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Archive for the ‘Social Lending’ Category

Zopa, CEO Douglas H. Dolton – SNW Interview

Interview with Doug Dolton, CEO of Zopa, the social lending company with offices in UK, US, Italy, and Japan. He has some interesting thoughts, and bullish views on the scale that social finance will achieve over time.

Social Networking Watch: Zopa, CEO Douglas H. Dolton – SNW Interview

What is your long term vision? Where could you see Zopa and the industry being in 10 years time?

I honesty think that the efficiency, convenience and trust that you get with dealing with an entity like Zopa will become more and more attractive to people. I can see this will be a multi-billion dollar business. 10 years from now or so, we’re going to have quite a bit of interactive social finance activities taking place with unsecured consumer loans and who knows beyond where that could go. Transactions involving currency exchange, transactions involved car insurance – that’s another thought, where a group of people will come together and pool their resources to provide the first tier of losses associated with car insurance and then they will buy a blanket coverage to provide a full coverage to everybody. As time goes on, we will see more and more of this democratization of finance taking place with transactions well beyond simply unsecured consumer loans.

Written by Colin Henderson

July 26, 2008 at 21:15

Posted in Social Lending

Global Financial Turmoil and the responsibility of social lending

Nice crisp explanation of the cause of the sub prime crisis by Governor Frederic S. Mishkin of the US Federal Reserve. In particular I liked this quote “a global margin call on virtually all leveraged positions”. Later on I offer an observation on how social lending has a responsibility, and a role to play in all this.

FRB: Speech–Mishkin, Global Financial Turmoil and the World Economy–July 2, 2008

The subprime crisis exposed problems with the securitization of mortgages. In particular, it became painfully clear how poor the underwriting and credit-risk analysis were for a wide range of products. Some appraisers, brokers, and investment banks were motivated by transaction fees and had little stake in the ultimate performance of the loans they helped to arrange. Many securitized products were complex, and the ownership structure of the underlying assets was opaque. Investors relied heavily on credit ratings instead of conducting due diligence themselves, and credit rating agencies failed to fulfill their raison d’etre. The result has been rising defaults, particularly in the subprime mortgage markets, with losses to both investors and financial institutions.

The ultimate losses from the recent residential mortgage-market meltdown have been estimated by Wall Street analysts at about $500 billion–less than 3 percent of the outstanding $22 trillion in U.S. equities.2 Why did a relatively small amount of losses on subprime mortgage loans lead to such broad-based financial disruption? After all, a 3 percent decline in stock market prices sometimes happens on a daily basis with hardly a ripple in the U.S. economy.

In part, the outsized impact of mortgage losses on broader financial markets probably stems from the fact that they exposed a more extensive set of problems in financial intermediation that were not limited to the original subprime loans. The liquidity shock that hit us in August has been described by one of my colleagues as a global margin call on virtually all leveraged positions.3 The liquidity shock quickly brought an end to the credit boom that preceded it, as a striking loss of confidence in credit ratings and an accompanying revaluation of risks led investors to pull back from a wide range of securities, especially structured credit products. Along the way, the inadequacies of the business models of many large financial institutions were exposed, and these models are now in the process of significant re-examination and rehabilitation.

However this statement, when the Governor spokeof the future, caught my eye. The agency problem he refers to, is the reliance on mortgage brokers, appraisers, and all catch points for mortgages. He explained earlier those agents had been motivated by mortgage volume, took their commissions, and ran. There was no incentive for those agents to offer quality, and in fact they were incented to offer volume, with poor or fictitious quality.

