Person-to-person or peer-to-peer (P2P) transactions were the way to borrow and lend money and supplies long before banks and other institutions existed. These transactions take place directly between two individuals - peer-to-peer - without going through a third party, such as a bank or a broker.
They benefit both individuals and there is money to be made. Other peer-to-peer transactions, such as charities, person-to-person philanthropy, along with crowd funding, do form a connection between recipients and donors, but no profit is realized or sought.
Updating an Old Concept
The rebirth of the old concept is a result of internet technologies, especially Web 2.0 and the development of the market niche concept. Add to that the global economic recession. Because of the recession, banks and credit unions raised the benchmarks by which borrowers qualified for loans. They were very leery of taking on too much debt.
Funds for lending dried up; a credit-crunch was on. As that transpired, social lending websites started to show up. These venues cut out the middle man and allowed folks to lend directly to businesses or individuals. Lenders and borrowers could choose how much to lend or borrow, who to lend to, who to borrow from, and what sort of interest would be charged.
Zopa - The First Person-to-Person Lending Company
Considered the whale in the P2P pond, Zopa was fired up in the United Kingdom in 2005. Today it executes around 2% of all unsecured personal loans in the UK lending markets. The Zopa site lets you choose the type of borrower you feel most comfortable with, what level of risk you feel comfortable with, and the interest rate you would feel most comfortable about charging.
To mitigate loss in case of a slim-chance default, the lent money goes to several different, approved borrowers. When repayment starts, the investor receives a slice of the capital or principle along with some of the interest. It is incumbent upon Zopa to act should payments lapse. They will turn to debt collection agencies or even go to court on behalf of the investor. Of course, some defaults do occur, but that is part of the cost of doing business. Losses have been few and the company continues to thrive.
Funding Circle - Investing in Small Businesses
Funding Circle is one step away from being a peer-to-peer lender. With this company, the investor lends money to small businesses rather than individuals. Funding Circle thoroughly checks all borrowing companies. These companies must have two years of audited accounts to be eligible for a loan. Identity checks, background checks and credit histories are scrutinized.
Once given the okay, the business submits a request for a loan along with an interest rate target. Investors are invited to offer funds and specify the interest rates they would like to see. A very cool aspect of Funding Circle is the transparency. You can see what type of business you will be assisting. You can take a look at their accounting books. And you can ask all sorts of questions, such as where the company will use the cash you will be lending them.
Potlatches and Rendezvouses
Much talk is made about the global village the internet has afforded us. With peer-to-peer lending and borrowing, it is almost like attending one of those old gatherings of yore when folks from different parts of country would gather to barter, to trade, and get the latest news - the rendezvous and the potlatch, for instance. Only now our peer-to-peer transactions are done electronically.