What a difference a year can make! One year ago, a barrel of oil cost $58 and most mortgages, brokers and agencies were solid. Back then, banks had time enough to consider the next big market segment – Gen Y – and the next big technology – Mobile Banking.
Today’s bankers are focused on surviving one day at a time, and while that makes sense in today’s volatile credit market, keeping an eye on emerging strategies, competitors and service channels should never be far from any banker’s mind.
You see, while bankers have been busy fretting about real estate values, credit quality and liquidity, their Web 2.0 counterparts have been dreaming up a new blend of finance and social networking called “social finance”. Its market share is expanding rapidly and could take the world by storm like ING Direct which accumulated a staggering $63 billion in just three years. We could learn a lot from this Web 2.0 banking model.
Social finance companies such as Prosper and Zopa entered the banking market in 2005. Backed by global investment companies such as Benchmark Capital, Fidelity Ventures, and Wellington Partners, the social financiers attempt to reach a younger demographic with several blends of financial services and social networking.
So far, Prosper has attracted more than 500,000 members in the US while Zopa had attracted around 200,000 in the United Kingdom prior to arriving in the US late in 2007. Neither company reveals its current product numbers or total assets.
The social finance concept is simple – the borrowing members take out small loans ($25,000 or less) while other members invest in those loans. Prosper conducts an online auction where investors bid on the borrowers’ loan requests. Once the auction ends, Prosper combines the lowest rate bids into a single loan to the borrower. Prosper then handles the on-going loan repayment, reporting and collection tasks on behalf of the matched lenders and borrower.
A similar process occurs with Zopa. Here the investor buys a one year CD and understands that he (or she) must donate a portion of the yield to reduce the monthly loan payment for one of Zopa’s borrower. The portion can be as little as one-tenth of one percent. Zopa borrowers create special profiles that explain their reasons for borrowing, and investors review the profiles to decide who to help. Zopa borrowers are encouraged to “market” their profiles to friends, family and others willing to help them with their loans.
Obviously, this “get-to-know-your-borrower” concept is quite different from traditional banking where deposit customers rarely know the borrowing customers — although the connection certainly exists in portfolio lenders. The Web 2.0 version of lending establishes a more direct connection where the depositor actively helps the borrower. The concept evokes strong allegiances between lender, depositor and the social finance company.
Add competitive rates and a guaranteed return, and these social finance companies stand a good chance of increasing their market share beyond current levels. At this writing, Prosper offers a loan rate as low as 7.68% while Zopa offers 8.48% minus the contribution of well-meaning investors.
Could a more traditional bank jump into the social finance game? Of course! Banks have well-established – and regulated – underwriting and collection practices. Add the advantage of ties to the local community and the social finance model may be just the ingredient that helps build a community bank’s market share in these turbulent times.
The following ideas borrowed from the social finance model and other Internet banking entities that can help you expand your business and compete against the emerging Web 2.0 companies:
These are sobering times for every banker, and we will be watching Fannie and Freddie for some time to come. But these sobering times will end, and when they do, more of your customers will be online than they are today. Keeping an eye on Web 2.0 will help you prepare for them and keep your bank strong in the future.
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