P2P Lending and Online CD Auctions

I realize I’ve written about P2P lending in the past but when I saw in NetBanker that Lending Club was getting back into the market, after suspending operations this spring, I became intrigued.  I realize this is a new service and you can’t directly compare it to a seasoned business.  However, from the filing while they were booking new loans it appears that a substantial number were financed with the company’s own funds.  They were also keeping the loan rates lower than the market could have been, most likely to attract customers looking for a loan.  This was probably somewhat of a discouragement to attracting potential “lenders” as the returns would have been reduced.  In other words they were effecting natural market conditions.  Another interesting note was that fully half of the loans that were booked were to reduce credit card debt.  Which I feel shows where the current growth in their market truly lies.  I’m still not fully convinced that the market can handle too many of these “services” right now.  Currently the general population are hearing through the media about the stresses on the economy, whether real or not,  and consumer psychology is what drives the market.  With consumers conserving and saving funds and dealing with fuel inflation there really isn’t a lot of excess consumer funds or deman to place into a somewhat risky investment vehicle as these loans tend to be.  In other words I think the market is still last resort for people looking for a loan and their is more demand for these funds than supply.  I think these businesses are going to struggle until the consumer psychology starts to turn and the demand to invest picks up. 

So much for the asset side of the balance sheet.  Recently on the liability side MoneyAisle has come online.  In a nutshell it is LendingTree for CDs.  Customers login put in how much they are looking to place and the term of the CD then the 72 banks currently in the program bid on the money.  Except for the marketing and free press aspect I’m having a difficult time figuring out what the banks really gain from this.  Granted the dollars are small and they don’t have to bid but small banks have enough competition in their own markets and now they are competing on a national scale to attract “expensive” funds.  This is nothing more than national rate shopping.  These customers are most likely not going to add additional products from the bank that books the CD and when it matures they are going to leave.   Unless the bank is de novo, just opened their doors, or is having a difficult time attracting funds I’m struggling as to why a bank would put a lot of these CDs on the books.  For MoneyAisle to be successful they are going to need a lot of banks because each one will probably plan to only put a small amount of these expensive funds on their books.

I like the fact that people are testing the markets for new delivery channels and this is all pretty interesting.  If you don’t try something you will never know if it really works or not.  So, I do applaud all of these people for giving us the consumer more options.  The real test will be how it helps their businesses.

Customer Service Upgrade

It is difficult to charge someone for something that they are used to getting for free.  That is unless the service receiver can either see value in it or the service is new and different enough that it is an “upgrade” to what they had been receiving.  I’m talking about customer service at banks or credit unions.  Now there are different types of service every customer needs.  However, a lot of call centers are staffed as one size, fits all.  Since above all banking is a service, how the customer is treated and if they get their issue addressed on their first contact will go a long way to making that customer happy.

Let me draw an example with another service industry, transportation.  Specifically the airlines.  There used to be very little competition in the airline industry but the funds airlines put into on-board service and aircraft maintenance were more or less guaranteed.  Then what happened, the airline industry was deregulated.  This was a huge boom to the traveling public with more routes opening up, airlines could serve where their was demand, and the biggest benefit being prices dropped.  Also,  new airlines stepped in with a different model on how to run an airline (Southwest).  Let’s address this a little more.  Customers accepted what Southwest had to offer because they knew what they were (or weren’t) going to get for service up front and the price was cheap.  But the existing airlines now had to compete with this model and their customers were used to a certain level of service.  It has taken a while but it seems that the airlines have finally organized themselves where they can make money (under normal circumstances).  They offer lower fares but still provide more service than the low cost carriers.  They still offer First Class which can be purchased or used to reward their frequent flyers. 

I know this is a rather abbreviated example of what the airlines have experienced over the last 20 or so years.  I wanted to use this to show that similar things have happened in banking in roughly the same timeframe.  Even though banking is still heavily regulated.  In a lot areas certain restrictions have been lifted.  The biggest example would probably be interstate banking.  We have seen many banks merge over time to where there are really two major tiers of banks.  Community banks which stress their attachment to the community and service and large national banks who stress their branch networks and markets served.

