Well, it is clear now to any casual observer that the “peer-to-peer“, or “social” lending space has become inhabited, demonstrated success and popularity among the masses, and is here to stay. However, “peer-to-peer” is really a misnomer, as it implies one individual of a certain social or financial status, lending money to another individual with a similar social and financial status, and that is just not the way this market has worked itself out.
The market leaders, Lending Club and Prosper, aggregate lenders‘ funds and then distribute them among hundreds of loans, in increments sometimes as small as $25. These lenders have no idea who they are lending to, let alone that the borrowers somehow qualify as peers. In many cases, the lenders are institutional investors (hedge funds and private equity) and actually represent the fastest growing segment of the investment community in “peer-to-peer” lending, with Prosper recently pointing out that nearly half of their investors now come from institutions. Asset managers at these funds have recently begun to embrace “peer-to-peer” loans as what they acknowledge is a new class of assets, and are aggressively selling these assets to their clients.
While both Lending Club and Prosper began life structuring their loans and lenders around the notion of “affinity” lending, it quickly became clear that lenders wanted to spread their risk and diversify their $25,000 (or whatever) across 100 different loans, thus minimizing the impact of a single default to their investment portfolio. That forced Lending Club and Prosper into the SEC regulated world of securities broker/dealer because they were taking hundreds of thousands of dollars from thousands of lenders and spreading that money around across thousands of loans, otherwise known as trading securities. I know, but if it looks like a duck, and it quacks like a duck, the SEC is always going to call it a duck. So, once the SEC decided that these guys looked like broker/dealers, they shut them down and forced them to re-emerge after spending millions of dollars to come into SEC compliance as, well, banks.
They now set interest rates, divide borrowers into a specific range of credit-worthiness, and distribute lenders’ funds across multiple loan requests just like a bank does. They also hold the money. And, they also publish prospectuses for every loan they fund, just like a bank.
So, we have the two 800 pound Gorillas in the “peer-to-peer” lending space who are not actually “peer-to-peer” lenders after all, but are simply banks.
The second-tier players in the space are companies like Weemba, who bill themselves as “peer-to-peer” lenders, but are actually aggregators of loan requests from individuals, which they in turn present to their lending customers, who are also banks. Basically, a lead generator for conventional bank loans. After charging an introduction fee to the borrower, they then leave the borrower and the lender (banks) to do what they will with each other. Hardly any “peer-to-peer” going on there is there?
But I suspect that my buddy, Annette Gallagher, former CEO of Weemba (as of late February), would have implemented a very different business model if it were entirely up to her.
LendFriend appears to be a more pure “peer-to-peer” lending platform in that it provides the tools for loan origination and documentation that minimize the emotional and psychological clutter that is usually involved when family members loan each other money, but in order to avoid regulatory oversight of any kind, they appear to simply provide the tools and documents and let lenders and borrowers sort it out for themselves, though once a loan is agreed, they charge a payment processing fee, so I guess they are a registered loan servicer. Maybe not a ton of value there. But, a big part of their web site is dedicated to their store, where you can buy branded tee-shirts, travel mugs and water bottles, so I guess that’s something.
PeerForm is another “peer-to-peer” lender founded by a bunch of guys who used to be derivative traders on Wall Street, offering loans of up to $25,000 at interest rates ranging from 4.56% to 27.08%, which suggests a similar platform to that of Lending Club, but without the broker/dealer designate. Hedge funds are exempt from SEC regulation and I have heard that the guys who started PeerForm have basically said, catch us if you can. But, still not a “peer-to-peer” play, as their lenders must be accredited, and are all from the private equity and hedge fund space anyway. Not peers.
There is one successful, true “peer-to-peer” lender in the market, a company known as National Family Mortgage. Since launching in November 2010, National Family Mortgage has closed over $28 million in true peer-to-peer, intrafamily mortgage loan volume (mostly down-payment loans secured as proper second mortgages and tax-deductible home improvement loans.) They’ve helped keep over $14 million of interest in the pockets of hardworking American families, protected them from numerous tax issues, and saved them millions of dollars. Tim Burke, the company’s CEO was one of the pioneers in the space, having been one of the founders of CircleLending, an early entrant in the P2P space which was acquired by VirginMoney. National Family Mortgage is probably America’s premier online solution for helping families properly structure and manage real estate loans with their relatives.
Another true “peer-to-peer” lender who recently came to market (and in September, there will be another that will be known as iPeopleFINANCE.com) and who has not only created a real solution to an enormous and rapidly growing problem (the Student Loan bubble), but who has also managed to figure out how to do real, permanent good in the process.
SoFi is a true “peer-to-peer”, student-loan platform started at Stanford University’s Graduate School of Business in the Fall of 2011, raising and lending out roughly $2 million, and now they have plans to roll the program out to 40 schools in 2012. And, they are definitely NOT a bank. They took the old “community banking” model and instead of redefining it though geography, they redefined it through “social”, and by doing it through dedicated school-specific lending funds, they empower alumni to provide funding for students through the alumni IRAs, creating meaningful long–term communities in the process.
Alumni do well and do good, meaning they earn an attractive financial return from an investment they feel is making a positive difference to their community. Most students receive a lower fixed loan rate than their private or Federal options. Both alumni and students benefit from the peer-to-peer connections they form. In addition, schools access a new, stable, and low cost way to address their student-funding gap while enhancing accountability to students and alumni. Sounds like a winner to me, especially the “doing well while doing good” part.
As followers of this blog know by now, I love the impact of social technology and the emerging global significance of the new social age. iPeopleFINANCE.com is being engineered to come to market (in September) as a true social lender, offering loan programs to individuals, small businesses, community development projects, as well as for student loans by alumni affinity groups, and larger loans by organized syndicates with specific backgrounds, institutions and interests to similarly motivated individuals, students, groups or projects.
We also expect to launch the first US platform for Crowdfunding when the SEC completes its 270 day review next January, and we expect that the JOBS bill will have implications for the “peer-to-peer” or “social” lending market as well.
We love SoFi and wish and expect them to do well (such a world-class management team) and we also look forward to participating in this $1.2 Trillion Student Loan market in much the same way as SoFi does, through our proprietary alumni-affinity lending model, which is based on our belief that the closer people get to those providing their funding, the greater the pressure they will feel to satisfy their obligations, and the lower the risk of default on those loans. We think the SoFi model bears this theory out.
So, I think that “social finance” is the most appropriate label for this market. It conveys most precisely, the fundamental principles upon which the market will be built. That is, the provision of alternate financing options to people who are under-served by conventional banking models, and who are priced out of those markets by exorbitant fees and rates, and the collateral positive impact that this type of social finance has on the community in the process . SoFi is definitely a “social finance” play. iPeopleFINANCE will be too.