What About Peer to Peer Credit Cards?

It always seemed to me that traditional banks tend to make most of their money on the backs of people making small errors and having to pay penalties rather than just charging for capital as their business model might otherwise suggest. Credit card companies seem to be doing the same thing jacking rates to the maximum allowable limit if their customer goes late on a payment. All of this makes it look like the traditional banks and credit card companies are making money by being deliberately opaque, hiding their true cash cow of fees in the fine print.

The peer to peer lending market that has been springing up over the past few years (Prosper.com, LendingClub.com, etc.) has been exploiting the opportunity this opacity creates. Who would have thought these peer to peer lending sites had a chance against traditional banks? But borrowers and lenders warm up to them because they strive to become as transparent as possible which is a welcome change.

But why do I have to get a loan for a specific need? The reality of the situation is that the current peer to peer lending market is uncollateralized. I can't go hold a chunk of the house ransom if a borrower doesn't pay me back for that home improvement loan I gave him. I can't "repo" the motorcycle I helped that guy in Utah purchase if he defaults, so what sense does it make that these are specific loans for specific goals? I'm merely making uncollateralized loans to individuals for whatever purpose they want. (and they could be lying) Its really just a bet on the person's credit rating and "confirmed" financial situation.

So why couldn't we think of it more like revolving credit? Why couldn't I get a Visa or MasterCard from a P2P loan site instead? The P2P lending company would sponsor the process issuing a credit card to borrowers funded by lenders pooling their money. Adding to the existing P2P loan benefits, the lender makes more money because revolving credit interest rates are higher than "standard loans" and the borrower has much more clarity into the factors that can make his APR go down and credit limit rise over time.

Since there is no one purchase the borrower would be arguing for in their "loan application", their listing would be a generic revolving credit application. Lenders would fund slices of the pool the borrower uses as available credit and the APR and size of the credit pool would be the principal negotiating factors. Over time, as the borrower proved a good repayment reputation, a "credit review" would automatically go up for bid again potentially increasing his credit limit and decreasing his rate.

I think this would make the peer to peer lending market a little bit more realistic. P2P loans are generally uncollateralized just like revolving credit. Give borrowers an easier way to access their P2P credit by issuing credit cards and lenders will make more money without a change in risk. Uncollateralized P2P loans should be granted at higher rates than their traditional collatoralized counterparts.

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P2P Credit Card P2P Loans Peer to Peer Credit

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Comments (3)

Anders from RTP

I started a discussion on this at the P2P-Banking.com blog so head over there for the most current comments.

Joe Davy from Chapel Hill NC

One thing that comes to mind is the purpose for which most "lenders" use these communities. It seems to me that most people look at funding a slice of a loan as a sort of small, high risk/yeild CD (a predefined lifespan, interest rate, etc). That said, revolving credit has an indefinite "lifespan" meaning that a lender would still see dividends from interest payments on the loan, but that they would be unable to remove their original capital from the credit line without decreasing it. Any thoughts?

Anders from Vienna, AU

@Joe: Good point. After some time though, who cares if the principal is repaid? You'll be making more money in the long run. Of course it has a much longer time horizon but at some point the borrower is going to pay off his credit card and close the account as well.