Although some of the most complex structured-finance products may be gone for good, securitization will only recover fully when new business models solve the agency problems that were inadequately dealt with in recent years

This highlights a market opportunity, where social lending can bring significant leverage to bear. In the speech, the Governor spoke of credit ratings failing, and he spoke there of the Moodys etc rating on the ABCP (Asset Backed Commercial Paper) market. There is another rating that becomes essential in all this, and that is the rating on the end borrower, the person who takes out the mortgage to purchase a home. The rating on that person must be complete, accurate, and transferrable. By transferrable, I mean it must be available for inspection, and due diligence up stream as the collaterisation process disseminates the mortgage into pieces that become CDO’s and other ABCP. Social Lending is not just about people lending to people. That is a great beginning, and offers the valuable inspection from the wisdom of crowds.

In the future the market may well see additional markets appear, and social lending must at a minimum outperform the old way of doing things.

Written by Colin Henderson

July 6, 2008 at 03:17

“The proceeds we receive from the sale of each series of Notes will be designated by the lender members who purchased the Notes of that series to fund an unsecured consumer loan” | Lending Club

With that lengthy statement, we now see how Lending Club intend to operate their business as defined in their SEC S-1 filing today.

Some more detail here.

sv1 Lending Club S-1 filing

The proceeds we receive from the sale of each series of Notes will be designated by the lender members who purchased the Notes of that series to fund an unsecured consumer loan originated through our platform to an individual consumer who is one of our borrower members.
… …

A series of Notes will be issued only if and when the corresponding member loan closes and is funded. A member loan will close and be funded if the borrower member loan request has received full funding commitments, or if the borrower member chooses to accept partial funding of the loan request after receiving funding commitments for the loan request.

And this taken from the description of the lending platform:

About the
Loan Platform

Through our online platform, we allow qualified borrower members
to obtain unsecured loans with lower interest rates than they
could through credit cards or traditional banks. We also provide
our lender members with the opportunity to indirectly fund
specific member loans with credit characteristics, interest
rates and other terms the lender members find attractive by
purchasing Notes that in turn are dependent for payment on the
payments we receive from those borrower member loans. As a part
of operating our lending platform, we verify the identity of
members, obtain borrower members’ credit profiles from
consumer reporting agencies such as TransUnion, Experian or
Equifax and screen borrower members for eligibility to
participate in the platform. We also service the member loans on
an ongoing basis. See “About the Loan Platform.”
The Notes. Our lender members will have the
opportunity to buy Notes issued by Lending Club. Lender members
will be able to designate the particular member loan that they
want the proceeds of each Note they purchase to be used to fund.
The holders of Notes of each series will have the right to
receive their pro rata portion of principal and interest
payments on their Note but only if, and to the extent, that we
receive loan payments on the corresponding member loan, net of
our service charge.
The Notes will be special, limited obligations of Lending Club
only and not obligations of any borrower member. The Notes are
unsecured and holders of the Notes do not have a security
interest in the corresponding member loans or the proceeds of
those corresponding member loans.
Lending Club is obligated to pay principal and interest on each
Note in a series only if and to the extent that Lending Club
receives payments from the borrower member on the corresponding
member loan funded by the proceeds of that series, and such
borrower member payments will be shared ratably among all Notes
of the series after deduction of Lending Club’s service
charge and any unsuccessful payment fees, collection fees or
payments due to Lending Club on account of the portion of the
corresponding member loan, if any, funded by Lending Club in its
capacity as a lender on the platform. If Lending Club were to
become subject to a bankruptcy or similar proceeding, the holder
of a Note may have a general unsecured claim against Lending
Club that is not limited in recovery to such borrower payments,
but, as described in more detail below, the matter is not free
from doubt. See “Risk Factors — If we were to
become subject to a bankruptcy or similar proceeding.”

In essence it appears that Lending Club make loans to borrowers. Lending Club then issues notes to investors, corresponding with the loans to borrowers. Seems simple enough. The rest of the prospectus details the risks as expected in any prospecus, and has a great amount of detail in words and tables on FICO scores, expected default rates, and other statistical data.