Over the years I have worked for and with both types of banks.   The smaller banks tend to offer more personalized service and can react to an customer quicker because approvals etc. have less layers of management to go through.  However, due to their size they have smaller financial resources to tap for both technology and the number of staff to come up with new products and services.  Larger banks do have greater resouces both financially and with the number of staff members.  However, being able to call the bank and get the same person twice to fix a problem is next to impossible so customer frustration levels get elevated.

As I’ve stated in a previous post the cost of “technology” is decreasing so that hurdle should be lowering for smaller banks.  What they can also leverage is not just taping into their own staff for ideas but opening up lines of communication directly with their customers and the community.  By builiding an online community on the Web they can open themselves up to the whole world. 

Banks don’t stress this to the outside world but they do look at how profitable a customer is and will use that information to price products for their more profitable customers.  However, one idea that hasn’t been looked into is allowing customers to pay for better service and advice.  Why can’t their be different tiers of support with agreed upon issues that will be handled by the lowest tier for no cost (a bounced check, an issue with a cleared check, etc.).  But if someone wants some investment advice as to which CD is better for their needs etc they can either pay a one time fee or if they have a constant need they can “pay to upgrade” themselves.  The customer could pay an annual membership fee for instance.

I recently ran across an article on NetBanker where it talked about a recent service from H&R Block for this year’s tax prep that described a similar approach.  You can either pay one fee to file by yourself online or a separate fee to do it with a representative online and there are all different layers of service.  This will get away from a one size, fits all approach.  This way the customer who wants or needs greater expertise in customer service and is will to pay for it will.  This could also effect the cutomers’ loyalty since you have given them the opportunity to upgrade themselves.

P2P Lending Follow Up…

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.

Maybe my name should be “Carnak”

A funny thing happened while I was in the process of writing my last blog post.  Zopa teamed up with a list of credit unions in the U.S.  Now, part of this strategy is marketing based, to get their name out there and to make a presence.   But, a big part of it is also market based.  As I stated in my last entry until they had a way to tap into the wider market Zopa would stay a minor force.  This strategy also gives Zopa access to an existing funding source with an established market presence, in the form of their CU partners. 

Based on the following quote the forward thinking institutions, like these CUs, recognize that they need to do something now to tap into the needs of Gen Y, “The merging of financial services and social networking is a great way to reach the younger generation,” says Doug True, senior vice president of FORUM Credit Union of Fishers, Ind., one of Zopa’s launch partners.   I applaud Zopa and their credit union partners for attempting to get the ball rolling and experimenting with new products for the market.  Again, to reiterate what I mentioned in the last post the cost of establishing a program like this isn’t very great.  Not to mention, by being new and innovative they are getting a lot of press, me included, off of this offering.  The jury is still out as to whether this will be successful.  There are a couple of barriers to wide acceptance.  The first question is, will a large enough segment of the general public want to get involved and be direct lenders to strangers, in order to make this a worthwhile program?  How about the timing of this offering?  With all of the credit issues in the news lately will this also put off potential lenders?  Most of the market of potential borrowers, for these high rate installment loans that this program is offering, are exactly the same people that are having difficulty today making mortgage payments.   The best I can say for now is “stay tuned”.

Getting back to the subject of Gen Y…

They may be youngest generation in the workforce right now and yes, they take to new technology and social networking easily.  However, they are still just consumers who want the same service like everyone else.  Heather Peters of Pleasanton, CA based Javelin says, “It is a common misconception that Generation Y is a web- or digital-only generation who sees no value in face-to-face interactions or traditional channels, such as ATM, branch or phone…”.  As most of us who have been in the industry for any period of time will attest, this is one area we can improve on.  There are many reasons for some quality deficiencies in our industry and I would be interested in hearing your take as to which ones are the most critical and how they can be addressed.

Lastly, I would like to point you to a very good blog post I ran across from Tim McAlpine’s entry on the Open Source CU site.  He also touches on a lot of the subjects I’ve spoken about here.  The main one being, no one in banking organizations in general are taking ownership or sees the importance of these new ways of doing business.