Harvard Business Review: P2P Lending is 'breakthrough idea' for 2009

Harvard Business Review has named P2P lending as one of the top 20 breakthrough ideas for 2009. John Sviokla, vice chairman and director of innovation and research at Diamond Management and Technology Consultants, predicts p2p lending will be one of the "most important financial-services innovations in the coming decade."

Here is an excerpt from the Harvard Business Review:

...peer-to-peer lending is cheaper than consumer credit. Lending Club’s rate for the best credit risks is 7.88%, whereas the bank rate for personal loans, on average, is over 13%. A credit-worthy borrower gets the money faster and for 5% less.

Why now? First, the internet and social networks enable peer-to-peer interaction on an unprecedented scale. Second, electronic mechanisms for assessing potential customers are emerging. Lending Club starts with traditional credit scoring and adds a proprietary assessment of customers’ reputations within their social networks. You may think of Facebook as fun and games, but important underwriting information is hidden in there for those who know how to look.

So what? A profound secondary effect of the down market will be an increase in the availability of peer-to-peer finance and its convergence with traditional lending. My bet is that mainstream investors and banks will cherry-pick the best investors in Lending Club and other systems – reducing risk by tapping their superior credit-assessment capabilities – and fund them to grant more and bigger loans. Moreover, within five years every major bank will probably have its own peer-to-peer lending network.

If innovative legislation were drafted to allow peer-to-peer risk coverage, similar transactions might begin to flourish in the insurance market. Precise knowledge of local conditions would allow individuals to band together in order to underwrite the cost of insuring properties in safe neighborhoods or to make insurance more widely available in higher-risk neighborhoods.

The current economic constraints will only accelerate the growth of these new entities. I predict that they will be among the most important financial-services innovations in the coming decade.

To borrow or lend through Lending Club click here.

More on Swap-A-Debt: Sometimes lenders can't find cash either.

This week, on behalf of Prosper Lending Review, I contacted Edward DeFeudis, Chairman of Swap-A-Debt (OTCBB: SWPD) in hopes of scheduling an interview with Mr. Defeudis or Marco Geribaldi, the company’s President.

I can verify that Tom’s suspicion about Swap-A-Debt being some time off from a real launch is correct.

When I contacted the company’s office, I was met with a confused “Hello” followed immediately by “How did you get this number?” As it turns out, I’d reached the company’s chairman himself. I reminded Mr. DeFeudis that the officers of publicly traded companies are supposed to be public record as a matter of SEC regulation and I was very impressed that he answered his own phone. It wasn’t long before I began to suspect his might be the only phone in the operation. (Company president Marco Geribaldi’s phone rings only to a busy signal).

After explaining my purpose was to obtain an interview for Prosper Lending Review about the Swap-a-Debt Web site that we discovered and announced a few days ago, a very pleasant Mr. DeFeudis told me that “nobody knows about us, and we’d like to keep it that way for a little while.”

I pressed further asking about the recent launch and how many loans have been offered on the site thus far. Mr. DeFeudis informed me that the site “works” but that no loans have been offered at this time and that they’re not exactly open for business as they’re in the middle of a Web site redesign and working out some “legal things” which he didn’t seem to want to explain.

Clearly, Mr. Defeudis isn’t ready to promote Swap-A-Debt, even though we’re all excited to hear about it. I sent him my card and told him to call me when he’s ready for some publicity because all of our readers want to know the scoop.

In the meantime, my curiosity piqued, I’ve decided to read through the last couple of SEC fillings via EdgarOnline. Here I’ve learned some fascinating stuff.

Interesting excerpt from the balance sheet revision (October 31 un-audited to January 16, Audited)
BALANCE SHEET DATA: As of October 31, As of January 31,
2008
(Audited)
2008
(Unaudited)

Current assets $ 199,287 $ 384,360

Total assets $ 305,660 $ 494,398

Total liabilities $ 355,178 $ 1,661,583

Stockholders’ equity (deficit) $ (49,518) $ (1,167,185)

Under “liquidity and capital resources” the company’s report states:
Our auditor had determined that based on our financial condition there is substantial doubt as to whether we can continue to operate as a going concern.
The report also says: “In addition, we may not be able to raise additional funds on favorable terms, if at all.”


Swap-A-Debt Stocks are trading on the penny stocks board at an all-time low of $0.11, making this two-man operation worth an impressive $5Million. Not too shabby considering after opening nearly a year ago, they have yet to commence operation.

We’re waiting to see what Swap-a-Debt has to offer us when they are ready to launch for real this time.


