The Bankwatch

Tracking the consumer evolution of financial services

Social Lending is maturing | web 2.0 meets reality

The recent headlines are getting much coverage in blogs and lender forums.  Words such as “troubles”, “suspend”  and “halt operations” all characterise the situation as dire for p2p lending.

Loanio suspends operations

Prosper in violation of SEC; Loanio to halt operations

I would take a different view [disclaimer;  I am active with CommunityLend, a social lending company in Canada].

Social Lending / P2P lending is a disruptive influence to traditional financial services and that is a good thing.  Disruption infrequently comes from within – existing participants within an industry have little incentive or desire to promote radical change.  Such change can only introduce new risk and different results that will cannibalize their current state, and shareholders will no likely understand that either.  The better approach is to make tweaks to the status quo.

“You never change things by fighting the existing reality.  To change something, build a new model that makes the existing model obsolete” – Buckminster Fuller.

Having said that, there is little doubt that the world of financial services requires innovation, and people are expecting that.  People (consumers)also have a certain tolerance for risk associated with their financial services.  It is their money, and while risk tolerances vary amongst people, there is a range of high and low risk acceptance that accommodates all rational people. 

Social lending was produced by the confluence of technology capability, and peoples readiness to adapt and adopt new tools.  Within the industry there has been constant debate about the degree of regulation, and even the nature of regulation that ought to apply, or not. 

If we return to the disruption theme, would a rational person expect industry disruption to include elimination of regulation that is designed to protect people and ensure the appropriate risks are identified and understood?

Web 2.0 meets reality:

Web 2.0 has had something of a free ride to date, and that has been discussed at length.  All the talk of business models and gathering eyeballs for advertising does not change the simple reality that advertising is not a business model.  A business model requires people to buy things from people who sell things. [apologies to Austin Hill who said something similar at StartupEmpire recently].

Web 2.0 tools offer ways to fundamentally shift the way things work to a different model, and financial services is a definite candidate.  There is much that could be improved about financial services, where innovation is not often seen.  Many of the other uses of Web 2.0 are informational,  recreational, or small transaction based. 

The creation of a new system for lending that empowers borrowers is a welcome thing.  The creation of a new system that offers new classes of investments is also a welcome thing.

If we did a survey of borrowers and investors, and asked them whether they would consider participating in a new service when there are no rules, fallbacks or protection of any description it is doubtful such a model would stand up to that test, and it is equally unlikely it would develop the scale or scope to be called industry disruption.

There are over 60 p2p lending companies in 18 countries around the world.  At present, to the best of my knowledge there is regulation in Australia, Canada, US and Holland.  The nature of the regulation in the first three are securities regimes.  Holland is slightly different.  As for other countries, the question has to be asked, as to whether regulators are merely waiting in the wings or have actively decided to stand back.

In any event, the course is clear for US and Canada, and while web purists will not like what they see, it is worthwhile to take a deep breath and consider the alternatives.  The degree of regulation is certainly something that can be debated, but not whether there ought to be regulation.  Disruption is a difficult thing, and does not always follow a linear path.  The key is that is continues to move forward, and as we look at LendingClub, this can and will happen.

The stage is being set for a strong and legitimate industry in Canada, and US around the concept of social lending.

UPDATE:  Techcrunch have a summary and some interesting comments.

Written by Colin Henderson

November 26, 2008 at 13:37

5 Responses

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  1. Colin,

    p2p lending as a business model despite the bad news has still great chances and opportunities – otherwise Comunitae would have not succeeded to raise 2M Euro in funding in these circumstances.

    However most services face more and higher hurdles to cross than the “average” web 2.0 startup.

    There are:
    – higher than expected defaults
    – regulation issues
    – fraud prevention
    in some cases add
    – currency exchange risk

    Yes the hurdles are high – but I think the rewards if a service sucessfully overcomes these and reaches a critical mass establishing itself as the market leader in a (national) market are too.

    And as you said, it is potentially disruptive – it might change the industry – not in 5 years, but maybe in 10-15 years.

    I wish you a successful start with Communitylend


    Claus Lehmann

    November 26, 2008 at 13:51

  2. Claus … Thanks for that.


    November 26, 2008 at 14:55

  3. I agree. Let’s remember that social lending as we know it began less than 4 years ago (hey, I was there!) , and relies on penetrating two giant markets in savings/investments and consumer credit. This is a gargantuan task, but the rewards for everyone – especially consumers – will be huge. The venture money certainly agrees that it’s a task worth taking on. That said, steadily increasing volumes means that social lending is working its way further and further into the mainstream consumer’s “consideration set”, but “maturity” is a long way off.

    Interesting that Zopa in the UK (and Italy) faces none of the issues Claus’s list, and the biggest challenge is not on it: consumer inertia.

    As the late Richard Duvall was fond of saying from time to time, “Keep going! And going. And going and going and going…”

    Simon Deane-Johns

    November 27, 2008 at 09:55

  4. You said:

    “The degree of regulation is certainly something that can be debated, but not whether there ought to be regulation.”

    I disagree.

    In the U.S. anyway, we do not need ADDITIONAL regulation. P2P lenders were already originating loans under the auspices of state lending licenses or by originating through a regulated industrial bank and then reselling the loans to investors.

    We also have truth in advertising regulations and a host of other consumer protection laws on the books.

    And we have plenty of laws on the books to protect investors from fraud and criminal wrongdoing.

    It’s ridiculous to make p2p lenders register every $50+ loan as an individual security. It’s a waste of taxpayer resources (at the SEC), not to mention how it stymies innovation.

    These P2P marketplaces are exceedingly open and self-regulating. Unlike some of the worst examples from the current financial crisis, the p2p participants know exactly what they are buying and are learning through trial and error how risky these loans can be.

    We’d be better off if the SEC resources assigned to the tiny P2P market would be reassigned to any of the multi-billion dollar black holes that have opened up on Wall St.

    Jim Bruene

    December 1, 2008 at 19:34

  5. Jim – First off I cannot believe I am on the side of the government, however ….

    RE: “And we have plenty of laws on the books to protect investors from fraud and criminal wrongdoing”

    I think we are agreeing that such laws exist for a reason. We can debate the quality of the law, and the applicability to internet situations, but I take it from your comment that we agree some protection is required so that we don’t have south sea bubble situations.


    December 1, 2008 at 22:27

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