Do you remember the excitement and hoopla surrounding peer-to-peer (P2P) banking in the U.S. just three years back? Borrowers flocked to these websites to make loan requests and lenders were excited with an opportunity to play banker and earn higher returns than they could through traditional avenues. Then the credit crunch hit, default rates soared across all credit levels, lenders quickly discovered that they had seriously under priced risk in these consumer loans, experienced capital losses and loan originations just plummeted.
Against this backdrop, CommunityLend, a P2P service quietly launched in Ontario and Quebec early this year. Like Prosper and Zopa, CommunityLend operates an online market place that matches borrowers with lenders. Borrowers are charged interest on unsecured loans that CommunityLend calls competitive to that charged by banks and credit card companies. For instance, CommunityLend suggests lenders charge a minimum interest rate of 6.00 to 6.25 percent on loans to borrowers with the top credit rating — more expensive than the Prime plus 3.25% (about 5.5%) charged by the major banks on unsecured lines of credit but almost certainly much less than interest rates on credit card balances.
If you are excited about signing up as a lender with CommunityLend, you might be out of luck. Only accredited investors such as institutions and high-net worth individuals with financial assets exceeding $1 million can sign up to become lenders. CommunityLend is still tiny — just $97,000 in loan requests accepted so far but it is still early days. The accredited investor requirement is probably a huge obstacle to widespread adoption in the two provinces. This is not necessarily a bad thing because the past three years have clearly demonstrated the perils involved in retail investors trying their hands at becoming part-time bankers.