Internet Based Social Lending

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* Article: Internet Based Social Lending: Past, Present and Future. By Professor Michael K Hulme and Collette Wright. Social Futures Observatory, October 2006.



"As we head into the twenty-first century we are faced with a plethora of emerging social trends that directly and indirectly signals a changing relationship to finance and financial institutions. The development of and increasing integration of the Internet into our personal and public lives entails new directives of self-education, giving us the opportunity to not only become more aware of financial services and products but also to compare these services at the click of a button. As an enabling technology, the Internet allows us to communicate instantaneously across vast distances without the need for physical co-presence whilst also empowering people to take more control of their lives and their finances, most notably through entrepreneurialism and a heightened sense of individualism. An increasingly globalised world also means that we are becoming more aware of and concerned with human rights, world poverty and environmental issues. In our desire to be more philanthropic and ethical, we are increasingly calling banks to account for third world debt and a greater equitability on an international scale. Finally, disillusionment with the government means that we attribute a greater importance to communities to improve the lives of its residents. Consequently, the purpose of the following sections is to provide an in-depth study of the contemporary trends involved in Social Lending, which, by drawing on the differences between Social Lending and mainstream financial services aims to explicate why Social Lending has re-emerged in relation to emerging social trends.

The report considers several Social Lending organisations including Zopa, Prosper, CircleLending, Vancity and Life*Spin. Whilst all Social Lending initiatives used in this report are based on the idea of lending and borrowing directly from people, there are important internal differentiations. Consequently, we will briefly summarise the key differences between the different Social Lending schemes. Zopa was launched in March 2005 in the UK and it is based entirely online. Lenders are able to choose the risk level and both lenders and borrowers are able to specify the rate of return or the interest rate they are willing to pay. Zopa appears to offer a more commercial model of Social Lending in comparison with some of the other schemes. Similarly, Prosper, a US Social Lending schemes established in February 2006 is exclusively based on the Internet. Members are invited to join a particular group based on shared interest, such as women entrepreneurs or the graduates group. Similar to Zopa members can choose the rate of return and the rate of interest but there is more of a group responsibility and obligation to repay loans since the groups’ reputation depends on timely repayments. CircleLending was launched in September 2001 and it has more of a kinship model of lending since it relies very much on lending and borrowing between family and friends. Vancity was established in 1945 in Canada and has the longest history of all Social Lending schemes considered in this report. Vancity is more akin to a Co-operative since it is owned by members. However, it is included within our definition of Social Lending because it adopted a peer to peer model when it bought the Calvert Foundation Loan fund portfolio. Vancity provides loans between $1000 and $5000 to small borrowing groups (Hofheimer, 2006). Life*Spin was formed in 1989 in London, Ontario and it is specifically aimed towards low income individuals. Life*Spin stands for ‘Low Income Family Empowerment * Sole-support Parents Information Network’ (Life*Spin, 2006). Its peer to peer lending model is oriented towards empowering people through entrepreneurialism. Members make loan applications by submitting business plans. Other members then decide consensually whether to accept the loan application. As such, Life*Spin is more welfare and socially orientated in comparison with the other Social Lending examples.

The report also draws on two quantitative studies; a survey of Zopa members and a survey of people using more mainstream financial services, each with 500 responses. We also conducted 20 qualitative interviews; 5 with Zopa borrowers, 5 with Zopa lenders and 10 with people using mainstream financial services. To respect the anonymity of interviewees, all names used in this report are pseudonyms.

Through comparing several Social Lending schemes with mainstream banking, this report suggests that, whilst the re-emergence of Social Lending in not inevitable, it is the result of changing notions of how some people relate to finance and financial services."


The strong community aspects of social lending

Michael Hulme and Collette Wright:

"In the case of Social Lending, the ‘community’ rhetoric is invariably very strong.

Whilst Social Lending schemes are reminiscent of the collectivism inscribed in the ideology of friendly societies, they also reflect liberal democratic trends towards the responsibilisation of subjects. Jarrett argues that the efficacy of schemes such as eBay resides in their endeavour to produce the autonomous subject whilst simultaneously inspiring sanctioned behaviour through instilling the values of the community within the mindset of members (Jarrett, 2006). Social Lending schemes demonstrate a parallel trend, which emphasise not so much the ‘rules’ of the community that members must abide by but the ‘values’ that the community is based on. The U.S. peer to peer lending scheme Prosper directly underpins its community values through appealing to members’ ‘responsibility’. The website explains that ‘responsible people tend to stick together…When you join a responsible group with a good payment history you get a good reputation by association’ (Prosper, 2006). Here Prosper does not appeal to ‘brotherly’ values based on kinship but on the inherent ‘responsibility’ of its members. Neither does it command members to be responsible but rather aims to inspire correct behaviour through suggesting that members are responsible. By implicitly acknowledging that it cannot force members to act in certain ways – because membership is voluntary - Prosper enables members to be autonomous whilst nevertheless normalising correct behaviour by appealing to members to produce responsible action from within the self. In fact, Prosper claims that ‘belonging to a good group puts some pressure on you, too. If you stop making your loan payments, you'll not only tarnish your own reputation, but the group's as well’ (Prosper, 2006).

Through the interfacing of individualism and community, this notion of collectivism contrasts with the type of relationship formed through banks. Here the relationship is based on the individual with the institution.

