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Person to Person Lending - Can it get as big as banking?


If you have been following my blogs... 

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

With a wave of person to person 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 person to person 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 person to person lending becoming more popular are big.

It's 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 person to person lending marketplace yet.

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 person to person 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? 

Person to person 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 person to person 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 person to person lending market relatively small in comparison to banks. 

The market will allow for many successful person to person 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 person to person lending companies.

Person to person 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. 

Person to person 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 person to person lending companies or person to person lending companies will become more like social networks. 

As people stop borrowing from banks and consolidate their debt through person to person 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.


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