Posts Tagged peer-to-peer lending

Does this sound familiar?

Posted by on Wednesday, 7 September, 2011

This post comes to us from Josh Allison, Relationship Development Manager for Horizon Credit Union in Spokane Valley, WA. Josh will be presenting at CUNA Community Credit Union & Growth Conference, October 24-27 in San Francisco, CA.

It’s a recent email Josh sent to the Credit Union Development Educator email list serve. After reading the post—and the subsequent email discussion it generated—The CUNAverse team thought it would be great to share Josh’s thoughts with you, our readers…

From Josh Allison:

Josh Allison

Josh Allison

Good morning CUDE network!

Last night I saw a commercial for Lending Club. The premise? Simple. Some people deposit money so others can borrow at better rates. Or, as the website says: “Companies like Lending Club are cutting out the middle man − banks − to offer consumers the opportunity to lend money directly to others and obtain a higher return.”

Sound familiar?

A few weeks prior to that, I saw a TED video from the founder of Kiva. The premise? Simple. Some people deposit small amounts of money so micro loans can be made for budding entrepreneurs around the world. So, some people loan money so others can borrow it at more favorable rates. By the way, in her TED talk, Jessica Jackley mentions that she saw an “unmet need” for lending, which is why she started Kiva.

Sound familiar?

And a few months ago, I saw an article on a new program called ride share. The premise? Simple. Members “pool” together and share a ride. You become a member and benefit from the “ride community”.

Again, sound familiar?

Key words being used in all of these ideas include:

  • Community
  • Need
  • Club
  • Membership
  • Pool
  • Join
  • Together
  • Benefit

These words have historically belonged to the credit union movement. And now we’re sharing them with trendy new companies? Lending club explained their “club” concept in 31 seconds and I got it. Are our members “getting” our concept?

Two questions:

1. Are we articulating our CU difference and community concept, as well as these companies are…and in a way that resonates with a growing number of consumers who value this type of “community”?

2. Are we leading this new consumer trend for “mutual self help” or following from behind?

Josh Allison, CUDE

Relationship Development Manager | Horizon Credit Union


Interested in hearing more from Josh Allison?

You can learn more about this topic from Josh and many others at the CUNA Community Credit Union & Growth Conference, October 24-27 in San Francisco, CA.

Peer-to-Peer Lending and the Credit Union Tradition (Pt. 2)

Posted by on Monday, 29 August, 2011

In this, the second part of a two-part series, Matthew Cropp outlines his opinion on how peer-to-peer lending may help credit unions capitalize on the the social capital of their members. Don’t miss Matthew’s first post on the topic, here.

From Matthew Cropp:

When Alphonse Desjardins and Edward Filene began spreading credit unionism in North America at the beginning of the twentieth century, their primary motivation was to stop loan sharks from preying on those of modest means.

Have you seen The True Story of Credit Unions comic book?

At that time, most banks felt that small consumer loans were too risky and costly to be worth providing, and so, when they needed credit, working people often had to turn to loan sharks who would charge hundreds, or even thousands, of percent interest. Such debts could quickly spin out of control and immiserate borrowers, who would often end up paying many times the loan’s principle.

Thus, to bring affordable credit within reach of millions of people, the early credit union model functioned to leverage the social capital of members by requiring that credit unions have a narrow common bond. In practice, this often took the form of a workplace, church, or neighborhood; essentially, any community in which people regularly interacted with each other in roles other than that of “credit union member.” The social knowledge generated by those relationships was then used by the organization’s credit committee to determine whether or not to approve a loan.

The volunteers on the credit committee were respected community members who were elected democratically by the membership as a whole, and they generally viewed their role as an important trust. Thus, while commercial banks shied away from borrowers of modest means, credit unions were able to leverage the social capital of their “host” communities in order to fill the gap by providing low-interest loans to their members.

However, as the banking industry grew and became more sophisticated following the Second World War, the consumer credit niche that credit unions had dominated became more and more competitive. Pressured to provide increasingly complex and capital-intensive services in order to remain relevant, the nexus of the credit union movement’s growth shifted from the creation of new credit unions to increasing the size of existing credit unions through mergers. In 1969, the number of individual institutions peaked at 23,761 before beginning a steady, continuous decline.