Written by Colin Henderson

June 20, 2008 at 20:41

Posted in Social Lending

Trust and verify | Tapscott offers radical solution for credit crisis

Don makes a terrific point here on the power of what he terms wikinomics, that comprises four principles:

  1. openness
  2. peering
  3. sharing
  4. act globally

CNW Group | DON TAPSCOTT | Troubled financial markets need to embrace Wikinomics-style transparency says Don Tapscott

“For example, investors should be able to “fly over” and “drill down” into a CDO’s underlying assets. With full data, they could readily graph the payment history, and correlate information such as employment histories, recent appreciation (or depreciation), location, neighborhood pricings, delinquency patterns, and recent neighborhood offer and sales activities. Now that AAA ratings have proved worthless, currently investors don’t have a glimmer of what they are being asked to buy. And they won’t start buying until they fully understand what they are purchasing, and that the price is fair.

There is little chance that the Banks would do this together, but what if one or two did it first. In the book, Don offers the example of Goldcorp who were having difficulty locating their next gold find, and CEO McEwan was frustrated by the ‘glacial’ progress from traditional geologists. So he took all their supporting geological data, and offierred it online, in the form of a contest.

Within weeks, they received 100’s of submissions but not jsut from geologists, but from students, mathematicians, military officers etc. The contestants identified 110 targets, 50% of which had not been previously identified. Over 80% of the targets yielded substantial gold reserves. McEwan estimates 2 – 3 years were shaved from the normal process.

The Banking system suffers the same problem as Goldcorp. Glacial movement in determining the true underlying value of ABCP supporting assets.

Tapscott offers that if the data were made available online, the data that supports the paper, then the internet community could solve the problem faster and more effectively by providing insights, solutions, early warnings, and no approaches that could never be developed by information protective bankers.

Written by Colin Henderson

June 11, 2008 at 10:59

Posted in Social Lending

Tagged with

the pinstripes are chasing the poor | TIME

Microfinance, small loans in impoverished areas is becoming business that is interesting the large Banks.

The Big Trouble In Small Loans – TIME

And he’s getting more of them, from directions he never could have anticipated. Last year the Spanish multinational BBVA raised some $300 million to invest in microfinance, then reached across the Atlantic to snap up two Peruvian firms. “Everyone wants to do this now,” says Llosa. “And it’s not only Peru. This change is everywhere. Everywhere microfinance is working, it’s happening.”

Written by Colin Henderson

June 6, 2008 at 10:22

Posted in Social Lending

When will web 2.0 meet reality?

This is an important article in todays FT, that is summarised well in this first paragraph. / Companies / Media & internet – Web 2.0 fails to produce cash

Many members of the Web 2.0 generation of internet companies have so far produced little in the way of revenue, despite bringing about some significant changes in online behaviour, according to some of the entrepreneurs and financiers behind the movement.

The idea of web 2.0 germinated shortly after the crash that happened in 1999 / 2000. Three things have happened since then, at the macro level:

  1. the rise of the social web
  2. the rise of new web based tools, and a shift away from PC based tools
  3. the rise of advertising as a model, with Google being the poster child

What is highlighted in the FT article is that web 2.0 has not produced any new business models of consequence. There has been talk to SaaS (Software as a Service) but so far just talk. It seems ludicrous to suggest that an entire economy would shift from a diversified revenue model to one of advertising, yet many web 2.0 guru’s still speak as if that day is coming. The consensus in Silicon Valley appears to be that advertsing is the only means of making money in the future.

Its time for a wake up call in terms of how web based companies and that includes Banks online, would make money in the ‘new economy’ if there is in fact such a thing. I know from personal experience with CommunityLend that building a service in that is web based, and that challenges the norms, requires to address regulatory needs for example, and it is hard work.

The article speaks about the expectation, espoused in the recent Charlene Li/ Josh Bernoff book, Groundswell, that the holy grail lies in making the connection between the social graph, and personalised advertising.

At the start of the decade, Google struggled to find a suitable way to
make money from search before alighting on the keyword advertising that
has underpinned its fortune. A similar hunt for forms of advertising
that suit the social media – where users want to engage with each
other, not corporate brands – has proved difficult. By common consent,
the key to commercial success lies in co-opting the crowd, though few
have so far succeeded.

