The saying is “necessity is the mother of invention”. In this case necessity may be the mother of demand. A few months back I wrote about P2P lending and what kind of future it would have. It seems that demand for these loans is picking up since banks and conventional lenders are tightening the spigot to loan dollars. Especially, when it comes to small businesses. These loans tend to have lower rates than credit cards. As long as the loan can be funded it might also be easier to acquire rather than going through the necessary paperwork a conventional lender would require for a home equity loan. There is also the issue as to how much equity there is in the home with housing values coming down. Which is another risk existing lenders may not want to shoulder. According to the Wall Street Journal article which says the current market for these loans is $100 million and expected to increase tenfold by 2010 it is still a relatively small amount compared to the entire market.
I would contend that if traditional sources of funding shrinks and the demand is still there the market will turn more and more to any source, including P2P, for funding. If this happens and borrowers find P2P lending as easy and secure as they demand why would they ever have any desire to return to traditional lenders. I can see potential parallels to this scenario and that of the U.S. auto industry of the 1970’s. Where the auto industry ceded the lower end of the market to the Japanese. When the consumer found they could get a better product cheaper they became loyal customers and never went back to domestic cars. I’m not saying this is going to happen. However, if current players in the lending market wish to remain there they should have a strategy to at least compete and tap into this market. Zopa, one of the P2P lenders partnered up with a half dozen insightful credit unions earlier in the year to offer Zopa’s services. In a recent conversation I had with Doug True from FORUM Credit Union, one of Zopa’s partners, he told me that as of right now most of their customers taking advantage of this lending option are individuals. However, there are “micro businesses” who are also using this service. A lot of micro businesses that are started and run on the Internet would be naturals. These people understand the Internet and they can easily shop from a loan on-line rather than run around to a bunch of banks or credit unions. Doug also informed me that they are going to be expanding education, in conjunction with Zopa, of this promotion to their members.
The Gen Y and other Internet savvy borrower are the natural introductory market to use this as their first source for lending. After-all, the number of Internet banking customers is always growing. This lending option is just an extension to that. Also, P2P seems designed for the Facebook, Gen Y demographic. I’m starting to think that P2P lending is here to stay and with the current lending contraction by financial institutions this is just the push it needs to be a real player.
