IOU Central launches person-to-person finance platform in Canada (1)
IOU Central has launched today, and it’s a website allowing canadians to get loans from other inviduals on the website, also known as person-to-person lending or social finance.
The promise of the service for borrowers is that they will get to tell their story, why they precisely need the money, and any other personal details that would allow them to connect with other members of the website, in contrast to going to a “classical” finance company which would only focus on your credit history, your current revenues, and assets.
For lenders, it’s an opportunity for those who emphasize direct relationships when investing, and know personally which business/individual you are investing in. Lenders also get a high rate of return, up to an advertised 10.65% on their investment. Lenders can also choose to invest the amount of their choice for a request, to get risks distributed amongst other members.
Person-to-person lending is seen by most people as a revolutionary idea, a way to get easy funds for your upcoming projects and cut out banks. The first wave of p2p lending came two years ago, with zopa in the UK, which has now expanded in the US and Australia, lending club, and prosper, with each company making the promise that they will change the credit industry.
In practice though, the idea is not perfect. For instance, you can’t finance a house or any other sizable project. Most of requests are in the $3.000 - $10.000 range. Most of the members on these websites also realized that most of the requests had a high default rate. These websites then encouraged lenders to diversify their “portfolio”. This was a tactic used by lending club, which brought down the minimum loan to $25.
One thing I know though is that there is always a psychological barrier to micro and p2p finance. When someone invests his own money, there is always a minimum period of thinking and opportunity assessement, even if the transaction in question is just 50 cents. Websites like lending club encourages frequent and small transactions, which might not psychologically feasible for lenders.
This doesn’t mean though that p2p is a bad idea; to the contrary. Services like IOU Central fills a void in the credit landscape for people who don’t have access to classical financing options. I have also looked at the team behind IOU, and it seems that it started as a joint venture behind Palos Capital, a investment management firm, and FairRates, which was a p2p danish-based company.
Well, I’m definitely very excited to be seeing this development, I’ve been holding my breath for a while :)
Although there is a bit of a trend toward more “social” lending, based upon what a person’s need for the loan is and such, I’d imagine that most lending is going to be done objectively, by D/I ratios, incomes and the like.
It is a bit unfortunate, but the way the systems are currently structured, we don’t really socially know the borrower too well, I’m not even aware of mechanisms to contact them after the loans close.
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