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Social banking, as peer-to-peer lending has recently been christened, is doing its job. Over web-platforms, those with extra money and those faced with lack are conveniently brought together.
Editorial: peer-to-peer lending, cowboy style
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The community-like loaning keeps growing like all things Internet. In other words, a guy wants to borrow €1,000. However, he will not ask the neighbour. Rather, via a social bank platform, he gets the loan from ten people, say. And afterwards, he pays the ten guys back, interests added.
Social banking is predicted good success; in other lands as well, people-to-people lending platforms work just fine. Even so, recalling the painful reaction to the popularity of fast-loans-companies, we would still be wise to remember that borrowing-loaning is a financial transaction where risks cannot be disregarded. The more so that social banking is in no way regulated, needing no licence whatsoever – so, the risks are our own to bear.
The risks, at that, are many. Firstly: social banking as such may indeed prosper; but should the company providing go broke for whatever reason (due to side business, say), the lenders may lose their money. Expenses being low, the platform is usually profitable and would probably find a buyer – but... who knows?
The other risk is systemic; at least in theory it exists. Should a whole lot of loans go bad at the same time, resulting in losses for many, it may be that the broker loses grip of the situation. True: in contrast to banks, the risk is spread out wider – the sums involved divided between numerous lenders. Still, the hazard is there.
The third and perhaps the largest risk is linked to the contradiction between principle and name of social banking. Using the word «bank», even if indirectly, sends lenders the message that they have indeed to do with a bank-like enterprise i.e. getting money back is guaranteed to the tune of banking regulations. However, no such guarantees exist in social banking – the segment unregulated by law, as yet. Sound mind says: enterprises involved with mediating money should undergo surveillance. Even so, we are faced with a business which has outrun legislation.
By this, Postimees means not that the phenomenon must, at any cost, be subjected to harsh regulation. Nevertheless, people thus opting to lend to fellow men should be well aware of what’s going on – and consider the risks.