Peer-to-peer online lending grows in tight economy |
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Tackling the regulatory issues
Regulatory issues have been proven to be a complex landscape for P2P companies to navigate. Zopa's U.S. debut was delayed considerably as the company hashed out regulatory issues.
"Making a loan requires pretty much a bank license," Dolton says. "You've seen both Prosper and Lending Club change their models because of that issue; they both now use Web Bank to make loans. But then on the other side, you have lenders investing. Our read on the U.S. regulatory situation was that it was a security. We couldn't see any way around it. You needed to be registered with the Securities and Exchange Commission and all of the issues that brings on."
Zopa solved the issue by teaming up with a half-dozen credit unions. Borrowers and lenders become a member of one of the partner credit unions. Zopa services the loans to the borrowers and the payments to the lenders. Lenders purchase what's called a Zopa CD, which insures their deposit but limits the interest they can earn to, currently, 3.75 percent. At Prosper and Lending Club, lenders' money is at risk of default and so they're able to earn much higher rates.
Demand increasing
Despite regulatory issues and whatever other risks may exist, industry analysts say they expect P2P companies to experience strong growth.
"In April 2007, a half-million people visited Prosper's Web site; in April 2008 it was close to 800,000," says Michael Perlman, director of financial services at Compete Inc. "I don't think these numbers will go down. Over time, these P2P lenders will gain in volume as the trust around the whole model of lending to strangers gains more credibility. The younger generation is very comfortable with interacting their entire life online and communicating with strangers. As they grow up, there's an opportunity for this to enter into their financial lives as well."
Lending Club's CEO, Renaud Laplanche, says the industry
is becoming much more mainstream. "We've been growing 100 percent
month-to-month for the last six months. If we continue at this growth
rate, if Prosper continues to do well, and if Zopa really emerges,
that would give birth to a really credible industry this year. When
you look at $100 million, it may look tiny, but it's more than PayPal
moved in the first year."
Prospective borrowers and lenders would do well to
thoroughly research P2P companies before jumping at the chance for
a lower rate on a loan or a higher return on an investment. Most
companies keep current data on defaults and other important statistics.
Most also provide detailed Q&A sections and step-by-step instructions
of how borrowing and lending work. For an easy-to-compare compilation
of data points for Prosper, Zopa and Lending Club, see our chart,
"Peer-to-peer lending."
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