The only way peer-to-peer lending will succeed is if the banks are overlooking or turning away a large group of creditworthy customers, and so far it doesn't seem like that is happening.
Bank do refuse to lend to large segments of the population which can be lent to profitably.
In China, part of the reason is caps on loan interest rates.
But banks in developed countries, like the US and the UK, also fail to serve a large segment of the population. Those underserved by banks have limited options to get loans for emergencies etc., and difficulty building their credit history to gain access to cheaper credit in future.
If you're based in London and are a software engineer or data scientist interested in solving this problem, please email me (personal address in profile) and I can tell you about what we've built so far and what's ahead.
Why do they refuse to lend if it is profitable?
As an example, imagine that you lend someone $100, and there is a 50% chance they will pay you back, and in that case they will pay you $210. And all this costs you is a mouse click. Some individual would click "yes". In their free time.
Now in the bank, there is an employee doing this as a part of their paid job. They have a manager, that manager also has a manager, plus you need to pay the janitor, etc. You also need to pay diversity training for all of them. And all financial transactions they do must follow all kinds of regulations, which regularly change. Simply, the overhead is not worth it.
But I do see mobile payment and mobile borrowing could be mounted together.
I have to think there is some misunderstanding here - lots of nonbank companies issue loans. Ford Motor Credit is not a bank.
The thing that banks are uniquely allowed to do is to take deposits, and lend out that money.
Non-bank smaller lenders often have many fewer regulations, allowing them to make more targeted automated algorithms, which means they can serve people banks can't.
> Why do they refuse to lend if it is profitable?
Good question.
Note I didn't say it is profitable for the banks to lend to those segments. I said those segments can be lent to profitably.
In order to profitably lend to customers who banks turn away (mostly those with a 'bad' credit history based on credit bureau data, or those with little/no data at the credit bureau), you need:
1) Effective credit underwriting (i.e. accurate models/processes to decide whether to accept a particular application, and how much to lend to that applicant at this time), and
2) Efficient processes of acquiring, onboarding and servicing customers.
When a bank lends 10k at 8% for 3 years to a low risk customer, they'll make over 1k in interest over the life of the loan. So they can afford to have inefficient operations/systems.
When you lend 500 to a customer who is likely to pay back, e.g. 600 over the next 6 months, there's only 100 in risk-adjusted margin there, to cover all your costs of underwriting the loan, following up on missed payments etc.
They aren't profitable enough for an organization of that size.
Markets get segmented into tiers. With banks that might create a situation where the easiest lending targets get processed by the highest volume, lowest cost institutions, and the small valuable cases become boutique.
The problem with that is, unlike other boutique areas, the wealthier person can spend a little more for a limited run high quality good. But here the boutique has to sell to the poorest groups, so it's hard to compensate the provider through pricing for the lower efficiencies of being smaller. It might shut down services that the industry would provide if less consolidated.
I'm not defending this, just presenting one possible way this could be playing out even with everyone acting more or less rationally.
Q: Do I have a credit limit with Affirm?
A: Unlike a credit card, Affirm is not a revolving line of credit. While customers can take out multiple Affirm loans at once, each Affirm loan application is evaluated separately as a closed-end transaction. An application from a returning customer may be denied, however, if that customer has failed to repay other Affirm loans on time or if the customer shows excessive borrowing behavior.
The credit building is a little much... not sure what >30% interest builds.
- Many immigrant populations thrive because more established members of the community invest in and loan to their peers (especially family members). They may not have twenty years of credit history and market research, but they have close-knit ties that go back generations and a person's reputation as leverage.
- A Planet Money episode after Hurricane Sandy mentioned studies that proved a small business was more likely to survive a natural disaster if it worked closely with other businesses. The conclusion was that businesses would provide informal loans to one another to keep everyone afloat until the insurance claims could be processed (which could take months)
"Cant get a loan due to less-than-perfect credit? Then pay 4,000% interest!"
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The finance charge ranges from $15 to $30 to borrow $100. For two-week loans, these finance charges result in interest rates from 390 to 780% APR. Shorter term loans have even higher APRs. Rates are higher in states that do not cap the maximum cost.
For context, US banks typically charge this $15 to $30 in overdraft fees, for payments of less than $50. For example, see the table and note immediately below it here:
But many people, even in rich countries like the US, don't have a buffer to deal with situations like these. To many of them, paying $100 interest so that they can get their car fixed today, and continue to go to work and earn a living, is a rational and reasonable decision when compared with the alternative (can't drive to work -> no income -> can't pay bills -> ...).
I think it feels that way to those who think they know what helps and what doesn't. To me, it feels like a vast majority agree helping is good, but are cynical about the method and helpers. I think we can all agree that repeated failures and not learning from them is intolerable.
I've thought for some time that this is one area where (as you say) there's a clear social need, and that the solution is for a non-profit lending organisation to offer the loans. As in, the lending company would, overall, aim to break even once the cost of operation, loan defaults, and profit from loans are taken into account.
