Person-to-Person Lending Evolves and Devolves Simultaneously

Brad_strothkamp [Posted by Brad Strothkamp}

Is it me or is there at least one major announcement in the Person-to-Person (P2P) lending space every week?

This last week had two:

  • Fynanz shuts down. Fynanz, a student lending person-to-person lender, shut down last week.  A note on their site states "Due to market conditions, at this time we are not accepting new members."
  • Pertuity Direct emerges. Pertuity Direct emerged on the person-to-person scene today with a model of person-to-person lending (and more importantly investing) that make the process more palpable - more on that later.

Here is my view on person-to-person lending:

PROS

  • They are actually lending money to consumers that need it.  Unlike banks, consumers my actually be able to get a loan from a P2P lender
  • They offer compelling rates both to borrowers and lenders.
  • The investing (lending) side of the house is evolving into a model that is clearer and simpler. Pertuity Direct has an interesting investor model.  Investors don't fund individual loans (like with Prosper), but instead buy into one of two mutual funds. The funds differ in the types of borrowers and loans that make up the portfolio. Fund #1 - borrowers with 720+ FICO,  Fund #2 borrowers with FICOs 660 to 720
  • It is a unique lending process. Crossing traditional lending with the aspect of community is unique.

Cons

  • Few consumers know these lenders exist.  Forrester published a report around Person-to-person lending that showed that just 10% of US on-line consumers had heard of ANY P2P provider.
  • Few consumers apply for loans on-line let alone apply with firms they have not heard of (a requirement of P2P lenders). In the US in 2007, just 16% of consumer that applied for a home equity product did so online versus 32% for a product like credit card.  Throw in the fact that P2P lenders are not well known brand name, and the potential market willing to apply for these loans online becomes very small, very quickly.
  • It is a unique lending process - As on-line bill payment has shown us in the past, consumers are often unwilling to change habits and the change that happens happens very slowly.

Unfortunately, the cons outweigh the pros at this point.  Until that changes, the P2P market will remain a niche market utilized by only the most savvy of Internet users and investors. 

So what will be the sign that P2P lending is poised to take off?  I believe it will be when we see at least a quarter of consumers applying for loans online and/or we see a larger percentage of consumers utilizing comparison shopping sites. Forrester data has shown that consumers willing to do these activities tend to be longer tenure, savvy net users. The precise audience best suited for P2P lending.

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