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Peer-to-Peer Lending Explained: Brother, Can You Spare $100?

Where do you go when you need a small loan but don’t think you’ll qualify for one from a bank or credit institution? You could ask your family, but doing so may ding your relationship worse than an application would ding your credit score. Or you could appeal to a stranger–and become one of a growing number of borrowers that are turning to loans provided by peer-to-peer lending institutions.

Where do you go when you need a small loan but don’t think you’ll qualify for one from a bank or credit institution? You could ask your family, but doing so may ding your relationship worse than an application would ding your credit score. Or you could appeal to a stranger–and become one of a growing number of borrowers that are turning to loans provided by peer-to-peer lending institutions.

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iphone money

But the peer-to-peer lending landscape is changing just as fast as it’s growing. Fiserv, a global financial services technology provider, introduced a service to allow personal loans or payments to be
made securely through a bank or credit union using an email address or
mobile phone number. PayMate takes it a step further, allowing the “un-banked” to lend or borrow through its own bank channel partners. Then there are non-profit vendors such as Kiva, the global
granddaddy of person-to-person micro-lending, which came under scrutiny
this week after a New York Times article suggested that altruistic
lenders may not be giving directly to the borrower of their choice.

Confused yet? Fast Company to the rescue. We’ve compiled a short list of the major peer-to-peer lending players to show you how it all works.

 

For Profit

 

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Lending Club

lending club

Who They Are: Lending Club is the world leader in peer-to-peer lending, with $6.3M in new loans in the month of October 2009, according to Renaud Laplanche, co-founder and CEO.

lending club

Who Gets the Money: “There is never a circumstance in which the lender/investor is providing funds to a borrower they did not select,” says Laplanche.

How They Make Money: Lending Club collects origination fees from the borrowers upon closing the loan, and servicing fees from investors over the life of each investment.

What Investors Say: Chris Olguin who is semi-retired, uses Lending Club as a way to supplement his income. “Even though I like the idea of helping people with these loans and sometimes I might extend a loan to a person more based on personal feelings, my main purpose is to make money. Lending Club only approves people with good scores and has a good collection system but that doesn’t mean that there will not some people that can’t or won’t pay, so there will be defaults, but I think the defaults are kept and a reasonable level and I can plan for them, just like I would plan for another kind of risk in any investment.”

Is There an App for that? Laplanche says they have plans to make the service available via mobile phone and an iPhone application next year.

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Prosper

prosper

Who They Are: Prosper Loans Marketplace is America’s largest peer-to-peer lending marketplace, making over $183 million in loans since it launched in 2006, according to the company’s data.

prosper

Who Gets the Money: Prosper lenders’ bids / funds are always directed to the borrower listings they (the lender) select, says Tiffany Fox, Prosper’s communications director.

How They Make Money: Revenue is fee-based, with borrowers paying a closing fee for the loan, as well as charges for late or failed payment. Investors pay a 1% annual servicing fee.

What Investors Say: “I target loans that are more ‘altruistic’ in nature, like schools and medical needs that were asking for low amounts,” says Scott Stadum of Idealist.org, who has invested in Lending Club and Kiva in addition to Prosper. Although it was easy for him to start a lending group for returned Peace Corps volunteers on Prosper, Stadum says the Peace Corps places so many restrictions on the use of their name, he eventually shut it down. “I don’t make much from interest, but I continue to invest regardless,” he says.

Is there an app for that? Fox has no specifics to announce yet. “Mobile is in our development pipeline,” she says.

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Nonprofit

 

Kiva

kiva

Who They Are: Kiva says they are the world’s first person-to-person micro-lending Web site, whose mission is “to connect people through lending for the sake of alleviating poverty.”

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kiva map

Who Gets the Money: Though Kiva says it tries to maintain transparency throughout the lending process, David Roodman, a research fellow at the Center for Global Development wrote in his blogthat less that 5% of Kiva loans are disbursed after they are listed and funded on their site because they are covered by intermediating microlenders–Kiva calls them “field partners.” He believes this is okay because, as Roodman told Fast Company, the lender’s money will likely be going to someone else with a reasonably similar profile. As such, Roodman says, “Almost everyone involved benefits.”

How They Make Money: They don’t, until a loan is paid off ant the lender chooses to turn it into a donation. Still, Kiva is officially a 501c3 nonprofit entity and cautions, “Lending to the working poor through Kiva involves risk of principal loss. Kiva does not guarantee repayment nor do we offer a financial return on your loan.”

What Lenders Say: Sue Russell, a self-professed skeptical journalist, says, “I selected people and projects carefully via their posted profiles and biographic details, with an admitted bias towards helping women business owners.” However, after reading Roodman’s take, she feels misled. “Why sit and pore over profiles of people and their families if their loans are already a done deal? That’s a waste of my time.” She’s not totally giving up on them though. “I definitely intend to watch for further responses and assurances from Kiva’s CEO.”

Is There an App for That? There are several. Some will track the progress of the loan, others let you browse profiles of borrowers, drop a widget on your blog, etc.

 

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For-Profit Facilitators

 

Fiserv

fiserv

Who They Are: Fiserv is global provider of information management and electronic commerce systems for the financial services industry.

fiserv

Who Gets the Money: Shaw says consumers will be able to send money to anyone they know, “Whether it is to repay a friend for dinner, contribute to a fundraiser, pay team dues, or pay the babysitter. Payments will be deposited directly into the recipient’s account and confirmation of payment will be sent to the recipient’s e-mail address or mobile number.”

How They Make Money: Fiserv will charge financial institutions that offer the service a per-transaction fee.

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What Lenders Say: The service isn’t available yet, but Shaw notes, “Consumers will be able to use the personal payments service from Fiserv through their participating financial institution, eliminating the need to share account information with a third party payments service and resulting in both improved security and greater convenience.”

PayMate

paymate

Who They Are: Headquartered in Mumbai, with additional offices in San Jose, California, PayMate is a mobile commerce services company that allows users to send and receive money via mobile phone, pay for retail purchases, monthly utility bills, flight and movie tickets and more. Their services are available throughout AsiaPacific, the Middle East, North and South America, Europe and Africa.

paymate green

Who Gets the Money: There are no restrictions. “As long as standard ‘know your customer’ validation can be provided and authorized, anyone can use PayMate’s Green Money Transfer program,” he says.

How They Make Money: The sender is charged a 5% fee. Singh points out that the fee is then divided between the sending agent, receiving agent, the telecommunications network, the bank, and PayMate.

What Lenders Say: Too early to tell. The program was just announced on November 5.

About the author

Lydia Dishman is a business journalist writing about the intersection of tech, leadership, commerce, and innovation. She is a regular contributor to Fast Company and has written for CBS Moneywatch, Fortune, The Guardian, Popular Science, and the New York Times, among others.

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