It probably goes without saying that the loans would have a higher interest rate than those seen with longer-term standard loans, but I'd imagine they'd be orders of magnitude lower than some of the awful, predatory rates --many over 1000% APR-- that we typically see with UK 'payday' loans.
I remember in the '90s all the fuss about "microcredit" in developing countries. Maybe it's time to have something like that in "developed" countries too?
"Microcredit has been a disaster for the poorest in South Africa" https://www.theguardian.com/global-development-professionals...
"India's micro-finance suicide epidemic" https://www.bbc.com/news/world-south-asia-11997571
"Micro-credit schemes of trouble: Housewives turn ‘beggars and prostitutes’ to cope" https://punchng.com/micro-credit-schemes-of-trouble-housewiv...
The original microcredit vision was low rates, in strong collective settings, as an investment to support productive endeavours: giving people enough money to start a business, or supporting them in emergencies so that their situation wouldn't dramatically change (fix a broken car so you can keep working etc etc). It shouldn't be a way to support consumption. It's hard not to inject moralism in the process, but there must be criteria.
Anyway, even if we're specifically talking about micro-enterprise, there is a high rate of failure and then people having the loan as millstones around their necks, and there's questions about how good it really is to have a bunch of businesses of the sort that are financed by microcredit: https://governancexborders.com/2013/05/29/the-art-of-pointle...
As I said above, the major issues are (i) effective underwriting, and (ii) efficient operations.
The better you can distinguish good customers from bad (better data and better models), the less money you lose to people that don't pay back. The better your tools to serve customers, the more customers you can serve without needing to increase the size of your team.
By reducing costs, you can charge less, get more customers etc.
A non-profit would face exactly those same two challenges, just to break even. Not needing to make a profit would have a much much smaller impact on its ability to reduce prices, than the two factors I mention.
In the US we have Credit Unions, which are exactly this.
And, even if they were short cash for some reason,they have both access to zero-cost (or negative cost, given rewards) short-term loans [0] and sufficient income after essential expenses to pay it off without resorting to loans with interest.
[0] e.g., currently zero-balance credit cards as long as paid off within the next billing cycle.
>In China, part of the reason is caps on loan interest rates.
How exactly is that the reason? I thought about it, and guessed that you may mean that it is because lenders cannot charge high interest rates to those segments, but if they are a risk anyway (guessing because poor or have unpredictable income), why would banks want to lend to them? I mean, even if banks were allowed to charge higher interest, the borrowers could default on the principal or the interest, right? [Not a financial expert here.]
Uh, no.
Chinese banks are politicized, they lend for the strategic impetus of the government, which in itself is often really just the result of patronage (read: soft corruption) anyhow. And even without that you have crazy targets which distorts not only lending, but entire sectors of the economy.
Chinese lending is la-la land and not really based on credit worthiness.
Also - lending is all intertwined, public or not. Credit doesn't care where credit comes from, so if this lending bubble is big enough it could cause a recession. And now that China is #1 or #2 sized economy, it would possibly hit everyone.
The biggest remaining difference would be the "peer to peer" bit itself. Which feels like a good thing to drop to me. From a purely financial perspective, the "you choose who to loan to" just feels like a way to introduce economic inefficiencies: The loan facilitator doesn't have a whole lot on the line, so they're poorly incentivized to do their due diligence on each loan. And the lender doesn't have direct access to the borrower, so they aren't able to do so in the first place. Nor, being non-bankers, are they likely to have the expertise to do a great job of it even if they could.
The more I think about it, the more peer-to-peer lending, at least as I understand it, sounds like CDOs in tie-dyed T-shirts.
For fun, I tossed $1,000 into prosper in 4/2015.
I set it to auto invest each time I hit $50 in available funds from someone paying their loan back. I also only set it to auto invest at the B (estimated return of 6.8%) and C (est return of 7.8%) levels. The levels change a bit, but it factors in the estimated loss for each level too.
Currently, my portfolio is about $1,300 with a little bit extra in available funds.
Ive only logged in to get some tax documents after the initial $1k investment and setting up auto invest.
Not much for experience, but here ya go
This seems like a pretty shitty premise given the US mortgage meltdown of 2007.
In any case, peer-to-peer lending also has viability in microloans. The traditional alternatives for that have been credit cards (specifically the cash withdrawal), payday loans, and pawn shops, all of which have distinct downsides.
Not exactly. The US mortgage meltdown of 2007 happened because, in effect, banks realized that the aftermarket for debt had grown so unskeptical that they could basically resell any loan immediately after they made it.
So, from their narrow perspective, virtually no loan was too risky.
Just fine. Bailouts.
https://en.wikipedia.org/wiki/Washington_Mutual#Subprime_los...
Okay for JP Morgan though.
Banks did have "counterparty risk insurance" on their assets - those CDS (credit default swap) things. (Like the other banks. And thus the CDS provier AIG "failed", because - of course - all their insurance contracts were correlated / not independent enough.)
