MADISON, Wis. - Imagine a financial institution where people came together to borrow and lend money to and from one another. Now remove the "institution," and you have peer-to-peer lending (P2P).
If it sounds something like a credit union-only without the credit union-then you've just about got it. The question now for credit unions, say analysts, is how they will react to this "disruptive technology." Will P2P lending become a powerful partner that plays a role in taking credit unions to the next level? Or will P2P be to CUs what the DVD player was to the VCR?
"Peer-to-peer lending means very little to credit unions today due to the small volume we are talking about, but tomorrow is a whole other ball game," said George Hofheimer of the Filene Research Institute, which recently did a study on P2P. "What makes P2P a potentially strong contender in the future is that is does emulate some of the same ethos that credit unions were built upon. In the future, it could have a real impact on how people borrow and invest money. It could be the next wave of disintermediation."
Or it could be the answer to CUs' prayers: a means of revitalizing member and loan growth and reaching out to the young adult market if CUs are able to seal a deal with one of the leading P2P lenders (see related story, this page).
Two of the major players in the P2P market are ZOPA and Prosper. Essentially, both are offering people who have money to invest a way to lend it out and get better returns than are typically available to the small-scale investor, while also providing people who are in need of access to a larger pool of funds at more favorable rates than are typically available at traditional financial institutions.
Think of P2P lenders like ZOPA and Prosper as an online financial matchmaking service, pairing up people who have money to lend with people who need to borrow money. Both vet potential borrowers, assess the credit risk and distribute that risk among a number of different lenders, all individuals who determine how much money they wish to loan out at what level of return.
"What you have is a technology company that is brokering the deal between individuals who have money and individuals who want money," Hofheimer suggested. "And they're injecting a little fun into banking, but not in a corny way-like sending a bottle of wine when a loan is closed. They really understand the psychology of consumers and help them celebrate the deal.
"There are very few examples of all-out innovation in the financial services industry, and this is one of them," Hofheimer related. "P2P is breaking the mold, the entire conventional wisdom of the industry." The last time that happened, they called it "credit unions."
"Credit unions were an all-out innovation when they came on the scene," Hofheimer reflected. "They looked like a blip on the radar screen, too."
What P2P also shares in common with credit unions: a philosophy of people helping people.
"We consider credit unions to be our spiritual cousins," said Wade Longrone of ZOPA. "They've been all about people helping people since, what, the 1920s? That's what we're about, too."
Hofheimer agrees. "The trend is not necessarily the technology, but connecting how money works and connecting people. When you borrow, you're not borrowing from Mr. Money Bags, you're borrowing from John, the construction worker down the street. And when you invest your money in a loan, you know that money gets loaned out to Suzie, the teacher, who is just like you."
Could CUs replicate what companies like ZOPA and Prosper have already created? At least one credit union already has, on a much smaller level.
"VanCity CU offers a variant of P2P lending," Hofheimer explained of the Vancouver, B.C.-based credit union. "They have a peer lending model where there's a pool of funds that people deposit money into, then they decide who they are going to lend to-usually a small business."
But to do it on the scale that Prosper and ZOPA already have in place is a whole other story. Prosper started building its format two years ago and launched in February, according to CEO Chris Larsen. "People who are looking to borrow create a listing for a loan-the amount, the length of the term, and the maximum interest rate they are willing to pay," he explained. "We validate who they are and provide guidance on what sort of interest rate goes with what sort of credit score. They can also add what they plan to do with the money if they want or any sort of message about why they're a good investment."
Then people interested in investing money bid on the loan, similar to the way people bid in an e-Bay auction. The eventual loan is spread over 10 to 15 people, or more, and Prosper services the loan.
Prosper has established lending communities such as education, religion, ethnic, and female entrepreneurs that allow potential lenders to invest in a particular "type" of person while allowing those groups to prove themselves as being a good investment.
"We are trying to reintroduce community accountability," Larsen told The Credit Union Journal. "If you are borrowing money, and you are participating in one of the special communities, say a female entrepreneur, you know that if you default on the loan, it could hurt the reputation of the entire group. There is a shame factor. But it goes both ways. People are excited about it. They feel empowered. People are very passionate about seeing their money work in a rewarding way. They make a profit, plus do some good."
Although ZOPA has yet to launch here in the U.S., it's been working in the United Kingdom since 2005 and is working towards a launch in a potential partnership with credit unions that could be announced almost any day now.
"We vet the borrower for identity and credit risk, do all the same functions on behalf of consumers and classify borrowers as 'A' or 'B' borrowers," Longrone said. "Then you (as a lender/investor) pick the kind of exposure you're comfortable with, the amount of money you want to lend and the rate you want to charge. The borrower then looks at offers and accepts them or not. Loans are diversified across a good number of borrowers to mitigate the risk to any one person."
But for credit unions, is the advent of P2P friend or foe? Doug True, SVP of lending technology at Fishers, Ind.-based FORUM CU and president of the FORUM Solutions CUSO, sees friendship. "This is the first truly radical innovation in lending that we've had in a long, long time," True offered. "We have always viewed [ZOPA] as a potential complement to credit unions. It would take credit unions too long to replicate this. They could be a competitor if we don't partner with them. But I don't view them as a threat, I view them as a complement to credit unions. The potential to help drive new membership and loan growth through ZOPA is just a gigantic opportunity."
