Forget anonymity in peer-to-peer lending

 

The other day I came across FYGO, a new twist on the P2P loans concept. Rather than an anonymous market where lenders and borrowers are joined together auction style, FYGO creates a social network in which you borrow and lend to people you know.The network is created using your contacts and all the lender and borrower amounts are aggregegated.

That's quite a different play to Prosper and Zopa. In those cases, a large percentage of loans go unfunded. According to Deutsche Bank, as many as 70% of total loan requests don't lead to a transaction. If my own experience trying to explain P2P is any guide, this is largely due to individuals worrying about whether or not their loan will be paid off by someone they don't know and can't identify.

With FYGO, you are either borrowing from someone you know directly, or who they know directly.

There is a person-to-person negotiation feature, so users are able to agree between them loan terms and come to an acceptable arrangement to both parties pre-funding.

Compared to its anonymous-parties cousins, I think that FYGO has a good opportunity to go beyond low-value unsecured credit, albeit today they are limiting loan amounts to $2000USD. For example, you could imagine it as a vehicle for small business loans, even a means for angel investors to get to interesting startups.

In the meantime, however, FYGO are doing something very interesting already. Knowing who are you are lending to (and borrowing from) may be the thing that the other P2P sites were missing. If that's so, then FYGO is likely to be the place where the P2P action is happening.

Comments

[Juan Giovaneli]

James, do you have the complete Deutsche report on social lending? There is any other bank that has a report on these online lending platforms? I would really appreciate your contribution!

Many thanks, the blog is really good!

JG.

[James Gardner]

Hi - the report is available for download here:
http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000201284.pdf

Thanks for your comments, and glad you are reading!

[Juan Giovaneli]

Thank you!

JG.

[Juan Giovaneli]

James, do you think that P2P loan concept con success on time? Can you give me your extended opinion? Do you think it could be doable on third world countries as a form of microcredits? I would really appreciate your opinion on the subject.

Thank you.

JG.

[James Gardner]

Hi Juan,

Not only do I think that P2P loans are successful, I have data that suggests that they are. For example, Prosper wrote more than 7 million uSD in loans in January, and are on track to do more than 10 in Feb. I think that P2P is potentially very disruptive to traditional banks, for which it is a superior model for unsecured lending. Secured, like a mortgage, is a different story at the moment though.

On the subject of microcredit p2p sites, the success of sites such as www.kiva.org tell us that the model works excellently in this market as well.

Hope this helps.
Regards
James.

[Juan Giovaneli]

James,

Thank you so much for the response, it is really helpful. I do think that P2P lending can be a very successful system in third world countries and that could be a great way to include very poor people in their own enterprise... But the idiosincracy of people in South America or Africa, for example, can make transparency and repayment very difficult. That could make costs of a "South American or African Zopa" go up high. Thanks again for your time. Keep the blog this way: it's really great!

Regards,

JG.

JG.

[Tom Psillas]

Check101.com is about to release a business-only peer to peer lending portal in August 2007.
It will be augmented with a barter concept where, both businesses and individuals, can sell items on HerculesMall.com auction/stores. They will also be able to auction off trade credits for cash to provide instant liquidity.
Check101.com is a division of Tamion Corp. They print over 30 million ads on cash register receipts per month.
This should work better than Prosper becauase borrowers could sell off assets via barter and cash in their trade credits to pay off cash loans.
If lenders cannot collect on their loans, then it makes no difference; no system would work. Also, if a borrower cannot borrow then you lose that customer.
I think people think that Prosper is an easy way to get a handout. The reality is it is not. Mess up once and you are history. This is why we do not wish to compete directly with Prosper. We would just be creating another venue where lenders bite the bullet.
Barter for small items works well for individuals and loans for businesses makes more sense for us.

[Jeff Broderick]

James do you have any idea what happened to FYGO.com? Seems like the one flaw in their model is a 12% interest rate cap. Being an online Payday lender I can tell you that simply will not work.

[James Gardner]

Hi Jeff,

No idea at all. I got an email from the founder after I initially wrote this post, but nothing since. A pity, because I thought that it would have been an interesting play.

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[wisconsin payday loans]

Compare the new FHA - Hope for Homeowners Program to a mortgage loan modification, if your are in foreclosure, close to foreclosure or have a high interest rate sub-prime style loan, you have several options.

[Peer to peer lending]

The p2p lending industry could provide a much needed source of funding in a time when banks are hesitant to loan money. As a social lending network, lenders have the added bonus of knowing they are helping a person in need, while getting a decent return on their investment.