Difference between revisions of "P2P Banking"

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'''Exchanges where peers can lend and borrow money from each other, without the intermediary of banks.'''
 
'''Exchanges where peers can lend and borrow money from each other, without the intermediary of banks.'''
  
See also the entry on [[P2P Exchanges]]
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See also the entry on [[P2P Lending]]
  
  

Latest revision as of 14:26, 13 August 2011

Exchanges where peers can lend and borrow money from each other, without the intermediary of banks.

See also the entry on P2P Lending


Description

1. P2P Banking, From the Wikipedia:

"Peer-to-peer banking is an online system that allows individual members to complete financial transactions with one another by using an auction style process that lets members offer loans for a specific amount and at a specific rate. Buyers have the option to look for an amount and rate of interest that meets their needs.

All members are categorized by their risk level. Members can browse for other people based on various demographic information.

Since P2P banking does not use third party banking institution intermediaries the rates and terms are often much more favourable for the members.

Unlike conventional banking where the spread between deposit rates and lending rates are consumed to finance the bank's administrative and logistic expenses, both lenders and borrowers get to save such costs, while paying certain commission to the P2P portal provider and/or the credit rating agency." (http://en.wikipedia.org/wiki/Peer-to-peer_banking)


2. P2P Lending, From the Wikipedia:

"Person-to-person lending (also known as peer-to-peer lending, peer-to-peer investing, and social lending; abbreviated frequently as P2P lending) is a certain breed of financial transaction (primarily lending and borrowing, though other more complicated transactions can be facilitated) which occurs directly between individuals or "peers" without the intermediation of a traditional financial institution. Person-to-person lending is for the most part a for-profit activity, this distinguishes it from person-to-person charities, person-to-person philanthropy and crowdfunding which also create connections between donors and recipients of donations but are nonprofit movements." (http://en.wikipedia.org/wiki/Person-to-person_lending)


Characteristics

"The main characteristics of person-to-person lending are disintermediation and reliance of existing social networks.


Disintermediation is a term that denotes the removal of intermediaries in a supply chain, and in the present context, the absence of traditional financial institutions as intermediaries between individuals ("peers"); an important impetus for this is a drop in the cost of servicing customers. The enabling technology for disintermediation has been the Internet that gave rise to several new crowdsourcing-based business models, such as employment portals (connect employees and employers), auction portals (connect buyers and sellers), and peer-to-peer lending platforms (connect borrowers and lenders).

Many peer-to-peer lending companies leverage existing communities and pre-existing interpersonal relationships with the idea that borrowers are less likely to default to the members of their own communities. The risk associated with lending is minimized either through mutual (community) support of the borrower or, as occurs in some instances, through forms of social pressure. The peer-to-peer lending firms either act as middlemen between friends and family to assist with calculating repayment terms, or connect anonymous borrowers and lenders based on similarities in their geographic location, educational and professional background, and connectedness within a given social network." (http://en.wikipedia.org/wiki/Person-to-person_lending)

History

"Lending money and supplies to friends, family and community members predates formalized financial institutions but in its modern form, peer-to-peer lending is a by-product of internet technologies, especially Web 2.0. The development of the market niche was further boosted by the global economical crisis in 2007-2010 when person-to-person lending platforms promised to provide credit at the time when banks and other traditional financial institutions were having fiscal difficulties.[1]

The first person-to-person lending company to launch in the United Kingdom was Zopa, in February 2005. The first person to person lending firm in the United States was Prosper, which launched one year later, in February 2006. The first company to launch in Canada for business financing was P2P Financial in September 2010.[2] For a full list of notable person-to-person lending companies, see person-to-person lending companies. For maps visualizing different geographical locations of the companies, see the maps created for Europe and Northern America.

In 2005, there were $118 million of outstanding peer-to-peer loans. In 2006, there were $269 million, and, in 2007, a total of $647 million. The projected amount for 2010 is $5.8 billion." (http://en.wikipedia.org/wiki/Person-to-person_lending)


Examples

ZopaWeb, Prosper


Discussion

Advantages vs critiques

"One of the main advantages of person-to-person lending for borrowers has been better rates than traditional bank rates can offer (often below 10%). The advantages for lenders are higher returns than obtainable from a savings account or other investments. Both of these benefits are the result of disintermediation, the lack of high overheads to traditional financial institutions with many employees and costly locations. The paucity of administrative procedures in person-to-person lending has the additional benefit that loan application and the transfer of funds takes less time and both borrowers and lenders can access their money faster.

As person-to-person lending companies and their customer base continue to grow, though, marketing expenses and administrative costs associated with customer service and arbitration, maintaining product information, and developing quality websites to service customers and stand out among competitors will rise, and compliance to legal regulations becomes more complicated. This causes many of the original benefits from disintermediation to fade away and turns person-to-person companies into new intermediaries, much like the banks that they originally differentiated from. Such process of re-introduction of intermediaries is known as reintermediation.

Person-to-person lending also attracts borrowers who, because of their past credit status or the lack of thereof, are unqualified for traditional bank loans. The unfortunate situation of these borrowers is, however, well known for the people issuing the loans and results in very high interest rates that verges on predatory lending and loan sharking.

At the same time, because past behavior is frequently indicative of future performance and low credit scores correlate with high likelihood of defaulting, many person-to-person intermediaries have begun to decline borrowers whose credit scores are below a certain bound.

It seemed initially that one of the appealing characteristics of person-to-person lending for investors was low default rates, e.g. Prosper's default rate was quoted to be only at about 2.7 percent in 2007.

It was shown later that the original numbers were highly elevated by the fact that person-to-person lending companies were young and many new loans had not had time to go bad yet, and that, e.g. the actual default rates for the loans originated on Prosper in 2007 were in fact 36% or even 45.3% ." (http://en.wikipedia.org/wiki/Person-to-person_lending)


Success Factors

From a banking/business commentator at http://bankervision.typepad.com/bankervision/2006/09/peerless_bankin.html


"What will determine the success of P2P is whether they can recruit enough sophisticated investors to fund their loans. According to this report, only about 30% of loans get funded at present on Proper.com. And it does demand a sophisticated investor: practically everyone I've spoken to - incredibly, this includes some bankers are well - fail to understand that Prosper and Zopa are just like banks in that they enable risk to spread across a portfolio.

In other words, the thing that has to be determined is if there are enough people with money to spare, an understanding of the economics of risk, and a willingness to try an innovative model to make the whole P2P thing fly.

Because if borrowers find their loans aren't getting funded, sooner or later they'll stop asking for loans." (http://bankervision.typepad.com/bankervision/2006/09/peerless_bankin.html)

P2P Lending as a Threat to Conventional Bank Institutions

Swiss Private Banker: P2P Lending a Threat to Bank Balance Sheets:

In an video interview in June, Konrad Hummler, managing partner at Swiss Bank Wegelin & Co, states how he sees p2p lending as a threat to banks. P2P lending services could replace vital functions of banks. He says government influenced major banks are too inefficient. Established institutions will use calls for regulation to protect their business against newcomers.

(The interview is in German language)

More Information

  • Ripple is an example of peer-to-peer banking.

For updates, see the P2P-Banking tag at Delicious