Ponder the following question:
Entity A lends $10,000 to Johnny Jones at a rate of 6%. Entity B lends $10,000 to Johnny Jones at a rate of 6%. Which entity made the socially rewarding loan?
Well, if Entity A was Johnny’s neighbor Billy Smith, and Entity B was the bank down the street — let’s say Bank of America — then there are some who would have you believe that only Entity A made the socially rewarding contribution.
These are quotes from two P2P lending sites:
- “Prosper…was created to make consumer lending more financially and socially rewarding for everyone.”
- “When you lend through Fynanz you also perform a social good.”
My take: Hogwash. And that wasn’t my first choice of words.
According to Javelin Research (reported here):
Higher-income and younger consumers are the most active users (of P2P lending sites). In Javelin’s survey, 36% of borrowers said they used the service for the better interest rate. Some (33%) turned to P2P to avoid using credit cards. Others (27%) go that route because they do not qualify for a loan from a bank or credit union.”
Since when did lending to high-income consumers become a social good?
Oh, I’m sure defenders of the claims will tell that me that, surely, some borrowers at these sites are economically disadvantaged and can’t get loans at large banks and credit unions.
But let’s not forget that Prosper charges a one to three percent loan closing fee, and earns money servicing the loans for lenders. It’s not a charity.
The type of marketing that some P2P lending sites practice — playing up the social good — is an interesting and new trend. Historically, financial services marketing played on two emotions: fear and greed. The fear of losing money, and the greed of making a lot of money.
Now there’s a new tactic: Play to the desire to contribute to the overall social good. There’s nothing wrong with this — on the contrary, it’s a welcome and needed development. In fact, it might be one of the baby boomers’ biggest failures that the desire to make social contributions hasn’t been more prevalent, and more inculcated into marketing practices over the past 20 to 30 years.
But to think that P2P lending is a major contributor to this social good is naive, and for these sites to market themselves that way is disingenuous.
Javelin predicts that demand for P2P lending will quadruple over the next five years. Is it reasonable to think that the desire to lend to the economically disadvantaged will drive that growth? Or that the majority of borrowers will even be the economically disadvantaged? No, on both counts.
P2P lending sites will succeed because they’ll deliver on the greed factor, not the social contribution factor. Their ability to match people with money to invest with others who need it — and to offer those lenders (investors?) better returns than they would get otherwise will drive the growth.
Javelin also believes that the desire to pay off credit card debt will P2P lending demand. As a potential lender (investor?), I think that’s pretty risky.
But that’s exactly what the P2P lending sites should be capitalizing on. Helping potential lenders (investors?) understand how participating in P2P lending can and should be part of their portfolio of investments. Help me understand which investments in my portfolio have a similar risk/return profile as P2P loans, and could potentially be reallocated to P2P lending.
Is it lending or investing?
My questioning the substitution of the term investor for lender above is important here.
Is lending the same as investing? (For that matter is saving the same as investing? That’s something I think credit unions should be contemplating). My parents were encouraged to save. My generation was encouraged to save and invest. The notion of lending isn’t part of the language for many potential participants — i.e. suppliers — of P2P lending sites.
So while we typically think of marketing as an effort to create product demand, for P2P lending sites, marketing will be critical to procure the supply side of the equation, as well.
Relying on the desire to contribute the social good won’t be sufficient.