At its core, this transition from small, tight-knit organizations to the large, community-based credit unions that form the bulk of the contemporary movement represented a profound trade-off.

On the one hand, the new credit unions could leverage economies of scale in order to provide newly developed services that would be far beyond the means of a traditional credit union to offer. Conversely, as they added an increasing diversity of membership groups to their common bonds, the social capital that the new credit unions could leverage for the accurate provision of credit rapidly declined, and the responsibility for determining credit-worthiness shifted from the volunteer credit committee to the professional loan officer.

On net, however, the benefits of economies of scale seemed to trump the losses that came with decreasing institutional social capital, and so the trend towards larger and larger credit unions has persisted down to the present.

The recent (re)emergence of p2p lending suggests that, for credit unions, the economies of scale vs. economies of social capital trade-off may no longer be necessary.

This does not mean a return to the simple credit unions of old; indeed, the nature of “community” has radically changed for many people since the first half of the twentieth century. Back then, there were numerous institutions that people expected to remain part of for large parts of their lives: the life-long employer, the church parish where one was both baptized and laid to rest, etc.

In the modern, globalized, intensely interconnected world, however, the flexibility of many people’s careers and lives means there are few large, geographically stable communities in which they are deeply invested that can be tapped by credit unions for social capital. Community still exists, of course, but its webs of trust and obligation are widely distributed and far more protean than in previous eras.

As such, fully leveraging the social capital of credit union members while also retaining the benefits of economies of scale requires a re-examination of a subtle aspect of credit union identity. In the past, credit unions were founded as institutions that provided their host communities with the infrastructure necessary to financially reinvest in their constituent members. However, as credit unions grew in size through mergers, the institutions’ identification with any particular community decayed, and with that identification went the ability to mobilize that community’s social capital.

What has remained is a commitment to serving the member as an individual rather than as a member of a specific community.

It is this contemporary commitment that provides a powerful opportunity for credit unions to re-engage with the social capital of their members. Instead of being devoted to the development of an already existing community, credit unions might see their current mission as facilitating the development of the plurality of communities in which their members are participants.

There are a variety of ways to approach this goal. In my opinion an obvious one is for credit unions to construct infrastructure that allows their members to lend directly to each other on a peer-to-peer basis. By providing expert guidance and systems designed to make originating, receiving, and collecting such loans a relatively simple process, credit unions would be empowering their members to fully leverage their idiosyncratic social knowledge of each other to increase the availability of credit, especially for people in their communities for whom loans at reasonable rates are currently out of reach.

Though utilizing a novel approach, I would argue that such a program would, in fact, be carrying on the vitally important work, begun by Desjardins and Filene more than a century ago, of credit unions harnessing the power of social capital to improve the lives of under-served and marginalized populations by making available affordable credit.


Matthew Cropp is author of the blog Credit Union History and earned his MA in History at the University of Vermont.

Peer-to-Peer Lending and the Credit Union Tradition (Pt. 1)

Posted by on Wednesday, 24 August, 2011

This is the first in a two-part series from Matthew Cropp, budding historian and author of the blog Credit Union History. Look for his second post in the coming days which outlines Matt’s opinion on how peer-to-peer lending may help credit unions capitalize on the the social capital of their members.

From Matthew Cropp:

In recent years, the emergence of “peer-to-peer” (p2p) lending has been one of the most interesting and discussed trends within the world of financial services. A number of for-profit companies, such as and, have sprung up which allow individuals to make loans directly to each other (minus a service fee), and the open-source project Rain Droplet has been pioneering the provision of such services on a quasi-cooperative basis. The fast-growing industry, which has originated hundreds of millions of dollars in loans, has even been recently featured in the New York Times.

The reason to which much of the media ascribes the success of this phenomenon is that p2p lending represents technologically facilitated dis-intermediation of the provision of credit. By cutting out a large percentage of the bureaucratic apparatus that separates the person with surplus savings from the individual with need for credit, the story goes, “depositors” can receive higher rates of return and “borrowers” lower rates on loans than either would get from a traditional financial institution.

While true as far as it goes, a myopic focus on this dynamic neglects another factor that has been key to the explosive growth of p2p lending: “social capital.”

