Business Model Breakdown is a blog series where we break down a business model into its most elementary components, so that we can see how it is changing the value paradigm in its respective industry
With the peer-to-peer (P2P) lending industry gaining traction worldwide, Community Lend is the first company to break ground in Canada. After successfully navigating the regulatory loopholes, the company is quietly moving into new markets across Canada as they hope to bring back the spirit of community-based lending by leveraging the power of the Internet. Today we will take a look at their business model and gain an understanding of how P2P platforms are changing the game in the lending industry.
For the past number of decades, if you wanted to borrow money for a trip, or a new car, you would have a limited number of options. The most likely scenario is that you would either put it on your credit card, or take it out on a line of credit. Either way, you would go through the bank and pay interest at a rate that was only as competitive as it would be with another bank. With more and more people becoming increasingly frustrated with their limited options, the P2P lending industry came to life.
In 2005, UK-based Zopa introduced the first online P2P lending platform and kick started what is now estimated to be more than a $1 billion dollar market. Between 2005 and 2009, the industry experienced a CAGR (cumulative annualized growth rate) of 80.9%, which is expected to increase exponentially as the industry grows to a projected $100 billion dollar market size by 2012. With numbers like this, it’s no wonder the guys behind Community Lend saw an opportunity to make both a difference and a dollar.
The concept is simple. Lenders (must be accredited investors) are given the opportunity to invest in loans at interest rates from 6-29% (currently, the average interest rate on Community Lend is 16.06%, a number that is high compared to other sites). Borrowers go onto the website to create a loan request and set the desired interest rate. To be considered, all borrowers are screened based on their credit history and general stability in regards to loan repayment. At the point where both the borrower and the lender agree on terms of the loan, Community Lend processes the loan through their website.
Community Lend makes its money by charging a fee to both the borrower and the lender. From the borrower, the company takes the greater of 1 to 2.5% of the loan value, or $75, while from the lender a 1% per annum fee is taken on the outstanding loan balance. Community Lend’s business model relies on scalability in order to make money, as the company only turns a profit when great volumes of loans are put through the system. At this point in time, only $655,000 worth of loans have been accepted, but over time that number should increase exponentially. As a comparison, Lending Club, a US-based P2P lender, was founded in 2007 and by March 2010 had over $95 million dollars in loans funded with over $1 billion dollars in loans demanded (obviously they have a much bigger market).
The value to both borrowers and lenders is obvious. For borrowers, it gives them the chance to get a loan at a lower rate than traditional alternatives. For lenders, it creates an investment opportunity with a pre-screened group of individuals, generating relatively stable cash flow with a much higher return rate than other investments.
The company launched in Ontario and Quebec, and just recently moved into BC. While they are still in the early-adopter phase, it’s likely that it won’t be long before the P2P concept catches on and reaches broad-scale adoption. Barriers to competition are relatively low, but any company who enters the market will have to go through a stiff regulatory process. As the market matures and the industry landscape shifts, companies like Community Lend have the potential to alter the lending marketplace in a profound way. It’s our guess that it won’t be long before banks start to see their share of loans being eaten up by P2P lenders and start developing strategies to counter the trend.
In what is traditionally considered an industry full of dinosaurs, Community Lend is changing the rules of the game by simplifying it. Overall, everybody except the traditional institutions stand to gain as P2P lending makes its way into the Canadian marketplace. After all, it’s nice to turn to the community when you need a little cash for something worthwhile.
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