I'm not saying they are/were angels. There were seriously in the stupid zone just from a technical point of view. ( See that table: https://www.econlib.org/archives/2013/05/conditional_ins.htm... )
I think the important distinction between all the banks are stupid and a stupid systemic failure of banks is important. After all, a lot of banks were not stupid, and stayed afloat well, without any sort of bailout.
Particularly before it was repealed, you had two different kinds of banks: Savings and Loans, and investment banks. S&Ls were the ones actually making the loans, and would have been prohibited from getting involved with CDOs. Investment banks would have been allowed to get involved with the derivatives market, but could not have operated as a S&L.
The banks who were just operating as S&Ls made out like bandits - they made bad loans, immediately found a rube to sell them to, and whistled Dixie as they walked away.
Banks that bought a lot of these CDOs ended up being the rubes, and that activity was the major source of the "too big to fail"-type bank closures and near-closures.
Where it gets muddy is that it used to be illegal for those two kinds of banks to be the same entity. But still, I think you can draw a logical, if not physical, line down the middle in order to say, "the people actually making the bad loans weren't really the victims here."
Only if you have a very superficial understanding of the mortgage meltdown. The underwriters of many of the bad mortgages were able to quickly sell the mortgages off to other banks. So there was almost no incentive to actually restrict who they were lending to.
Also, you imply a contrapositive that isn't the case. Just because there were banks that were excessively lending in the early 2000s doesn't mean that there are banks that are being excessively conservative and leaving behind good returns.
Secondly, there are tons of companies working on peer-to-peer lending in US as well. Lending Club and Prosper has been around for a while. Newer ones like Upstart and Lendup are also in the same category. Their claims essentially that they have more data and better models to make better decisions than what traditional banks can do
Banks, being an integral part of the financial system, are only allowed to take on so much risk. Third party companies have no such restrictions. But they can’t issue loans because they are not a bank. So what happens is a bank issues a loan according to criteria the bank and the third party agree to. Then the bank sells it the next day to the third party. That way the bank is more insulated from risk because they aren’t holding the loan.
Some p2p companies such as lending club actually do the same thing. The bank sells the loan to lending club, and then lending club essentially “sells” to all the individual investors: lending club doesn’t take the hit when people default.
The downside of such a model, besides missing out on upside, is requiring volume. You need lots of it to keep the lights on. So if investors get spooked you are in a world of hurt, which is probably what is happening here.
Well, what you say is certainly true in America. But is it necessarily true in China?
Those are the kinds of assumptions that may not hold as you cross borders.
Source: https://newyork.cbslocal.com/2018/04/24/china-assigns-every-...
Lending is not fully market driven.
This is not necessarily personal lending, it's grey market business lending, so it's not about 'credit scores'.
The whole concept of social credit is what I refer to as stupid-evil. For one its whole concept is obviously exploitable as a 'recruit the low credit and purge the high credit' list if anyone ever want to form an insurrection powered by their newly minted low caste. And that is without the obvious side effects of people reacting accordingly to the actual information like not trusting anyone with top-tier social credit as likely too powerful to be held accountable and will thus screw you over at the drop of a hat.
Unfortunately even the US has had a similar issue to a thankfully far lesser degree with the idiotic "Operation Choke Point" abuse of power. Such abuses should always be reigned in.
- Yuan falling 10% since January
- Shanghai Composite falling 25% since January
- Trump's 20% tariff on $200 Billion Chinese import
- Trump's threat of tariff on $500 Billion Chinese import
- EU and US agreeing on free trade
- EU and Japan agreeing on free trade
- US, Japan, and Australia forming an alliance to invest in SE Asia.
- Xi Jing Ping becomes president for life
- Anbang, Wanda, HNA being taken over by Chinese government
- Manufacturers prompted by tariffs to move out of China
- Xi Jing Ping's Made in China 2025 plan to have everything made in China
- Malaysia, one of the one road one belt's strongest partner, pushes back on future Chinese projects, citing corruption.
If I had to guess, China's economic collapse is near
Also, there's a certain irony to this being your second ever comment.
"Throwaway accounts are ok for sensitive information, but please don't create them routinely. On HN, users should have an identity that others can relate to."
There's room for interpretation here, but I think it's fair to say that the preferred default is the consistent use of a single permanent identifier. Do you prefer a different approach?
I'm not sure if this is true.
Less developed economies that tried to be protectionist obviously were hurt by it (many examples: India, China etc.)
But large swaths oft the economies of most, even developed nations are protected. Banking, telecoms, agriculture, military and in many cases broadcast entertainment and energy - are still protected to this day.
And then of course de-facto protectionism of state-backed or related entities.
Large open economies usually have more to gain relatively speaking than do smaller open economies, which risk being gobbled up.
Which is something no western media want to cover, for one reason or another.
I see lot of medium to small problem in China, largely fixable and are being fixed right now. For US I see lots of large problems, ticking bombs and it seems no one want to touch it.
For consumers, it’s a bit different, but again the kind of official loans available are much more restricted than the developed world, with lots of unofficial lending again filling in the gaps.
Note in my experience most p2p financing companies aren't actually peer to peer. They have a bunch of cash from investors, banks or other p2p loans companies which they then loan out.