An interviewee speaking about her relationship with the bank explains that:

- “…me and the bank’s relationship isn’t very, you know, me Rita and the bank, it's like account number blah, blah, blah and the bank, it's not personal or anything like that. Other customers I'm just the same as them really, but there’s no solidarity or relationship between us” (Rita).

In the absence of any sense of connectivity with other people using high street banks, interviewees tended to perceive their relationship with high street banks as one based on authority and rigidly defined consumer and institutional roles that establish a set of unequal power relationships. Another interviewee stated that: “High Street banks have this sort of mentality of almost siege mentality where, you know, they’re on this side of the counter and you’re on that side of the counter” (Mickey)

Consequently, high street banks depend on structures of authority which situate customers in a position of subjugation. The lack of connectedness between other members of the bank forecloses the possibility of community formation. In contrast, Social Lending schemes are based on a horizontal power structure, which, although implicated in a set of power relations enable the formation of ties between members. Importantly, Social Lending schemes interface the individual with the community. Here, the individual is an autonomous, freely acting subject, who nevertheless is encouraged to develop feeling of obligations towards the community. To some extent, then, like friendly societies, Social Lending schemes make individual gain dependant on community participation. The main differences between friendly societies and Social Lending schemes appear to be the ways in which friendly societies were dependant on physical location; uniting family, friends, neighbours and colleagues because of shared geography rather than shared interest. Furthermore, as we shall explore in the next section, Social Lending schemes tend to enable a greater level of individual autonomy in comparison with the tighter knit communities of friendly societies."


"‘Peer to peer’ lending schemes are imbued with power relations and differentiated gain. It appears that Social Lending is successful when self-interest serves the ends of the community:

- ‘While we need to create social networks to allow individuals to realise capital, those networks must ensure that the groups of people involved retain some control over the capital. Only in doing this can individual gains and interests be assumed to be synonymous with group gains and interests’ (DeFilippis, 2001).

Overall, by making individual gains dependant on the community, Social Lending schemes utilise the contemporary desire for community, whilst serving the needs of the autonomous individual. Trends towards the responsibilisation of citizens means that the individual must be inspired to believe that their participation in the Social Lending community is socially beneficial yet also serves their own interests. However, the concept of social capital is an academic ideology, which is to a large extent divorced from the everyday reality of ordinary people. The problems to overcome, then, appear to be the extent to which people can connect financial matters with community formation."


Here is what they write about Zopa, the pioneering UK social lending initiative:

“"The Zopa model is to a large extent based on ethicality. Zopa aims to attract lenders who have a desire to lend money directly to people for altruistic purposes. Furthermore, the Zopa model is premised on the idea that by removing the need for intermediaries it offers a fairer financial deal for borrowers and a better rate of return for lenders. In this sense, it actually makes it financially advantageous since financial gain is dependant on Zopa’s ethical principles. This model is advantageous because it increases the belief in Zopa’s ethicality through members’ greater involvement and participation in altruistic lending. The ability to discern exactly who and what members are supporting is very compelling. It means that Zopa appears to offer a more authentic and transparent form of lending, where members feel more personally responsible because they believe that it is ‘my money’ that is helping particular known individuals in specified ways."

Hulme and Collette Wright also write:

“Currently, Social Lending schemes tend to attract a particular type of person who is very competent using the Internet and who is financially savvy and stimulated by risk-taking. The Social Lending typology is best characterised as a ‘minipreneur’; the ‘switched on’ and ‘better informed’ consumer who, through a desire for control, uniqueness, autonomy and choice is driven by the need for empowerment and authoring of the self.”

Different projects have different emphasis. The two social lending flagship projecs, Prosper in the U.S. and Zopa in the UK, have different rhetorics, with the former stressing individual interests above collective interests:

“The Prosper community is overwhelmingly referred to as a series of ‘groups’ (Prosper, 2006). This is significant because a ‘group’ is defined as an ‘aggregation’ of individuals who may have ‘common characteristics’. In contrast, ‘community’ refers to ‘collectivism’ where a ‘shared identity’ and a ‘unity of will’ define ‘belonging’ (Wikipedia, 2006b). Thus, whilst a ‘group’ defines a sum of people constituting a unit, a ‘community’ defines a sense of collectivism based on reciprocity, mutual benefit and intimacy. A community is thus dependant on close inter-personal ties whereas a group is not.Furthermore, Prosper has a much sharper focus on the personal rather than community benefits of the exchange. The loan listings are almost entirely for private uses.”

Hulme and Wright then emphasize how social lending is generally related to the trend of p2p horizontalisation:

“It appears that the most important factor characterising Social Lending and differentiating it from mainstream banking is its horizontal rather than hierarchical structure. Mainstream financial services rely on a structure of hierarchy where the customer is in a relation of subjugation to the organisation, which enables the organisation to imbue itself with a position of authority based on dictating its rules and a presumed superior knowledge. In this regard, it is important that Social Lending schemes are also known as ‘peer to peer’ lending schemes. Here the structure is horizontal, relying on interactions between equals. It is this horizontal structure that legitimates and enables a series of social phenomena that differentiates Social Lending from mainstream banking. The horizontal structure makes community possible because it legitimates connections between members. It also creates a utility for social interaction and in a more general sense, the horizontal structure is empowering because unlike authoritarian structures, it warrants and provides the tools for a higher degree of control, autonomy, individualism, self-education and self-authoring technologies. Social Lending, then, has a much more social and interactional foundation making financial transactions richer and deeper. This suggests that Social Lending is helping to redefine relationships with financial services based on much greater valuing of the person.”