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P2P Lending Software

Peer-to-Peer (P2P) Lending and Banking Software

Peer-to-Peer lending (often referred to as P2P lending) is an emerging segment of banking that Javelin Strategy and Research believes could grow to over $159 billion per year by the year 2012. How accurate is that forecast? We don’t know. And frankly, we don't believe the forecast is important. What's important is that SIT is participating in the peer to peer lending market today. We've partnered with CommunityLend (based out of Toronto, Ontario) to translate this vision into reality.

CommunityLend was seeking a partner who could help them marry their Web 2.0 interface to a solid core banking engine. They found their answer with SIT and the Portfolio Plus banking software application. Using the open interfaces available with Portfolio Plus, virtually any application can communicate with core banking services using XML messaging.

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Three developments have emerged to open the doors to Peer-to-Peer lending. In no particular order, those developments were:

• Muhammad Yunus, CEO of Grameen Bank, proved that massively scaled micro-financed loans to poor people in developing nations, could work and be profitable. Muhammad won the 2006 Nobel Peace Prize for his efforts.
• Visionaries like Chris Larsen, CEO of Prosper.com, and Michael Garrity, CEO of CommunityLend were able to leverage their past success to attract investors to this new P2P lending model.
• eBay proved the Consumer-to-Consumer (C2C) market using an auction/bidding system could work (indeed, Chris Larsen, CEO of Prosper.com, refers to his company as the “eBay of loans).

To date, three basic models of P2P lending have emerged:

• The “friends and family” model.
• This was pioneered by Circle Lending (now owned by Virgin Money). Negotiating loans between friends and family is, for most, an awkward experience. Circle Lending helped provide a model that made it easier.
• The eBay-like model.
• This model is being used by companies like CommunityLend and Prosper.com
• The micro-finance model.
• This model is similar to the eBay model except there is a much stronger social component to the lending (i.e. the loans are aimed at the poor). To see an example of this you could visit Kiva.org.

So How Does the "eBay-like" P2P Model Work?

The eBay-like P2P model works on a simple premise—ordinary individuals request loans from other individuals.

Clients will request a loan through a P2P banking site, placing a loan proposal up for review by bidders. After a credit check is completed, the prospective borrower puts his or her loan up for “bidding.”

Bidders – ordinary people now acting as lenders – offer to finance the loan and set their own rate of interest for the borrower. More importantly, the loan can be for virtually any cause, ranging from debt consolidation to a business loan.

Once the loan target is reached by bidders, whether by one bidder or several, clients will take on a loan at an interest rate significantly lower than conventional banks. Monthly payments are then deducted automatically from the borrower’s bank account, with the P2P site taking a fee from the transaction.

Are There Advantages Over Traditional Lenders?

In theory, both the lender and the borrower gain advantages. The borrower gets a less expensive loan rate, and the lender gets a higher rate of interest (over that of a savings account).

What About Risk?

Like traditional banks, credit checks are performed on potential borrowers and this credit rating is made available to lenders. The eBay-like P2P lending model encourages lenders to spread their risk over many loans. As an example, a lender may invest $50 in 100 loans for a total of $5,000 to be loaned out.

Conclusion

The web, coupled with banking software applications like Portfolio Plus, has enabled a new type of borrowing and lending to take place that could evolve to be a multi-billion dollar market (Javelin Strategy and Research believes it will be $159 Billion by 2012). It's not just growth predictions that have analysts (and us) excited. It's the opportunity for innovative solutions. As an example, in the USA, there is a company called Finanz that focuses solely on Peer-to-Peer student loans. That's exciting. The Lending Club is another innovative example. The Lending Club focuses on Peer-to-Peer lending through a social network. The innovation of Peer-to-Peer lending, to date, has demonstrated that there could be a surprise or two in future loan offerings.