According to the sociologist Robert Putnam, social capital is the idea that “social networks have value. Just as a screwdriver (physical capital) or a college education (human capital) can increase productivity (both individual and collective), so too social contacts affect the productivity of individuals and groups.”[1]

In the case of the provision of credit, social capital is key to determining the riskiness of a particular loan in two vital ways.

First, it allows for the lender to more accurately assess the riskiness of a borrower. At a traditional financial institution, the relationship between the loan officer who decides whether or not a loan is extended and the potential borrower is generally characterized by a low level of social capital.

Working with such sources as credit scores and interviews in which borrower attempts to put the best face on his or her situation, even the most skillful professional will be left with a great deal of uncertainty that has to be priced into a loan. As a result, many borrowers must pay more than would be necessary had their financial institution access to perfect information, and some deserving borrowers are excluded from credit altogether.

By contrast, the information that a lender who is also a personal acquaintance of a borrower has to work with can potentially be far more comprehensive. Not only can the p2p lender see the same “objective” measures as the aforementioned loan officer, but he or she can also factor in the idiosyncratic knowledge that can only be gleaned from observing the potential borrower in a variety of social situations over time.

Thus, while a borrower with a bad credit score might be rejected by an institutional lender, an acquaintance who better understands the full context of that number might judiciously decide that the borrower could, in fact, meet the desired obligation, and thus decide to extend him or her credit.

In and of itself, such an informational advantage would likely be sufficient to drive the growth of p2p lending. However, its effect is augmented by the fact that greater social capital doesn’t simply allow for more accurate predictions of default risk; rather, it actively reduces that risk.

When an individual defaults on a loan originated by a large institution to which he or she has little social connection, the consequences are predictable and almost entirely economic. That person might have certain objects repossessed and will have more difficulty obtaining institutional credit in the future, but the fabric of relationships that constitute his or her social life remains relatively unaffected.

In addition to carrying the economic consequences outlined above, defaulting on a loan from an acquaintance can have profound social consequences. Not only can it disrupt the valued relationship with the lender (including access to the resources and opportunities that said relationship provides), but the default can also spill over and affect the defaulting borrower’s relationships with mutual acquaintances. Unless there is a very good reason for the default (such as an unexpected job loss or catastrophic health event), those mutual friends would interpret the default as an injustice inflicted upon the lender and might thus socially punish the borrower in a variety of ways.

As such, borrowers are incentivized to work far harder to continue servicing p2p debts than they would debts originated by impersonal financial institutions.

By leveraging social capital in these ways, it is clear that, all other factors held equal, p2p lenders can rationally provide cheaper credit than can impersonal financial institutions. However, when recent journalistic reports have contextualized the practice as a new phenomenon that is entirely dependent on recent technological innovations, they’re ignoring a fundamental fact: that, for its first fifty-odd years, the growth of the credit union movement was driven by the very same dynamics, and that it can, in fact, be understood as having pioneered p2p lending.


More to come in Matt’s next post, including his opinion on why social capital in today’s world can help credit unions.

[1]Bowling Alone, 18.


Matthew Cropp is author of the blog Credit Union History and earned his MA in History at the University of Vermont.


>Is traditional lending headed out the door?

Posted by on Wednesday, 17 October, 2007

>Hey folks, I just ran across a really interesting article that you need to check out. Not only does it give a pretty good overview of the current peer-to-peer landscape, the author highlights an individual who uses peer-to-peer lending as a means to escape the for-profit payday lending trap.

The article goes on to talk about how peer-to-peer groups such as Lending Club are using social networking sites to conduct business. Credit unions also get a shout out, as Aite research director Christine Barry points out, “Peer-to-peer lending reminds (her) very much of the credit union model… You’re usually lending to people that belong to the same kind of affinity group. There’s a certain degree of trust.”

Call me a credit union dork, but I love reading about this kind of stuff. I get all excited thinking of all the possibilities for credit unions with peer-to-peer lending, social networks, and specifically the 18-to-30 demographic.

>Peer-to-Peer Lending Continues to Grow

Posted by on Thursday, 13 September, 2007


My colleague Josh has posted on the emergence of peer-to-peer lenders before, but it bears repeating:

These tools are not going away. In fact, quite the opposite.

