Microlending and Social Media: Competition Between Banks and Non-Bank Lenders
The mention of microlending may call up images of loans made to farmers in India or credit extended to women entrepreneurs in immigrant communities. While the village-based credit delivered by non-governmental organizations does constitute microlending, it is only part of the scope of microlending today. Now, instead of rural villages, microlending has shifted to social media-based online communities and the prevalent non-bank payment companies are facilitating the transactions. To prevent the loss of short-term loans to competitors, banks need to establish a social media presence that will help retain customers and generate income.
By definition, a microloan is any extension of credit in which either the borrower, the lender or the amount lent is small, seldom above $25,000 and often as little as $500. Oftentimes, a microloan is made to a person who otherwise would not qualify for a traditional loan or credit card. This is not necessarily because they are not credit worthy, but perhaps lack a sufficient credit history.
Community is the Basis of Microlending
It wasn't so long ago that banks served a defined county or region and that credit unions served only strictly-defined groups. Although many financial institutions have moved away from a purely community-centered orientation, many credit unions and community banks still maintain an emphasis on community in their branches and lending practices.
This concept of providing financial services within a defined geography or for a specific group is simply a formalization of the centuries old practice of lending circles in which people pooled their savings and made loans to members of the circle. Lending circles make loans with confidence because they know the applicant's circumstances and capacity to repay. This keeps default rates low. It isn't peer pressure to repay that makes microlending work, it is the community's knowledge of the applicant before the loan is made.
A New Type of Community
Thinking of Facebook as a community is the first step financial institutions must take in order to understand how to use it, and why loans are logical services to deliver via social media.
Facebook enables people to build an online community made up of people they have met and then add new acquaintances that already share a common connection with an existing friend. LinkedIn groups work the same way. People are associated with colleagues and by extension their colleagues' colleagues. It is this connectedness that makes social media communities akin to villages and lending circles.
Microlending on Facebook is already underway. Kiva and Accion are online organizations that solicit for charitable investments to fund microloans to entrepreneurs and small businesses. Among the most successful microlenders is Kabbage. Kabbage, financially backed by UPS, focuses on advancing funds to internet-based merchants. Also of significant note is Microplace, a related PayPal Company. It might be no surprise, if in a few years, Microplace or some other online entity becomes serious competition for banks, just as PayPal has on the payments side.
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