With APRs on credit cards doubling out of the blue, investment options dwindling and banks tightening their loan policies, RaceTalk connected with Kim Muhota – CEO of Pertuity Direct – to discuss how online social lending could play a significant role in freeing up consumer credit and helping the U.S. pull out of the financial market meltdown.
A financial services industry veteran, Kim provides insight into the current credit crunch and how social lending (otherwise known as peer-to-peer) is quickly becoming a viable alternative to traditional banks.
Q: Celent predicts that by 2010, there will be $5.8 billion peer-to-peer loans made in the U.S. – an 800% growth from 2007. Why do you think peer-to-peer lending has taken off the way it has?
Peer-to-peer lending has grown quite fast over the last 2 or so years for a number of reasons. Most recently, there is the issue of the liquidity crisis which means that even the prime borrower or small business owner does not have access to credit as they did a year or two ago. Traditional providers are also raising prices pretty aggressively to drive more revenue growth and compensate for added risk – and this impacts the consumer adversely.
There is also the fact that P2P loans are installment loans and are therefore very transparent and user friendly – in other words, there is no penalty pricing, hidden fees or anything like that. The P2P marketplace offers good potential returns for lenders and allows individuals to participate in a vibrant community of borrowers and lenders. So there are multiple compelling reasons why P2P is becoming more of a main-stream alternative than it was just 2 short years ago.
Q: What are the benefits of taking out a loan on a social lending site, as opposed to a traditional financial institution?
Social lending sites offer loans that are well priced (typically between 6.9% – 17.9%) and have fixed rates. Alternatives like credit cards have been increasing their interest rates across the board and have gotten very aggressive with penalty pricing and unfair fees. Social lending sites offer a loan product that allows you to go through the application and approval process in minutes; any time of the day.
The no-hassles loan option is a much better alternative to having to go into the branch, dealing with paper work and high fees. Further, it’s a great social networking opportunity where borrowers can tell their story and lenders can get to see where their money is going. Most of the lenders and borrowers are like minded individuals looking for a better deal than what they are getting from their bank.
Q: JPMorgan Chase — the largest credit card issuer in the U.S. — recently began adding a $10 fee to borrowers’ monthly balances (which accrues interest) and raise minimum payments to 5% from 2%. Is social lending a viable alternative to credit cards help consumers mitigate debt?
Absolutely. The fact that the loans are fixed term and fixed rate loans means that the consumer knows exactly what their loan payment is going to be and they know exactly how long it will take them to pay off the loan. It’s a great mechanism to get proactive around managing debt.
Q: Do you believe that social lending can play a role in helping to reverse the current economic crisis?
Yes. The current economic crisis is driven in large part to a lack of liquidity in the credit markets. Any option that provides much needed credit liquidity will help solve the current crisis – and the social lending model allows for the liquidity in the credit market by the consumer themselves. So in many ways, it’s the consumer driving the solution directly by participating in the social lending marketplace.
Q: How do you see the social lending space evolving in the next 9 – 12 months, following the October 2008 decision by the SEC to crackdown on the industry?
The recent regulatory changes raise the barrier to entry and increases the price to play in the space for the various companies out there. Most importantly, it provides an added level of regulation which is built to protect the consumer – and that’s always a huge positive. I think we will see more people adapting to the social lending marketplace as it continues to gain awareness and traction broadly. As a result, there is a good chance that we will see one or two innovative banks and financial services companies looking to partner with some of the social lending players as a way to get a head start into what is positioned to become a great customer acquisition channel.
For more of Kim’s thoughts on the current credit and liquidity crisis, you can check out his posts to the Pertuity Direct blog here.
Disclosure: Pertuity Direct is a Racepoint Group client