For your reading enjoyment, here are my sources:
http://idea.sec.gov/Archives/edgar/data/846377/000121390009000105/fs1a4_swapadebt.htm

A very interesting article about Swap-A-Debt company President Marco Geribaldi’s eclectic and impressive work history, from advising members of the Presley family about Graceland operations to IBM and Helicopter companies. http://www.aviationtoday.com/rw/pressreleases_rw/25639.html

The SEC’s Warning about Microcap Stocks: http://www.sec.gov/investor/pubs/microcapstock.htm

Last week in review, and what to watch for this week.

1/21/09: Pertuity Direct Launches

1/22/09: Swap-A-Debt Launches
1/23/09: Liberia gets its first microfinance bank

1/23/09: Peer to peer loans make the Wall Street Journal

1/24/09: Some complain about Pertuity Direct using a “hard pull” on a borrower’s credit history.

What to watch for this week:
More information on Swap-a-Debt’s launch.
Exciting news from Microplace!

Paying for college the peer to peer way

With Fynanz exiting the US student loan market earlier this month there’s still room in the student loan market for a peer to peer player.

Lending Club requires a swift three-year repayment, and the interest is higher than some commercially-available student loans. Some students may want to turn to Greennote as a funding option. Greennote.com has a fixed interest rate of 6.8% and doesn’t require citizenship or a co-signer. (Prospective investors, take note.) Greennote is backed by Menlo Ventures and is based in Redwood City, CA. They launched in June 2008.

Another alternative for students is a mico-grant program found at CollegeDegreeFund.com. Students establish a profile and companies and individuals can provide a sponsorship of any amount towards his or her needs. Funders can contribute as little as $1.00. This is not an investment program, but a micro-grant program of essentially free money for college students. I’ve sent an e-mail off to the managing partners to see how many sponsorships have been funded so far as they reach the one-year mark of operation and I will update here when I hear back from them.

Pertuity Direct removes beta label; launches officially

After a couple weeks of live beta operations, Pertuity Direct today officially announced the launch of its "next generation social finance platform." On the Pertuity Direct Blog CEO Kim Muhota explains why this is the right time to launch a social lending platform. Earlier this week, Jessica Ward authored a review of Pertuity Direct for Prosper Lending Review.

Here is the official press release:

Pertuity Direct Launches Next Generation Social Finance Platform

Company Brings Together the Advantages of Capital Markets, Social Networking and Traditional Banking

Vienna, VA, January 22, 2009 – Pertuity Direct, an online consumer financial services company built on the foundation of mutually responsible banking, today announced the launch of its next generation social finance platform. Pertuity Direct’s platform enables borrowers and lenders to come together in a social lending network to obtain smarter financial solutions and better rates. Through the National Retail Fund, members have the potential to earn competitive returns via a regulated investment fund.

By eliminating the traditional bank as the middleman, consumers can now get better interest rates than they would typically experience with banks or credit card companies. “Our model is unique in that it combines the benefits of social lending with the strong underpinning of credit risk management, and privacy” stated Kim Muhota, CEO of Pertuity Direct. “For borrowers, Pertuity Direct does not require any public posting of personal credit information, and for lenders, there’s no bidding, researching or guessing involved. We make the process quick, safe and optimal for both parties.”

Investments are made through the National Retail Fund, a social lending mutual fund that combines lenders’ capital to fund a diversified group of approved and credit worthy borrowers. The money is lent to a large group of borrowers through the fund, and as such creates safety of automatic diversification of investment. Unlike with other social lending models, lender money is not tied up for long periods of time, nor is liquidity tied to individual loan repayment. The National Retail Fund provides liquidity through quarterly share repurchases. Currently, two funds are available via the National Retail Fund: National Retail Fund II and National Retail Fund III. Further details on both funds can be obtained in the prospectus.

“By investing in the National Retail Fund, a lender’s money goes to work immediately at account opening, and funds are deployed to available borrower loans without delay,” said Andrew Rogers, Chairman of the Board and Treasurer of the National Retail Fund and President, Gemini Fund Services, LLC. “With this approach, lender money does not sit idle until suitable borrowers are found and the bidding process concludes. This model makes the social lending process easy and efficient for the investor, and beneficial to the high credit quality borrower.”

As part of the social finance platform, the company offers a ‘Pertuity Bucks’ rewards program to lower or eliminate borrowers’ principal loan balances. Borrowers are given the opportunity to tell their story when they apply for a loan and update their profiles as their situation evolves.

