Social Lending

Social Lending is another name for the trend of people lending/borrowing money to each other without the intermediary of a bank.

It is also covered under our entries of P2P Finance and P2P Lending

Definition

"The basic idea with social lending is that when you need money, others will pool their funds together and lend them to you at x% interest rate. Prosper uses your credit score to determine your risk rate and then based on that risk rate you bid for the loan with your terms. What makes Zopa & Prosper popular is the "social" aspect; that is you can post your story about why you need the money." (http://www.centernetworks.com/social-lending-web-2-0)

Examples

• 35 social lending platforms

For example:

1. Prosper (US)
2. Wiseclerk (Prosper feeder) (US)
3. Zopa (GB)
4. Boober (Netherlands)
5. Frooble (Netherlands - will re-open September 2007)
6. CircleLending (US)
7. Fygo (US)
8. Duck9 (US)
9. Paltrust (US)
10. LoanBack (US)
11. Community Lend (CAN)
12. Ireloans (IE)
13. La Tontine des Blogueurs (FR)
14. Smava (DE)
15. One2Money (DE)
16. FairRates (DK)
17. eLolly (DE)
18. LendingClub (social lending service for facebook users)

Also:

• An updated directory is maintained here at

http://www.wikiservice.at/fractal/wikidev.cgi?EN/BarCampBank/BankAndFinanceWatch

• In Europe: http://www.wiseclerk.com/group-news/countries/germany-p2p-lending-sites-in-europe/

Discussion

Research findings:

"Abstracts from the paper “Open Business featuring the Finance and Insurance field” conducted by E. Ezeani, S. Kizil, V. Kostakis, H. Kroezen and T. van der Schoot for the Msc course: ICT and Organisation, instructor: Anna Snel, University of Amsterdam, 2007.

(…)In the traditional model for lending there are used the 6 Cs as a metaphor to develop a framework for analyzing lending to individuals or organizations. These are capacity, character, credit, collateral cash flow and community. Apart from these, the decision-making process is hierarchical, with intermediaries also playing important roles. There is also the idea of credit evaluation. In the traditional lending system that is now being challenged by P2P financial model, before a credit is approved, it must fulfill the fore mentioned criteria known as the 6 Cs. Furthermore, because of this evaluation process and the often-difficult additional processes one has to go through, it has been uneconomical as well as time and energy consuming to borrow money through the traditional lending model. P2P finance model aims to overcome these difficulties and bureaucracy, thereby making lending more open and transparent, through disintermediation through the Internet and flattened intermediaries of decision making, financial democracy, and provision of technologies whereby people in a community of like minds can lend money direct to each other. (…)

(…)Moreover, Michael Hulme did an empirical research (2006, Internet Based Social Lending: Past, Present and Future, Collette Wright B.A. M.A.) based on 20 qualitative interviews and 1000 quantitative responses and divided into 2 questionnaires. Strangely enough, whilst 61% of respondents in his survey of general bankers felt that the main aim of their principle bank was to make money for themselves, 63% said they were very satisfied with the overall service they received from their bank. Similarly, whilst 44% felt that banks were very trustworthy, 49% felt that banks did not have their best interests at heart. (…) people have a diversity of positive and negative feelings towards banks. (…)

Prominently, P2P lending is encouraging a coalition among values and finance, in which finance moves beyond the transactional towards relationship and authentic emotional value, based on transparency and authenticity. “Modern day Social Lending has various ideological antecedents in friendly societies by focusing on a study of aspects of community and individualism” (Hulme, 2006).

In addition, Hulme (2006) has argued in his paper that the concepts of the individual within community, transparency and ethicality are fundamental to social lending schemes, providing the ideological foundations of the financial exchange. More concretely he asserts that “our research has suggested that Social Lending attracts a particular type of person who demonstrates a need for financial services founded on ‘good faith’, ethicality and a varying desire to participate in communities or networks of individuals where financial exchanges are based on principles of personal social responsibility, philanthropy, altruism and transparency”.

While P2P lending is unlikely to substitute mainstream banking, not least because it does not compete with the range of services they offer, according to Hulme (2006), we would expect that it will significantly increase its appeal to a mass but niche market.(…)"

More Information

3-part article on social lending starts here at http://www.centernetworks.com/social-lending-web-2-0

115 page report on the history of social lending, with case study of Zopa, at http://www.socialfuturesobservatory.co.uk/pdf_download/internetbasedsociallending.pdf

Blog: http://www.p2p-banking.com/