Peer to Peer Lending – Will it replace banking?


If you have been following my blog…

You will know that I am investing my time and energies into peer to peer lending.

With a wave of peer to peer lending start ups over the last few years, the model has proven to be viable (While very early still).

For those of you not familiar with peer to peer lending it is like a marketplace for borrowers and lenders to borrow and lend money with each other.

Sort of like the ebay of banking.

The implications for banks of peer to peer lending becoming more popular are big.

Its popularity is inevitable as more products are developed to secure the loans through clever risk modeling.

While the industry is young and relatively under developed, we have seen how social networks have changed the internet rapidly and I for one can see the same happening in banking.

Hence the investment and interest.

No banks have made an acquisition of a peer to peer lending marketplace yet.

But what happens if Thomas Power’s theory (A good friend of mine that created one of the first social networks – ecademy) on The Bank of Facebook becomes a reality?

Well Thomas forecasts that when social networking meets financial services we have an interesting scenario for banks to say the least.

Hence the reason why Facebook is more than likely looking at the US peer to peer lending companies LendingClub and Prosper.

What happens when the products get more innovative and start to take the risk of default away from the lender through insurance or a reserve fund for defaults?

My answer is…

…a touch of clever marketing and people will get fed up with receiving lousy interest rates from banks, want to take less risk than stocks and not pay management fees on mutual funds, unit trusts and other collective investment schemes.

The net result?

Peer to peer lending will become a serious asset class that will grow quick.

So this has all the potential to be a big breakthrough in the way we borrow and lend and something the banks would be crazy not to be looking into.

But there is a problem…

There is a huge problem that will stop the true success of peer to peer lending…

…banks are responsible for supplying our nation with 97% of our money supply through their loans.

In other words if people stopped borrowing through banks and only borrowed real money from their peers, we would be in a dire depression with no money in circulation.

So the only way for this system to prevail is for politicians to reform the way money is supplied to our economy.

Take away the banks license to print money called fractional reserve banking and the industry can boom.

This special subsidy we pay to banks to allow them to create our nations money supply will keep the peer to peer lending market relatively small in comparison to banks.

The market will allow for many successful peer to peer lending companies, but they will never be able to compete with banks until we look at the way money is created.

But the good news is…

…our economy will collapse eventually if we don’t reform, so this will happen at some point.

Once this happens all banks will only be able to lend real money and they will have to compete with peer to peer lending companies.

Peer to peer lending companies do not have the overhead of 200,000 staff and branches across the world so it will be interesting to see how banks plan on competing when they don’t have the special subsidy.

So here is my forecast…

Once we are done with this round of quantitative easing to refinance a false economy, we will get the inevitable next financial collapse.

Politicians will blame the banks to move the negative PR away from politicians and over to bankers.

Banks will lose more popularity.

Peer to peer lending will start to get more business allowing it to invest in marketing to make more people aware there is an alternative.

The social networks will acquire or joint venture with the peer to peer lending companies or peer to peer lending companies will become more like social networks.

As people stop borrowing from banks and consolidate their debt through peer to peer networks the money supply will contract further as money is created through bank loans.

During the depression that will follow, the government will start to look at monetary reform as they realise they cannot refinance through quantitative easing any further.

And hey presto.

We have a banking and money system that works.

How long this will take?

That I cannot answer, it depends how long we are willing to continue with this quantitate easing ponzi scheme and how long we can pay interest on money that does not exist.

You heard it here first.

Love it or hate it, let me know what you think below.

Simon Dixon

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9 thoughts on “Peer To Peer Lending – will it replace banking?

  1. GuySands

    Thanks to the power of the internet, for disseminating information, public ignorance on the way the banking system works is gradually being lifted. As you mention in your piece, the fact that private banks are allowed to create money through debt (money created from thin air essentially) is not only grossly unfair but it is also the root cause of all our economic roles.
    This debt based money system was barely mentioned in the IBC interim report, and it looks increasingly likely that their investigation of the banks will be the sham that one might expect it would be. I am personally doubtful that there will be any significant change. In fact I am suspicious that everything has already been pre-agreed with the banks so as not to be too painful for them and the investigation will be nothing more than a pre-scripted piece of theatre for the general public with the banks apparently ‘furious’ about the ‘radical’ reform imposed on them by Government.
    In reality the show will go on and the banks will continue to print money from thin air and lending it to people at interest – including the most RIDICULOUS thing of all –to the Government (which could be creating it’s own money), but doesn’t.
    Bill Still does the best job of summarising the problem in this excellent 8 minute video clip:
    Regards, Guy

  2. Enjoying this debate. Even better that the technology is rapidly developing- creating solutions (or at least challenging) big constructs of currency infrastructure.

