This week’s New Scientist (online here) has an interesting article about a potential shift away from conventional banks to online agreements between would be lenders and would be borrowers. The article quotes a study by the Social Futures Observatory which claims 74% of Britons would consider a non-bank alternative.
One of the sites that the article talks about is US-based Prosper.com, which tells prospective lenders that they could charge interest at between 8% for AA rated customers, through to 22% for those with the lowest rating, for loans up to US$5000 (larger loans cost even more). The process is described in the screen grab below (click on it to get a better view).
The process of bidding and rating is similar to eBay, but here the product that is on sale is money.
Another similar site is zopa.com, which advertises lower average returns for lenders (i.e. lower charges for borrowers), and seems to talk more about risks. Zopa have a chart comparing their average rate of return (before tax, but after bad debt and fee) of 6.75% against Cahoot at 4.8% VirginMoney at 4%. Zopa is a UK venture and appears to be regulated, although is says that it is only regulated by the Financial Services Authority in terms of its insurance mediation activities. Disclosure, I am not a financial adviser, do not take or depend on my advice!
The people putting this idea forward call it social lending, which may be a major misnomer for anybody paying 20% a year interest rate. Generally, if the main banks don’t want to lend you more money, there is often a good reason, and that reason often means you can’t really afford to be paying 20% interest rates!
Social lending could be the next big scam or disaster, or it could be a major revolution. If enough people were borrowing and lending via Social Lending then market forces would drive rates to an equilibrium point. At the moment the UK bank rate is 5%, it might be that if there were a large and liquid market in social loans, then the interest rate could be slightly above that, perhaps 6% (because of the risk the return for Social Lending should normally be higher than for a safe deposit). At 6% for lenders and borrowers, plus a small fee for automated bidding, most lenders and borrowers would be better off than dealing with a high street bank, at least until they lost their money.
All in all, the social lending scheme reminds me of the line from Bertol Brecht’s Threepenny Opera “Who is the bigger criminal: he who robs a bank or he who founds one?”.