A key hindrance to the above, is that people interact in social media because they want to not because they want to be advertised to. Back to the work at CommunityLend, making the link between social connections, and economics is complex, and introduces many nuances that have not been previously encountered. More to come on that.

Written by Colin Henderson

May 27, 2008 at 11:42

Question for Zopa | is that 10K registered or 10K real customers?

Zopa are reporting 10,000 members in their US service. At first I was highly impressed and pleasantly surprised, however on reflection, I now question this number.

Is it:

  1. registered members with investments or loans at Zopa? (lower but a ‘real’ number)
  2. registered users of the site (always a higher number)

Both numbers have importance, but the Finextra press release is written to suggest that the 10k number relates to 1. but I am betting now that it relates to 2.

I can’t locate this info on Zopa’s blog, something I also find odd … so am posting here.

Anyone from Zopa care to comment and clarify?

Finextra: Zopa reports 10,000 US members

After its first full quarter of operation in the U.S., Zopa, an online lending company that uses the power of community to help people reach their goals, has reached a number of significant benchmarks for success.

In addition to growing to more than 10,000 US community members, a number of Zopa borrowers have actually achieved a negative effective rate on their loan.

Written by Colin Henderson

May 3, 2008 at 13:34

Posted in Social Lending, zopa

Tagged with

Digital Money Forum conference – 2008

Off to London now for the conference. I am really looking forward to this event, and the content. The panel in particular should be an interesting chat.

Co-participants are:

Expert Panel: Meet the Bloggers

Moderator: Steve Bowbrick

Chris Skinner, Balatro

Aneace Haddad, Welcome RT

Colin Henderson, Bankwatch

Scott Loftesness, Payments News

Dave Birch, Digital Money Blog

I am sure we will get into some good discussion about whats wrong with payments, and missing in electronic money/ smart cards/ alternative financial services/ social lending. What really interests me, is that I feel I know each of these participants personally, yet have met none of them … until Thursday.

I will be live-blogging while there, so if you are interested, feel free to listen in/ chime in. You can also follow quick updates here.

[ Digital Money Forum ]

The goal of the Forum is to encourage discussion and debate around the real issues at the heart of electronic money in all its forms. In addition to this Forum, every autumn we organise the annual Digital Identity Forum (see the web site at for more details), the sister event to the Digital Money Forum

Written by Colin Henderson

April 21, 2008 at 21:40

Beginning the conversation about p2p Lending in Canada

Shameless plug: Its been a long haul, but we are making progress, and this week launched our blog at CommunityLend. /Shameless plug

As we evolve the conversation, I want to get beyond what happens here at Bankwatch, which is Bank oriented, and focus on p2p Lending in Canada, and around the world from a consumer perspective. What do consumers want and expect in their financial services? How do consumers see the balance between themselves and financial services changing?

Thoughts and comments welcome.

CommunityLend blog

Beginning the conversation about p2p Lending in Canada

Written by Colin Henderson

April 7, 2008 at 00:25

Posted in Social Lending

The role of social in the economy

William is doing a good job at taking the discussion forward on the Social Economy. I have wavered myself on whether it is an economy or whether social is rather a new factor in the (online) economy.

FORUM Solutions Discovering the Social Economy

I tend to define the social economy a little more broadly: as that increasing part of our society’s economic decision-making that is influenced by emerging social tools. The water cooler is now global, and people can influence each other’s spending habits and brand preferences more effectively and instantly.

The Social Futures Observatory have an extensive paper on Social Lending. They make the point about the confluence of social capital with traditional economic capital. When that happens, they argue, the sum is greater than a simple economic transaction. People value their social capital, so when it is brought to bear upon economic transactions, much greater value is developed.

Written by Colin Henderson

April 6, 2008 at 16:58

Posted in Social Lending

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