surching4me

I stumbled across a very interesting video today presented by Thomas Power the Founder and Chariman of the business networking website Ecademy and yourBusinessChannel. Presenting from Silicon Valley during a Social Media retreat, he speculates on the idea of large social media players like Google and FaceBook moving into the Banking Space. For a few years now there has been some traction with what is known as Peer-to-Peer Lending. Sites like Prosper, Peer-Lend and the Lending Club.

This is all grabbing traction as the it gains more main-stream awareness of a more personal lending experience combined with the recent global economic fiasco. Trust in traditional banking avenues is not what it once was but the need for lending down on main street continues. According to an article posted by the Washington Post’s Nancy Trejos, an astounding $282 million dollars in Peer-to-Peer loans were made in 2006 alone, with an estimated growth in 2010 to $5.8 Billion Dollars. That is an astounding number of non-traditional loan transactions occuring.

So just what does this have to do with Social Media? Simple, the name of the game in this space is to acquire as many users as possible within your service. Most are aware of the fact that revenue has always been discussed as being generated through Advertising and Marketing channels. Within the banking industry for individual loans it is also the name of the game. On the news we have heard about these traditional banks having issues, but what you are not clearly told is that these Investment Banks primarily deal with the top of the heap, lets say 5% of the population, and that is being generous, while the buld of loans being transacted affect the other 95% of wage earners. The Banks that play in this field are known as the Commercial Banks. Those brick and morter outlets in your local neighborhood. To them it is all about volume and collecting as many depositors as possible to turn a margin.

It is at the brick-and-morter level where Peer-to-Peer lending is beginning to take hold. The more depositors or “Users” the more money is on deposit which the banks either invest with larger banks or allocate for funding loans. In comes Google and FaceBook with user bases that are larger than some individual countries in the world. Adding in a financial hook to that user base has already begun to occur as both Google and Facebook have added things like Google Check-out or
Facebook’s Payments service (which can be found in your account settings.)

In stead of working with an account that is focused on savings or growing a balance, these accounts are used to purchase things on-line through their social services. It is a very small leap for either of these giants to add the functionality to begin offering loans to their users funded by the money maintained in these accounts. “That’s not right!” Is what you say? Well the reality is, this is no different than what occurs in any Commercial Bank. YOU deposit YOUR money, and the bank uses it on the back end for their own gain until you need some of YOUR money, at which time they pull from the pool of money on deposit to give back to you.

It may sound outlandish at first. However with the growth of social media sites and increasingly large on-line usage by the average Man/Woman on the street, why not take advantage of the opportunity to add lending? The biggest difference between the historical loan process and that of Peer-to-Peer lending is the involvement of other Users, who are aware of what their money is being used for. Lets say for example you and 19 other friends of yours decide to form a group that puts $100 each into a single account for the sole purpose of lending out to people looking to borrow money. This $2000 is not put out there for others to apply to borrow from. As with any traditional loan there is an interest rate on that money. the average intereste rate for loans today under $100,000 is around 7.7%. Which means that if you loan out all $2000 you are looking at getting back for your generosity about $154.00. But at that level you are competing with Commercial banks, so why not lower your rate to something more appealing in the Peer-to-peer market? Lets say a flat 7%. You still get $140. Assuming you can turn around that $2000 over the course of a year two, three or 4 times, you can see how your income begins to grow on your initial $2000 investment.

So what would Google or Facebook get out of it? Simple, take you and your 19 friends $2000 on deposit with one of these two, multiply that by the billions of users in their networks, that is a huge amount of money for them to perform the same functions that commercial banks do which is to not simply let it sit there but to actively invest any static funds not committed to loans and generate an additional and probably staggering amount of income for themselves. So as you can see, it is pretty much a win, win, win situation for everyone. You become the Commercial Bank, albeit for small loans, the Social Media service becomes the Investment Bank and those needing small loans have an immense choice of options to choose from in essentially a Loan Marketplace for small business or individuals looking for money.

It will be interesting to see how all of this plays out as more independent Peer-to-Peer lending houses come to the market. I would expect at some point for there to be a mass shopping spree by the likes of Facebook, Google and even Microsoft, snapping up these independent loan start ups to plug into their much larger social networks. I think you can see the possibilties. What the traditional financial services or “Big Boys” think of this, not to mention the numerous international financial regulatory agencies, will be a battle to sit back and watch unfold.