As a famous line crooned by Bob Dylan once extolled, the times they are a-changin'. This is no less true in the banking sector, which is seeing the rise of new forms of lending and borrowing money, namely through person-to-person, or social, lending.

 

According to Sean Emery, co-founder and chief executive officer of RainFin, which recently launched and is an online marketplace that brings together creditworthy borrowers and smart lenders, few industries are as overdue for a radical change as the banking sector.

 

“Banks have positioned themselves as middlemen between people who have money to invest and those who need to borrow money, earning plump margins and fat fees for the privilege,” he began.

 

 

However, Emery pointed out that against the backdrop of a global financial crisis, where people feel that the big banks have failed them, general users are beginning to look at alternatives such as person-to-person or social lending.

 

He elaborated that this new person-to-person model of lending uses the web to disrupt the financial services industry, by directly linking people and groups who have cash to invest with people and even small businesses who want to borrow money.

 

This means that consumers are able to lend and borrow money at more competitive interest rates than they could get from the banks and without the excessive charges and fees.

 

 

Emery continued that the first major social lending marketplaces in Europe and the US  began to rise about five or six years ago; since then though they have grown from tiny operations into a major force in the global financial services industry.

 

He cited a report by TechCrunch, which indicated that in the US, peer-to-peer loans have eclipsed more than $1 billion since 2006, while social loan volumes are around $50 million a month and growing. “In the last 30 days, these two lending marketplaces issued 5600 new loans totalling nearly $64 million with a borrower average interest rate of 15.81%,” he added.

 

Similarly, in the UK, small Peer-to-Peer lenders like Zopa and Funding Circle are poised to potentially replace high street banks in the long run. Nor is South Africa immune to this trend. Emery pointed out that we have had social lending in an offline form called stokvels for years, to which 40% of the South African population currently belong.

 

“There are around 811 000 stokvels with an estimated value of R44 billion in South Africa. Specialised social lending platforms essentially bring stokvels into the internet age,” he added.

 

 

As to what has caused social lending’s worldwide rise, one apparent and obvious answer is the global economic crisis.

 

According to Emery, trust is one of the biggest assets any bank owns and faith in the banking sector has been shaken to its core by financial turmoil. “Against this backdrop, people around the world are questioning why they should not take back a bit of the power they have traditionally given to the banks,” he added.

 

However, people’s growing familiarity with social networks and crowdsourcing, is also playing a part.

 

Emery pointed out that, from group buying to open-source software to social sharing of news and information, we count on the crowd for a range of needs. With this in mind he argued that social lending is a natural progression, provided it’s transparent and well-managed.

 

By taking care of administration, collections and scale, he asserted that such person-to-person lending marketplaces could grow to 100 000 member communities of people lending to and borrowing from each other. This would provide for huge scale and dramatically reduce risk.

 

 

“Consumers are beginning to understand that there is something fundamentally flawed in a model where banks loan money out at prime plus two or three, take cash deposits on interest rates below prime, and essentially pocket the difference, in addition to a range of charges and fees. 

 

For that reason, the rise of social lending could pose a serious threat for South Africa’s banking oligopoly he believes.

“If the global growth numbers are any indicator, social lending is set to explode in South Africa, too. If it does, expect to see some of the most exciting changes we have seen in the local banking sector for years as banks start to rethink their traditional approaches to cash loans,” concluded Emery.   

It is certainly interesting to note that already online crowdsourcing ventures like Kickstarter have become to go-to destination for creatives and inventors in need of venture capital.