Is social lending a quaint concept?

An interesting factor common to many of the new alternative markets is the element of simplification: fewer steps per transaction, smaller dollar sums exchanged, and the reduced role of the middleman. To advocates, these characteristics are symbols of transparency, greater citizen engagement in the process, and a sustainable and informed approach to financial decisions. To others, the simplicity is a negative; the transactions are nearly medieval in their marketplace structure, the systems are inefficient, and there is no possibility of scale to make them true viable alternative financial constructs.

The origin of peer-to-peer lending is indeed older than medieval; Prosper’s website marks its advent as 300 AD in China. We have made vast progress since then in terms of efficiency and scale, and it is really only with the possibility of the internet and the growth of social networking that we find a renewal of this simple form of direct lending. Unexpectedly, the latest technological advances have enabled us to draw upon and revive ancient financial practices. Direct lending allows people who have otherwise been shut out of the complex credit market due to factors sometimes out of their control to turn to the old and trusted practice of asking the people around you to lend you a buck. Only now, the “people around you” are the millions on the internet.

Lending to a self-professed “entrepreneur” half way across the country (or world) is not quite the same as lending to your cousin, but these days, just knowing the destination of your money is a significant move towards transparency and accountability. But with this level of engagement in every single transaction you make, it’s true that the possibility of scale is lost. Evaluating potential borrowers on Prosper or Lending Club and then monitoring each loan you choose to make is a lot of work. The sums are small (maximum investment on Prosper is $25,000 and the default rates are high (on Prosper, 20%). Unless you are working with a small sum of money, alternative markets in their current form can only be utilized as an interesting and supplementary subset of any financial strategy.