Institute For The Future

Rise of p2p lending

What do retail banks do best? First, they are good for keeping your money safe. Money deposited in the bank is safer than money hidden inside the mattress. Banks with a deposit base are covered by FDIC insurance that ensures that your money will be safe even if the bank fails. Second, banks are hubs for moving money around in the society.

 

Since more than a century banks have been the central nodes for moving money from employers to employees, from one business to another, from consumers to businesses, from one country to another, from savings account to investment funds and so on. Banks have become extremely efficient at their central task of being society’s conduits of cash and coins, and in the process they have become gatekeepers of money deciding who can open a bank account, who gets a loan, who is credit worthy and who is not. In fact, their monopoly has tightened over the years and not declined till now.

 

The growth of social media especially peer-to-peer lending websites is slowly chipping away at the monopoly that banks have enjoyed over the last century. Now it is possible for anyone with a computer and an Internet connection to lend money to anyone anywhere in the world.

 

Internet has shaken up many industries in the last decade with music and newspaper industry being the best examples of strong industries that were turned upside down and are struggling to survive. The financial industry, which is a pretty closed industry, has been unaffected by the rise of the Internet till now. But I believe we are beginning to see early signals of challenges to the monopolies of banks and other financial institutions.

 

It is important to note that banks will still be making majority of loans in the future. I don’t foresee many people making million dollar mortgage loans to others, but increasingly people will be using social lending for smaller loans. Why go to the bank when you can get a loan at a lower interest rate through a p2p lending website.

 

 

Growth of social lending websites like Prosper and Lending Club has brought the opportunity to everyone to become an investor by providing personal loans for everything from car loans to cosmetic surgery. The message is poignant and simple: If your story appeals to me I can be your banker. Borrowers can upload personal videos and lenders can sort through financial and personal information to figure out who would they like to lend their money or whom will they invest in.

 

For the first time in a century there has been a growth of a new platform that enables people to lend to others in a structured format. Unlike the past where loans among peers were only limited to friends and family, it is possible to lend to strangers, and in the process get a good return on investment.

 

In this new world anyone with a computer and Internet connection is a potential investor. It is possible to screen the applicants just like the bank, figure out whether they are creditworthy (all borrowers have a creditworthiness score) and decide whether investing in this person is a good bet or not. Similarly, everyone is a potential borrower. All it takes is a compelling personal profile uploaded to a p2p lending website to solicit loans.