Today, one thinks of the financial sector as a collapsing industry. Yet the Internet has given birth to at least one economically promising opportunity—social lending.
Set up as wholly Web-based platforms, social lending Web sites match the lender with the borrower on a personal level, rather than pooling deposits of savers and giving loans to borrowers like a traditional bank. Building a community, these platforms make possible the distribution of small loans at a low interest rate. As a 2006 CNN article pointed out, this model represents “banking minus the bank.”
When one talks about loans of micro size, the concept of microfinance, which has won economics professor Mohammad Yunus the Nobel Peace Prize, quickly comes to mind. In fact, some social lending Web sites emerged to help bring international funding to entrepreneurs in developing countries. Kiva.org, one of the first Web sites with such a focus, partners with multiple microfinance institutions in all continents. These institutions use Kiva to post information about borrowers, including the amount of money needed, their purpose for borrowing and even pictures. Lenders read about these real people and decide who to support. With this structure, Kiva has found a way to effectively tap a very broad resource and to allow anyone with a credit card or a PayPal account to contribute as little as $25. Kiva has made a total of $130 million credit possible for more than 300,000 entrepreneurs around the world and gives lenders personal satisfaction from helping another human.
In the U.S., online platforms like Prosper and Lending Club have been gaining grounds in recent years. These sites, however, work as for-profit operations, charging borrowers and lenders a small fee for the transaction and do not limit themselves to microfinance. At Prosper, for example, an auction is used to bring borrowers to the most affordable option that the lender community can offer. In other words, they operate like eBay, an online exchange that enables people and stores to offer items for sale through a bidding system, except that the only products are loans. Thus, Prosper hopes to find a competitive, market-based solution for borrowers. However, Prosper and similar sites face two challenges—preventing predatory lenders from abusing the site and protecting their users from the default risk. Still, they have attracted the attention of many financial innovators.
In March 2010, a company called ClickandBuy introduced Buxter, a Facebook application allowing users to transfer money in small amounts. Could this be an early sign of the Facebook-banking era? CNET, a leading information and technology news source, predicted the launch of Facebook Credits, a platform that would work like a currency to purchase virtual items. Other social networks are also evolving with the goal of making the lending process truly person-to-person and affordable. Some colleges and universities, such as Stanford University, have introduced their students to GreenNote, a social lending service helping students look for education loans from people in their own network and beyond.
There is a long way ahead for the concept of social lending. And yet, with the explosive growth of social networking and Internet usage, social lending promises to bring back financial lending in its most primitive form: person-to-person.
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