard, Wells Fargo, and eBay. The sources of the angel funding are undisclosed.

It remains unclear to me, the independence or dependence between LendingClub and FaceBook. For example is it exclusive, or can LendingClub make other arrangments outside FaceBook. Are Facebook the Angel investors? Lots of questions, but fascinating to follow.

While different financial operations are appearing, they are narrowing into two distinct sets of attributes. On the one hand, Zopa, and LendingClub are closer to Banks, taking on the borrower risk assessment, bundling them into “risk classes”, and offerring these as investment to their lenders.

The other model, which I will term “social based”, indicated for example by Prosper, Boober, and CommunityLend [disclosure: I am advising on this Canadian entre]. This model allows the lenders to determine their lending approach, and is more personal, and socially oriented.

The degrees of social integration vary, but thats their basic model. Then there are other variants such as CircleLending whose focus is on family and freinds, although their basic model is in the second, social, category.

What is interesting about LendingClub is the apparent integration of the two approaches, although they are closest to the “risk class” approach, because the borrowers personal information is kept private.

Relevance to Bankwatch:

The almost concurrent announcements from Virgin, and FaceBook take Social Lending closer to mainstream. I will say again, that is not a question of Banks being worried about their future so much, as they need to be acutely aware of this space, and getting involved in some types of online social activity, even if its just a blog for now.

Credit Unions continue to lead in that charge, and I would predict one of the next big announcements will be a Credit Union becoming some involved in the space.

Written by Colin Henderson

May 25, 2007 at 10:24

Posted in Social Lending

14 Responses

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  1. […] up on my earlier post regarding the LendingClub launch read Colin Henderson's view on this. Furthermore in this blog it says (without giving sources): For the moment, the site […]

  2. Great article, it is great the the model is getting more and more recognition. It may actually eventually put pressure on banks to narrow spreads. I will definitely try this out and hope that it can be used outside of Facebook

    Kirill Dmitriev

    May 25, 2007 at 12:01

  3. In fact, Zopa have had a presence on Ecademy.com – the social network for business people for a few weeks now.

    They’ve set up a Social Lending Club where they can interact and engage with people within an online business network and hopefully attract new lenders and borrowers.

    Nevertheless – LendingClub and Zopa’s foray into social networks is highly significant in the personal finance space and the start of an exiting new distribution route.

    Financial Advisers/IFAs are also using the Ecademy social network to engage with potential clients and professional introducers – see http://www.ecademy.com/club/IFALIFE.

    Philip Calvert
    Author, Speaker, Internet marketing and Social Media Expert

    Philip Calvert

    May 25, 2007 at 12:02

  4. Thanks for the coverage of Lending Club! Great post you made, and to learn more, please go ahead and add the Lending Club to your Facebook profile.

    Also please continue to check back to the blog.

    Rex

    Rex Dixon

    May 25, 2007 at 12:24

  5. […] Which banks understand the web lifestyle? ← Social lending goes red hot, as FaceBook enters the space with “LendingClub” […]

  6. Great post Colin!
    I think Facebook really has the potential to sweep up the college and young adult social lending market for those lucky kids that have enough money to save, but not really enough to invest. They can also penetrate the market to those that don’t mind the risk of social lending, but haven’t heard of Zopa or Prosper.
    My real question is…when will banks start implementing social lending within the bank’s internet banking products and try to make money off these ‘alternative’ investments? This way the bank doesn’t have to lower their spreads on traditional loans, but still make money on the fees they could charge as a social lender.

    Heath Stanley

    May 25, 2007 at 14:15

  7. Why can’t/don’t the banks get in on peer to peer/social lending? I suspect they will wait and see if or when this causes any significant dent in their existing lending business model (I have no idea of p2p lending’s size). However, you have to think that they are in an amazing position given their client base and business to offer such a product if the need arises.

    Consider the classic second mortgage. Why can’t my bank facilitate the loan from the little old lady (how’s that for a stereotype!) who is also their client instead of me going through the mortgage broker or another third party? The bank processes the forwarding of funds and payments (easy because we are both clients) and acts as a trusted third party. They make fee income instead of interest income on a loan they don’t want to advance anyway. Why not allow clients to lend money directly to each other, and they simply provide the back end processing and movement of funds? They could do this for loans they don’t want to make themselves, e.g. allow clients to advertise their lending needs on a bank p2p website.

    I suppose one risk is that if someone defaults on payment, the lender may hold the bank morally accountable even though they should know the loan is p2p.

    John Januszczak

    May 29, 2007 at 11:47

  8. […] We’ll have much more on it later, but if you are curious now, login to Facebook and check out Lending Club (the easiest way is to login via the link at the top of the Lending Club homepage). Or read Colin Henderson’s great analysis here. […]

  9. While I don’t typically think of banks as innovators Bank of America has done some interesting things over the last five years (first major w/ free checking, ‘keep the change’ program, integrated online banking and brokerage) but I think this space is too new and has too many perception risks associated with it currently to be attractive to the banks. I think a lot of the people active on these sites are purposefully avoiding banks because of past experiences or distrust of major financial institutions and it would be tough to pull them away from their new-found financial communities. Been blogging about these p2p lending companies and their relationship to microfinance at http://www.bankerinindia.typepad.com

    Mark

    June 5, 2007 at 00:00

  10. Mark, Thanks for stopping by … I agree about distrust in companies, as one driver of the P2P movement.

    Colin

    June 5, 2007 at 07:28

  11. […] based on a similar business model and has an application on Facebook, making both of these tools a speedy and viral method for funding.  Another website based on this model, Zopa, lacks an application on […]

  12. Thanks boys8b0143fb64c41e89e204b7c458756922

    Hello people

    January 31, 2008 at 08:20

  13. Hi. My name is Maureen and I live Toronto, Canada. I am very interested in finding out how I can get connected in the Social Lending Club. I would love to be a part of a group that truly believes in helping each other in financial situations!!!!! Banks, etc are very unforgiving and never give people a second chance.

    Please get back to me ASAP.

    Thanks!!!

    Paulettte

    MAUREEN

    December 30, 2008 at 19:16

  14. @Maureen … there is only one such company in Canada, and it is undergoing qualification and regulatory approvals. For updates you can sign up at communitylend.com – incidentally I am involved in that company.

    Colin

    Colin

    December 30, 2008 at 23:19


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