Lenders have the option to browse these stories and can award Pertuity Bucks to borrowers who they find most compelling – for example, those borrowers who return to the website and update their profiles to share successes, such as starting a small business or earning a coveted degree.

Pertuity Direct is founded by executives with extensive experience in banking and financial services, including decades of experience from leading financial services firms such as Capital One, PNC, and E*TRADE FINANCIAL. Pertuity Direct is the culmination of Kim Muhota’s vision to simplify financial services for the main street consumer.

P2P lending from family and friends through Virgin Money

Virgin Money out of Waltham, Massachusetts has been in business since 2001--first as Circle Lending, then as Virgin Money in 2007 when Sir Richard Branson (owner, Virgin Records) bought a majority stake in the company. Asheesh Advani, CEO of Virgin Money USA, started his company when he saw a need for the proper management of informal loans between friends and family. And his booming company provides the tools for just that.

Virgin claims to be "pioneers in the social finance sector," and for good reason. Their personal loans have a default rate of 5 percent when most personal loans, without the oversight of a company like Virgin Money, have a default rate of almost three times that (14 percent). In an economy where people with cash to invest are eyeing the stock market with suspicion, where better to invest than in a family member or friend you know and trust, right? Investors are seeing returns of up to 10 percent in the p2p market.

A Friendly Debt?
According to Virgin Money the benefits swing both ways. "Imagine: Aunt Sarah as your mortgage lender!" their site says, promoting the notion of a feel-good relationship between borrower and lender. And from a borrower's perspective, why not send interest payments to your friends and family instead of the bank? If all goes well, this situation is ideal. But the idea of a loan between friends gone bad isn't ignored by Virgin Money. They don't deny the historical tendency for relationships to sour when money is involved. In fact, they claim that with their oversight and financial tools, problems can be avoided in the future, thus sparing borrower and lender from sticky situations and spoiled relationships.

Master to the Lender
From all appearances, Virgin Money provides every tool to make a loan between friends clean, tidy, and professional with terms, interest rates, documents, etc. But what about the notion that a borrower is ultimately master to his lender? It may not be an overt mastery, but an underlying one, nonetheless, and not a characteristic you'd find in many close relationships. Perhaps this distasteful notion could be part of the success of Virgin Money; perhaps it aides in the urgency to pay off a loan sooner and without default. However, money experts such as Dave Ramsey (The Dave Ramsey Show and Lampo Group, Inc.) strongly and loudly discourage lending money to friends and family specifically because borrowers who have been turned away from banks have already been deemed too risky an investment. And he should know. In a financial crisis, Ramsey himself defaulted on a loan for which a cosigner was stuck paying. He goes on to say, "If you truly want to help someone, give money." On the other hand, financial expert, Suze Orman, does not seem as opposed to the idea and provides some tips on her website for making personal loans effective, some of which parallel the tools used by Virgin Money.

There are many things to consider when borrowing or lending money in the budding social financial sector. Companies like Virgin Money address these considerations in a novel way, seeking to take the sting out of borrowing from relatives. Check out their website for more information on their vast array of products.

______

This post was authored by frequent contributor and freelance writer Liz Elden.

Where in the world is microfinance?

This is a summary/analysis of where US microfinance reaches. I'm profiling the organizations included below (in no particular order). I hope you find this as enlightening as I did. If you're aware of other organizations, let me know about them and I'll add them in.

• Opportunity.org - Offers microloans and services to 1.1 million working poor in 28 developing nations.
• Unitus.com - Unitus, an international nonprofit organization, works to reduce global poverty by increasing access to life-changing microfinance services.
• Globalpartnerships.org - Global Partnerships currently works with 21 organizations in Latin America.
• Villagebanking.org - FINCA International provides financial services to the world's lowest-income entrepreneurs in 21 countries so they can create jobs, build assets and improve their standard of living.
• Microplace.com - Owned by eBay since 2006, MicroPlace's mission is to help alleviate global poverty by enabling everyday people to make investments in the world's working poor.
• Endpoverty.org - Since 1985, Enterprise has equipped over 200,000 families all over the developing world to support themselves through their own entrepreneurial efforts.
• WholePlanet Foundation – A division of Whole Foods, provides microloans to microenterprises in ten countries. Unlike Kiva and others, it does not appear that lenders are able to choose the program or individual they would like to contribute to. Total authorized grants to partners as of October 2008 are nearly Eight Million Dollars US.
• KIVA.org – Kiva’s slogan is “loans that change lives” and is one of the leaders in the microlending community. The Kiva Web site allows loan funders to choose individual borrowers to fund, and Kiva estimates that by 2010 they will have facilitated $100 Million in microloans.
• WOKAI – Wokai, meaning “I go” in Chinese is an Oakland, CA startup and has provided just 43 loans in china, but is poised for growth—and has obtained substantial media in areas where its chapter membership is growing such as Seattle and San Francisco. Wokai reaches out to the Chinese-American community for help funding loans that recycle three times (to three different entrepreneurs) and is afterwards used for long-term lending by the lending partner in China.
• ACCION – Accion International is a long-term and global player in the microfinance world. They are active in 24 countries and the USA, and according to their Web site they have made $17.4 Billion in microloans. Their historical repayment rate is a stunning 97%.

