P2P Microfinance - Business Model

Discussion

Sander Van Damme:

“Before looking at where we think the future of peer to peer microfinance lies, we still want to investigate the business model of Zidisha in more detail to understand how they pay their bills and where their revenues come from. As shortly explained above, the platform has two main streams of revenues: a fixed fee new borrowers have to pay to check their credit history, and a 5% borrower transaction fee on repayments to cover expenses and transaction fees. This is being supplemented by “another small but significant source of revenue” (Kurnia, 2011), namely donations, which are tax-deductible in the USA. As for expenses, the website does not have that many either: the credit checks are being repaid by the fixed fee and all people working on the platform, as well as the local country managers, are volunteers for the moment. In fact it is the lender who bears much of the cost: it is he who pays the Paypal fees when uploading or withdrawing money and it is he who carries all of the exchange risk. When we compare the 5% fee on Zidisha to the African average ratio of operating expenses over loan portfolio of 22,64% (MixMarket, 2009), it is clear that under the current system, and certainly with the current small size of the loan portfolio, the platform would not be able to pay out any salaries. Currently, Zidisha is able to get a small surplus of $100 per month on their fees, which is being used for platform improvements. The non-profit expects to be able to afford one paid full-time staff person by the time it reaches $1 million in loans per year, a goal they feel “is not a far-fetched target” (Kurnia, 2011), given where they currently are and the growth they are experiencing. However, in the immediate term, the website will remain to be managed on a volunteer basis by all staff involved.

When indeed payment streams would increase and the platform would grow to many times its current size, Paypal fees would decrease and the 5% borrower transaction fees would possibly be able to cover more of the expenses. Nevertheless, even affording one staff member already seems to be a big success when we think of Kiva's proposal to donate 15% of the loan amount in order for them to pay their operational expenses. The more so since Julia Kurnia, in a recent newsletter promised to channel through all reductions on Paypal costs to the lenders. Because of the evolution the website has gone through, it is highly difficult to now still increase this fee with the purpose of paying for these expenses or even making a profit. First the question of what to do with current borrowers would have to be answered and then a possible problem would surface of coming back to excessive moneylender fees which currently already exist in the countries involved. In case of a minor increase (say 10% instead of 5%) this latter problem would remain fairly limited given the fact that earlier loans were successfully repaid at rates of 13-14% and lenders seem happy to accept returns of 3 to 4%. Nevertheless, we feel that such a move, because of the clear philanthropic motivation present in Zidisha founder Julia Kurnia, remains unlikely.” (https://www.zidisha.org/editables/news_docs/Louvain.pdf)