By Rob Packer, conference attendee
Even though the peer-to-peer (p2p) model is one of the oldest forms of lending, the Web has revolutionized process. Websites mean that instead of just being friends or family members, lenders and borrowers can now be complete strangers, encouraging borrowers to “market” their personal stories to lenders to get a loan.
This was the introduction to the conference session on the rise of P2P lending. Although I work for P2P lender Kiva, this panel discussion helped me better understand the differences between the various online microfinance lending and investing websites; Kiva, Lending Club, and Microplace were represented on the panel.
Kiva, the oldest of the three, is a non-profit organization that uses an intermediated lending model. Online lenders or social investors who have proven to be exceptionally risk-tolerant lend $25 or more to a borrower, the client of one of Kiva’s many microfinance institutions around the world. When the borrower pays the loan back, the lender receives their original $25, which they can then re-loan (and if the borrower doesn’t pay back, the lender doesn’t receive anything either).
Similarly, Microplace connects lenders with borrowers online, but allows lenders to earn interest on the loans they make. A social investor’s money is pooled and invested in microfinance projects throughout the world with a return of 1 to 3%. However, although both Kiva and MicroPlace consider that the importance of the stories of microfinance is one of their reasons for success, Lending Club works on an anonymous basis, much like a traditional bank. There are savings and lending portfolios that essentially cut out expensive “middle men” (banks), helping to provide cheaper loans to people the U.S. for a variety of purposes ranging from loans to pay for honeymoons to loans to pay off credit-card debt to more traditional microfinance loans to set up or improve businesses.
What struck me most about the discussion—and much of the conference as a whole—is the link between microfinance and traditional banking. The traditional target markets for microfinance institutions fall outside those of conventional banking: when bank lending contracts (as it has during the recession), the market for microfinance grows and even laid-off bankers find they can’t get bank loans. This environment helped p2p lending grow in 2009.
Kiva, for example, saw its loan activity increase, and 2009 was its most successful year to date. MicroPlace continued to provide returns on the money invested, outperforming bank accounts as well as stocks in terms of returns. Rob Garcia from Lending Club provided the most interesting food for thought when he mentioned that borrowers on Lending Club are more likely to pay off their Lending Club loan than their credit card, because they perceive that their web-based loans come from an “Average Joe,” while credit cards are part of the banks that have caused so much anger in the crisis.
My main takeaway on the discussion was that while the three different organizations may appear similar, they are all very different. Essentially, only Lending Club is a true peer-to-peer lender (Kiva and MicroPlace are intermediary-based). And it was this diversity that made me realize that these websites are here to stay.
NOTE: All 3 presenters encouraged the audience to try P2P lending out and experience it first hand. With as little as $25, you can start to make a difference in a borrower’s life on any of their websites. At the session, Rob Garcia of Lending Club offered conference participants a $50 lending club credit to help people get started. Use “MicroFinanceUSA” as the secret code, or use this link to open your account.
Rob Packer is Portfolio Manager for the Americas at Kiva, working worldwide to connect people through lending to alleviate poverty. He has recently completed a Fellowship with Kiva which saw him based in Bishkek, Kyrgyzstan and Barranquilla, Colombia.