Swap a Debt user reviews - false?

Swap a Debt's site has been live only a few hours and is not yet fully functional, but it is filled with testimonials. Unfortunately the endorsements read like ad copy and it is very unlikely these are real users. If not real users, these endorsements have the potential to damage the credibility of the site - the last thing a financial site wants to lose. Here are some of the user comments:

"We got married, bought a house, and had two kids in just a couple of years. It seemed as though we were spiraling downward as our bills increased and our credit scores decreased. Thanks to Swap a Debt, we were able to fix our credit and restructure our debt. We finally see some light at the end of the tunnel. Thank you Swap a Debt!"

I am the owner of a small successful restaurant. I thought that since my business was going well, the bank would give me a loan to expand without a problem. Boy, was I wrong! Thanks to Swap a Debt, I got the money I needed and feel good about my success."

"After the baby came, I made a decision - I needed to start my own landscaping company to live up to my expectations as a father. I was tired of working for someone else. Going to the bank was a nightmare, and it seemed as if I would never get the start-up money I needed to secure my family's future. A friend told me about Swap a Debt, and it was so easy and fast. Thank you Swap a Debt."

"When I discovered that my insurance company was not going to cover my delivery expenses, I panicked. I didn't know which way to turn, and then a friend suggested going to Swapadebt.com. Thanks to your company I got the money I needed to pay the hospital bills and had enough left over to finish the baby room. Thank you Swap a Debt!"

"I was tired of paying high interest rates on my credit cards. I have excellent credit and knew there had to be a way to lower my payments. I tried several times to have my credit cards lower their interest rates, but that was impossible. They would only end up trying to sell me something instead! When I found Swap a Debt, I was thrilled. I got a loan quickly and paid off my credit cards and closed the accounts. If more people did this, maybe it would change the way they do business. Thank you Swap a Debt!'

"We racked up some big credit card debt traveling to Asia to finalize our adoptions. While we consider ourselves blessed everyday for our kids, that debt was hanging over us like a dark cloud. We stumbled across Swap a Debt on Google, and shortly after received a loan at half of the credit card interest rate! We paid off the credit card and turned that dark cloud into a rainbow. Thanks Swap a Debt!"

"When we got engaged, we started to plan for our wedding and our future. We looked at our finances as our first "team" project. We quickly realized that paying such high interest rates on our credit cards was eating away at our savings. We were determined to save for a home, and thanks to Swap a Debt we are well on our way. Thanks Swap a Debt!"

"As a small business owner, I would sometimes find myself short on cash while waiting for my accounts to pay. I was yearning for a quick, simple economic answer to my short-term financing needs. I dreaded going into the bank and jumping through hoops to try to get a loan. Then I found Swap a Debt. I jumped on the computer when I wasn't busy, filled out the easy online forms, and I was done. Thanks Swap a Debt for making something simple; simple again!"

New p2p lending company Swap-A-Debt launches

A couple weeks ago we discovered a new p2p lending company seeking regulatory approval from the SEC. Apparently Swap-A-Debt received approval. Without a press release or formal announcement, the site is now live.

The quiet launch may be intentional - the community link does not work and there is a noticeable lack of legal documents and agreements which typically accompany financial sites. There are six borrower listings but all appear to be test listings. I attempted to register as a lender but did not receive a confirmation email. I was also unable to find a customer service phone number or way to contact the company through the site.


Here is their pitch to borrowers:

If you need a personal loan, a wedding loan, a small business loan, a debt consolidation loan or a school loan, Swap-A-Debt is your answer. Our Lender network makes the process very painless and very simple, while offering rates that are far lower than bank rates.

