Social lending. Alternative approach
P2P lending could give people cheap credit and high interest rates — by cutting middleman outside the process.
“Traditional lending works — for banks” Banks are to big to fail so risk for them is spread across whole society but not the profits. Making money while providing extraordinary product or services is natural but these institutions are just leveraging special framework made by government just for them. You will get near 0% ROI on account on demand but banks are able to multiply their monetary base to issue more credit then they really have.
Time for some data:
“In the 2000s, in the US alone, consumers paid a trillion dollars in credit card interest expense to banks.” Annual consumer lending revenues is about 420B. Lack of new players is evident.
Returns by portfolio size and age. This is similar to famous Dunbar number, if somebody could split his investments on 146 people the worst case still gives positive nominal return and second thing: purging existing network from bad lenders.
Our solution is to spread the credit risk into borrower friends — people that would vouch for borrower.
Intrest rate depends on borrower credit score (which is based on social graph and other resources) and for the investors — return rate is defined by (intrest rate) 1/(reserve ration) so low demand for money will generate lower returns and will attracts more borrower because of lower fees.
Existing markets are not quite effective in calculating market rates for interest — we propose different system that will make automatic investing possible.
In our social site you are able to invest in friends of friends credits. This is like 10 000 people.
If we assume modest 3% accessible market penetration even narrowed to social neighbours of my friends it is still about 300 people. Much higher that required 146 to give positive return in worst case. And even if somebody in our network will become default — he will be rejected and he will be without his credit line. And network percentage of unpaid loans will be lower and lower if network will become stable in growth. Further growth of network will require some