Harvard Business Review: P2P Lending is 'breakthrough idea' for 2009

Harvard Business Review has named P2P lending as one of the top 20 breakthrough ideas for 2009. John Sviokla, vice chairman and director of innovation and research at Diamond Management and Technology Consultants, predicts p2p lending will be one of the "most important financial-services innovations in the coming decade."

Here is an excerpt from the Harvard Business Review:

...peer-to-peer lending is cheaper than consumer credit. Lending Club’s rate for the best credit risks is 7.88%, whereas the bank rate for personal loans, on average, is over 13%. A credit-worthy borrower gets the money faster and for 5% less.

Why now? First, the internet and social networks enable peer-to-peer interaction on an unprecedented scale. Second, electronic mechanisms for assessing potential customers are emerging. Lending Club starts with traditional credit scoring and adds a proprietary assessment of customers’ reputations within their social networks. You may think of Facebook as fun and games, but important underwriting information is hidden in there for those who know how to look.

So what? A profound secondary effect of the down market will be an increase in the availability of peer-to-peer finance and its convergence with traditional lending. My bet is that mainstream investors and banks will cherry-pick the best investors in Lending Club and other systems – reducing risk by tapping their superior credit-assessment capabilities – and fund them to grant more and bigger loans. Moreover, within five years every major bank will probably have its own peer-to-peer lending network.

If innovative legislation were drafted to allow peer-to-peer risk coverage, similar transactions might begin to flourish in the insurance market. Precise knowledge of local conditions would allow individuals to band together in order to underwrite the cost of insuring properties in safe neighborhoods or to make insurance more widely available in higher-risk neighborhoods.

The current economic constraints will only accelerate the growth of these new entities. I predict that they will be among the most important financial-services innovations in the coming decade.

To borrow or lend through Lending Club click here.