In his his original post, Josh pondered, “How successful Lending Club will be…remains to be seen.” Well, in a post today, TechCrunch notes “Lending Club, the Facebook exclusive person-to-person lending service has passed the $1 million mark in loans to Facebook users.”

That’s not all, to me the big story is the timeframe – “The milestone comes just short of 3 months since the the site hit the $100,000 mark, and 3 1/2 months since going live as an original Facebook Platform partner.” It took less than four months to hit $1 million in loans. The average loans is about $4,700 to $5,250. How many credit unions can say that?

Lending Club will also announce today that they will expand to thousands of alumni associations and professional organizations.

For more information:

Filene recently released a report on peer-to-peer lending here. My favorite nugget from the report is where author George Hofheimer notes, “I had presented the P2P lending model to him [a CU lifer] and a group of credit union executives. What struck this experienced CEO was the similarity between credit unions in the 1950s and P2P lenders today.”

That’s right folks – History is repeating itself. Credit unions need to get back to their roots.

Other peer-to-peer sites of note:

Related articles:

Finally, a shameless (but related) plug – The CUNA Councils just released a great white paper entitled, Member and Staff Retention in a Gen Y World. More info is here.

>Alternative Financial Services and My Generation

Posted by on Thursday, 16 August, 2007

>NEWSFLASH… In case you weren’t aware, young adults are prime candidates for “alternative financial services” (AFS). These services include check cashing, pay day lenders, pawn shops, auto title lenders, rent-to-own shops, and refund anticipation loans…. you get the idea.

According to a recent REAL Solutions Special report: Solving the Financial Service Needs of America’s Working Families, folks who are likely to use these services are people who have:

  1. Little to no savings,
  2. Limited or blemished credit history,
  3. Are low-to-moderate income,
  4. Have no deposit accounts

These characteristics mesh with a large portion of the 18-to-30 crowd, and AFS purveyors are well aware. As any business would, they set up shop where folks are most likely to need their services. Young members of the military, for example, are surrounded by these alternative financial services as soon as they step foot off of their base.

And let me get one thing straight, I’m all for businesses doing what they can to succeed. However, when a business practice is irresponsible and/or takes advantage of an individual’s situation to make a buck… then there’s a problem. In this case, it’s a problem I think credit unions can help fix.

Want a real life example? Okay… here is a story of an intelligent young woman, also a credit union employee, who was caught in the AFS trap as a young adult. Her candid tale appeared last weekend in the Baltimore Sun.

In short, Aziza is awesome and very passionate about preventing others from following in her financial footsteps. We had the chance to chat during a Maryland/DC Credit Union Association REAL Solutions program this Spring. I can only hope that more folks out there in credit union land are as passionate as she is when it comes to AFS in general, and helping credit unions better serve 18-to-30s.

>I Can Get Money On Facebook?

Posted by on Tuesday, 17 July, 2007

>Yep, just log on to your Facebook profile… add the Lending Club application, click on a few links to setup your account with Lending Club, and you can be a part of the recent trend of organized peer-to-peer lending that is quietly gaining popularity. While Lending Club is not sponsored or created by Facebook, their use of Facebook is another way social networks are being used to drum up business and spread the word.

Zopa, a peer-to-peer lending group in the UK, now has a page or two on Facebook… however they aren’t directly soliciting members as Lending Club has done. This is most likely because they have yet to launch in the U.S. Here is an excerpt from Lending Club’s Facebook page:

Thinking of charging $1,000 or more to a credit card?

Think again: the Facebook Lending Club is a fun, smart and responsible way to get a small loan from the Facebook community, fully online, at the lowest possible rate.

So, why do I bring this up? To broadcast how social networks are being used to directly target young adutls and offer financial services. How successful Lending Club will be, and whether their use of Facebook will have any impact on that success, remains to be seen.

I will go out on a limb and say groups like Zopa and Lending Club are doing one thing right with the use of Facebook… they are reaching out to the demographic on their terms and being relevant to their needs. They aren’t afraid of being a leader and trying something new. And if this takes off, they won’t be the one’s playing catch-up.