  3. Mr Simon Dixon:
    Please correct me if I am wrong. In peer to peer lending as I understand it banks could only loan money out created by the government and deposited with with a bank either by the government or by a person or other entity.
    My question is, If we had a contraction of the money supply of several trillions of dollars, how would the government inject the replacement money into the economy to prevent a collapse of business activity? In other words to prevent a recession or depression. Would we have to create government jobs or a bigger welfare state to put the money in people’s pockets. The inability of banks and the government to increase people’s disposable income is why we do not have a strong economic recovery in the USA.
    Another question.

  4. Nice post!

    I think we are at the tip of the iceberg here. Fueled by the current interest rate environment, people are looking for alternative investments. P2P lending will continue to grow and I’d expect more sites and more options to launch (secured loans? some form of a mortgage loan?).

    The biggest threat to P2P probably is a healthy economy. Remember when ING paid 5% interest 4 years back? However, I’d expect the borrower rates on P2P loans to rise as well.

  5. Tom

    I love the idea but what makes the peer to peer money any more “real” than the bank’s “money”? What substance does it have, especially if it was created in the current system which we know is a Ponzi scheme.
    The issuing power should be taken from the banks and given back to Government to do it on behalf of the people. It is only a means of exchange, not a commodity.

  6. Marek

    As I see it the P2P lending idea is a nice scheme to push forward the monetary reform from the bottom up. There is another one: setting up of alternative currencies. However, first we should define what money really is. We were taught three major factors of production are land, labour and capital. However, what we really have is our Planet and People. That is it. What is capital? What is money? I would define money as a measure of value or intermediary in exchange. Therefore the increase of money through interest violates this essence. If we want to nationalize our money and create it for the people by the people, debt free, we should think of getting rid of interest once and for all on all levels. Then there is the question of backing of the currency. Should it be a basket of commodities? Or should it be work? Well in order to extract commodities we need human effort. I would strongly suggest that the only backing of money should be labour or human effort for the good of all humanity. This means a fundamental change in our mindset. I am not a religious person but I agree with the major world religions when it comes to interest. It is usery.
    Wiki on usery:
    Usury (in the original sense of any interest) was at times denounced by a number of religious leaders and philosophers in the ancient world, including Plato, Aristotle, Cato, Cicero, Seneca, Aquinas, Muhammad, Moses, Philo and Gautama Buddha.
    Here is what Tomas Aquinas thought about money and interest: To take interest for money lent is unjust in itself, because this is to sell what does not exist, and this evidently leads to inequality, which is contrary to justice. Money was invented chiefly for the purpose of exchange. Hence, it is by its very nature unlawful to take payment for the use of money lent, which payment is known as interest.

  7. fatbloke

    Banks currently have a number of advantages. Firstly they can borrow from the BoE/Fed at subsidies rates and lend out at commercial rates. Secondly they can lend more than they borrow due to fractional reserve banking making a margin on each loan and thirdly they get to lend the same money several times over as the money they lend out gets deposited back with them by the other party after it is used in a transaction. Fourthly they can write down bad debts as a business expense which most P2P lenders can’t and finally they are taxed at lower rates than most people with enough assets to consider P2P lending which is now at the 40 or 50% rate.
    One way banks might face the P2P threat is to buy up a P2P platform – ZOPA will be on the market before long. They could even lend money out to potential lenders and thus bring FRB to P2P lending!

  8. Steve Isaacs

    Hi Simon,

    An interesting article that raises a few questions – I’d be interested to read more of your thoughts.

    Do you envisage a scenario in which loans lent through peer-to-peer lending are regulated by the Financial Services Authority, or equivalent, with all the associated guarantees and assurances to depositors? One of the biggest obstacles the industry faces as I see it is to offer security to lenders. At present, the practise of ‘investing’ money with peer-to-peer lending organisations is far closer in risk-reward terms to investing in stocks and shares than it is to depositing money with a bank.

    As for banks’ alleged advantage due to fractional reserve banking, do you not think that interest rates offered on loans are simply a function of the risk associated with that loan, and that this rate will therefore be the same regardless of where the money being lent originates? As far as I understand, banks aren’t offering lower rates simply because they have the capacity to create the money which they lend. The fact that many peer-to-peer lending organisations have been able to undercut banks’ loan rates also calls into question the advantage you suggest banks currently have.

    I hope you can find the time to share your thoughts. Keep up the good work.

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