Community Credit Gains Ground
Readers of the newsletter are no strangers of social credit. We have covered many such initiatives in here in the past. While most of them are very small and niche, there are signs that some of them will soon go mainstream. The Economist looks at social credit at a time when banks are growing through some pretty rough times with all the subprime issues catching up. The credit crunch, the article says, is reinforcing areas of difference between social-lending firms and the mainstream market. Without the costly paraphernalia of a normal bank (branches, staff and regulatory costs), social-lending marketplaces have always claimed to offer borrowers cheaper credit than they could get elsewhere. That price gap has widened recently as mainstream lenders have hiked their rates and social lenders have largely failed to follow suit. And why aren’t social lenders raising their rates? One reason is that, unlike banks, they are not facing higher funding costs caused by the seizure in money markets. Another interesting angle is that
social-lending sites do a better job than their mainstream counterparts of assessing risk. Zopa, a UK based social lending site takes a stringent approach to credit assessment and will let only prime borrowers onto the site, boasts a default rate of just 0.1%. Prosper, from the US which is more laissez-faire and has a default rate of 3%, provides measures of “social capital”, such as endorsements by friends, that help lenders to judge the risk of a specific borrower. Read the article here.