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.
Technorati Tags: Marketing, Banking, P2P Lending, Javelin Research, Prosper, Fynanz
Ron Shevlin's Marketing Whims 
Ron,
Methinks that the P2P emperor may be clothesless. Or if not nude, at least scantily dressed.
Thanks again for being willing to snoop around in the less-explored corners, and for reporting out on what you find there.
Good stuff. We need more folks who are skeptical of conventional wisdom.
Bruce
Yeah, I’m with you. It’s kinda iffy if it is really socially beneficial to lend money to an AA credit-rated person at 7.95%. As far as saving/investing/lending goes, savings means put money into an FI and receiving interest and or dividends for your money. Investing is you providing capital to a business to operate and in turn receiving a portion of their profits, either in capital appreciation or dividends. Lending, I think, is just a channel of investment, definitely not savings.
Fynanz seems a bit more unfounded in their claim. Just because you are lending to somebody doesn’t exactly mean you are doing a “social good”. The quote about Prosper however seems a bit more strait forward.
Lending directly to somebody with a face and a name is, to me, a lot more “socially rewarding” than investing at a faceless bank. Its all semantics, but the way they state their intentions makes all the difference to me.
Also, I guess the difference between lending and investing is what is the money being used for? If I’m supporting somebody looking to pay off a credit card debt, I’m lending to them. If I’m lending to somebody who is starting a business, I’m investing because I’m counting on the success of that business. These P2P lenders are blurring that line for a lot of people.
I’d say lending and investing are the same thing in this context. Investments, at least those in corporations (not including gold bullion, Monet’s and Bob Dylan memorabilia) means you are lending them capital either for dividend/growth or a coupon rate of return.
I agree that most P2P lending is/will be for raw return on investment, and that’s what ultimately what will fuel growth. But there are at least some lenders/investors that consider the “social good” of the loan into their decision process.
And if the exchanges can figure out ways to “certify” the real needs of the end-users (like Kiva.org), I think there will be even more of it. The tens of millions that have gone out through Kiva prove there is a least some “social capital” at play.
Excellent points. Given the size of the lending and the potential numbers of lenders/borrowers one may lay claim to some extent the social aspect. Taking 100 to 300 basis points as a finder and admin fee is not a social aspect. Lending always takes a different view when the loan goes sideways. I wonder if the holder in due course will consider the bad debt as part of a social program. Another point , how can the use of money be considered so altruistic if it is to pay off credit card debt?
I think a little context is needed here. Prosper’s site leads with:
“Prosper is an online community for lending and borrowing money. Bidding on borrowers’ loans, lenders get great returns by offering great rates.”
And the quote used, also mentions financially rewarding.
Clearly this is an investment.
As to socially rewarding, that is in the eyes of the beholder. While a Mr Cranky may not sense that others might.
If we look in context of Big, Imperious Banks that make borrowing/ investing/ saving/ a one sided transaction, with few options, then its hard to argue that knowing where your money is going, that it helps people, and that at the same time provides you an economic incentive, is offerring something that Banks cannot. Whether thats rewarding or not is up to the investor.
Having said all of that, thanks to you for keeping the industry honest. This is a conversation that needs to be encouraged. P2P lending is not charity, nor is it altruistic. It is an investment.
Hopefully there is an honest blend of economic and social characteristics that people will see, whether to varying degrees, and that it offers a genuine financial, believable alternative.
[PS … see I can be nice … 🙂 ]
[Disclosure: I am involved with a P2P lending company]
Hi Ron,
there are many different p2p lending sites with different marketing messages and aims.
Regarding “socially rewarding”: In my opinion this is not the main message, but there may be a few exceptions, e.g. Kiva and MyC4.
Fees are rising (e.g. Prosper, Boober) and most platforms are still far away from a loan volume that makes them profitable. For Prosper numbers quoted for break even were about 300 mio. US$ loan volume (that was before the latest fee raise).
When fees were (or still are, e.g. Smava with 1% origination fee, no servicing fee) low, the p2p lending site could rightfully use slogans like “cut out the middleman”. At some height in fees that argument will no longer make sense.
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Thanks for commenting, all. Certainly, different sites have different messages, with varying degrees of effort regarding the socially rewarding message. Perhaps I hit the “disingenuous” angle too hard.
Nevertheless, I stand my belief regarding the marketing approach the sites should be taking — that is, helping investors understand how and why to incorporate P2P loans into their portfolio and overall investing approach.
Philanthropic contributions in the United States were about $300 billion in 2006. Boomers are are a lot more cranky than stingy, methinks…
Hi,
P2P lending might be a good idea – but to claim it is “socially rewarding” is ridiculous to me. At lest it would mean I charge a lot lower interest than any professional lender would do.
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