And the pitch to lenders:

On one hand, your bank pays you 2% interest on Your money; on the other hand, the same bank lends YOUR money to others at 8% to 18% interest rate. It seems a bit unfair. Don't you think? Swap-A-Debt makes the lending process simple and gives you the power to make well-informed decisions about whom to lend, so you can act as your own virtual bank! Use any Compound Interest Calculator, and you will see that in a 5-year period you can get 600% more on your money when you join Swap-a-Debt's Lender network.

The site touts five main features:

• Lend and Borrow Money on a peer-to-peer basis - this p2p lending action appears to be much like Prosper's auction style format. I was unable to find any mention of fees. Borrower's credit profile information is visible to all visitors unlike Prosper which only shows this information to registered lenders.
  
• Credit Rating - According to Swap-A-Debt, their credit rating system is "one of the quickest, most advanced, easy-to-use credit access systems in the industry." You can access information credit report information from all three major credit bureaus.
  
• Credit Doctor - This service is advertised to be able to settle collections and judgments for pennies on the dollar, remove inaccurate items from your credit report, increase your credit score and improve your credit. This service is "guaranteed" to improve your credit. The fee arrangement for the credit doctor service can be found here.
  
• Send Money - This service appears to be similar to PayPal.
  
• Payday Loan - This service may be outside of the p2p lending arrangement.

Although Swap-A-Debt is now live, it appears much of the functionality will probably be rolled out in the next few days and weeks. It certainly has a "beta" feel.

Swap-A-Debt's filings with the SEC occurred on the same day this month and within days of each other last month. If Swap-A-Debt received regulatory approval perhaps Prosper is not far behind.

Swap-A-Debt is a publicly traded company and trades under SWPD.PK. Marco Garibaldi is the CEO and Edward DeFeudis is the President.

Swap-A-Debt becomes the third p2p lending site to register operations with the SEC ahead of Prosper. Lending Club is the largest and most prominent. Pertuity Direct launched earlier this month.

Pertuity Direct Review

Pittsburgh, PA., Pertuity Direct has launched operations with the blessing of the Securities Exchange Commission (SEC). This startup, founded on a value of “mutually responsible banking” offers many ways to differentiate itself from the many players in the p2p lending market.

I’ve long followed microcredit but domestic peer to peer lending is fairly new to me. As someone who, shamefully, still hasn’t moved to online bill paying yet (it’s my new year’s resolution, honest), I’ve been just a smidgen nervous about this fascinating new format to borrow and lend in.

Pertuity Direct eases a neophyte’s fears by offering essentially a “peer to peer” mutual fund, rather than commitment to one single loan holder. For those of you p2p purists, this option is also available.

Pertuity Direct screens borrowers well, requiring a minimum 660 FICO score, but showing that most borrowers have at least a score of 720. Interest rates for borrowers range from 8.9% to 17.9%. Fees for lenders are estimated to be about 3.17%.

For borrowers there are additional advantages, including lower interest rates than many other peer-to-peer sites and no auction process to determine the interest rates. For borrowers this means that loans are funded within 2-3 business days after applying. Fees are relatively low, including a 1-2% closing fee, a $15 late payment fee and a $15 (average) fee for late payments. Borrowers can also benefit from 1% discount for Electronic Funds Transfer payments. Another interesting feature is “Pertuity Bucks” which are given to lenders to award as they see fit to responsible borrowers. These can only be awarded to borrowers in good standing, but are applied to the loan to pay down the balance. (When was the last time any creditor rewarded you for paying your bills on time?)

There are some nice perks to being a lender on Pertuity Direct as well. Pertuity allows for monthly or quarterly automatic deposits into your account from your bank account. They also allow you to withdraw your funds early (before one year) at a fee of two percent.

Pertuity Direct is managed by a team armed with credentials that would impress anyone in the business. CEO Kim Mushota spent 11 years with PNC, and Lisa Lough, the VP of Marketing came by way of E*Trade. The Senior VP of Finance, tom McNally comes from Capitol One.

My greatest complaint is that Pertuity Direct does not yet appear to be “Mint.com” compliant; meaning I can’t view my Pertuity Direct investments inside my mint.com financial overview. (Why can’t everyone just get along and play nice?)

Sources

http://www.wiseclerk.com/group-news/countries/us-pertuity-direct-launch/

http://prosperlending.blogspot.com/2008/12/pertuity-direct-to-launch-immediately.html

http://pertuitydirect.com/About/News/default.aspx

http://www.netbanker.com/2009/01/new_peer-to-peer_lender_pertuity_direct_nears_launch.html