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“An Analysis of European Online Micro-Lending Websites” “An analysis of European online micro-lending websites” AUTHORS Arvind Ashta Djamchid Assadi ARTICLE INFO Arvind Ashta and Djamchid Assadi (2010). An analysis of European online micro-lending websites. Innovative Marketing , 6(2) RELEASED ON Wednesday, 09 June 2010 JOURNAL "Innovative Marketing " FOUNDER LLC “Consulting Publishing Company “Business Perspectives” NUMBER OF REFERENCES NUMBER OF FIGURES NUMBER OF TABLES 0 0 0 © The author(s) 2021. This publication is an open access article. businessperspectives.org Innovative Marketing, Volume 6, Issue 2, 2010 Arvind Ashta (France), Djamchid Assadi (France) An analysis of European online micro-lending websites Abstract With the development of web 2.0, a new kind of lending is taking place on the internet, termed peer to peer lending or social lending. In Europe, this includes commercial lending websites such as Zopa, smava, boober, Kokos and Monetto. At the same time, following the lead of Kiva in the US, European microcredit web platforms are coming up including MyC4 and Babyloan in Europe. The paper examines how the legal design of the online websites differs from the micro- credit websites in Europe and how this impacts social performance issues of the different models. Since the population size of these websites is rather small, we use a comparative case study approach. The case study approach is the most adapted to studying small samples in more detail. The case studies are based on exploring of web- sites and review of academic literature and press reports. We find that although web2.0 permits platform models, most sites (commercial or micro-lending) have retained inter- mediary roles and have not permitted direct peer-to-peer contact. The paper will outline the advantages to both borrow- ers and lenders in the different models and their motivations. Challenges for expansion, such as trust-building as well as a marketing analysis will also be presented. The findings would lead microfinance institutions to lobby for specific laws, and invest in online lending solutions to radically reduce operating costs as well as to increase outreach. This research would add value to those who are operating in or launching new online microcredit platforms to under- stand this young and fast changing marketplace. Keywords: online lending, regulation, social performance, microfinance. Introduction© MyC4 and Babyloan. However, models are mushrooming all over the world, with a number of Since the early 1970s, Microfinance is growing at them in India alone. 30% per annum, but the vast majority of the poor are still underserved. Moreover, most of them are Although traditional microfinance has developed in being served at interest rates significantly over poor countries, today many developed countries are commercial lending rates, owing to small loan sizes also using the system with adaptations based on leading to high transaction costs. The CGAP local cultural differences. The online lending (Rosenberg et al., 2009) reports that operating costs movement started in March 2005 with a European are probably the main area to further reduce firm called Zopa, UK. Since then Zopa has gone to microfinance costs. the U.S., Italy and Japan. Its model, with variations, has also been copied and adapted by many other In addition to reducing operating costs, financing competitors. Today, there are more than a dozen for- costs can and are being reduced owing to the profit commercial operators in the online Peer-to- reduction of spreads possible through peer-to-peer peer lending market. In Europe these include (P2P) online lending. In addition, online lending offers an increased outreach to people living in operators such as Zopa, smava, boober, Kokos, and isolated rural areas. This increased outreach would Monetto. further reduce both transaction costs from In poorer countries, online micro-lending may have economies of scale and financing costs through a more difficult future since most poor people are larger loan negotiations. illiterate and do not have access to Internet via a This paper looks at this relatively new phenomenon computer. In such countries, mobile banking is of online micro-lending which targets both needy considered the best solution. In India, for example, entrepreneurs and individuals looking for small 37 million people have access to a computer but 370 financial solutions to their liquidity problems. million people would have access to a mobile telephone. In fact, the number of mobile Kiva, an American company, started an online connections outstrips landlines. Therefore, outreach micro-lending model in 2005 to target mainly the of mobile banking has greater potential than that of needy entrepreneurs in the developing countries. online microfinance. As opposed to this, in This too was duplicated, with variations and developed countries, access to computers is far adaptations by many operators. In Europe, we find greater and using a computer to make financial transactions is far more comfortable than pressing small buttons on a telephone. Therefore, the future © Arvind Ashta, Djamchid Assadi, 2010. of online lending is probably more important than 7 Innovative Marketing, Volume 6, Issue 2, 2010 that of mobile banking in the developed world, rather small, we use a comparative case study especially European, context. Perhaps the two will approach which is the most adapted to studying converge as satellite connections permit mobile web small samples in more detail. based access to computers. This paper is addressed to practitioners who are The paper reviews the leading issues with the most considering adopting online lending solutions to significant impacts on the entrepreneurial business reduce financial costs, to increase funding sources, of peer-to-peer (P2P) micro-lending on the Internet. to reduce transaction costs and get economies of Accordingly, we will first study the legal scale through this process. environment of the sector and de facto forms of 1. Legal design of the different websites intermediation adopted by both commercial lending sites and micro-lending websites in Europe. As explained in the introduction, there are two Secondly, we will comment on social performance major kinds of online lending websites: commercial issues of the different models as this business is and microfinance. There are others which are essentially a matter of interactions and relations slightly different, such as MicroPlace which is between individuals, not only for giving and getting actually a broker for security issuers lending to loans, but also for marketing and promoting them. Microfinance Institutions. However, we will not go Because trust is a critical issue in a sector whose into this for the limited purpose of this paper. mission is to promote transactions between 1.1. Legal forms of commercial online lending. individual strangers, we will devote the third section The legal form of all the commercial lending web- of this paper to the strategies used to enhance trust sites are for-profit companies. This is brought out in and overcome information asymmetry related Table 2. They all use auction mechanisms to ensure issues. We will finally proceed to a comparative that borrowers and lenders get the best rates based analysis of the marketing strategies of the sample’s on market competition. Zopa was the first one in members to provide insights for entrepreneurs who 2005. It took two years for others in Europe to enter may consider to launch or to modify their strategies the market1, indicating that even in highly visible in the field. high technology sectors like internet, there is a time Table 1. Sample’s members: P2P and social micro- lag between innovation and competition coming in. lending websites and launch dates A prominent quirk is that these are all essentially 2005 2006 2007 2008 2009 domestic operations. When Zopa wants to enter a Zopa U.K. new market, such as Italy, it starts a new company. March This is done essentially because legal regulations Kiva U.S.A. including contract laws in different countries are November complicated enough and private international law Smava Germany February rules are unclear in cross-border litigations, thus Boober increasing risk significantly. Netherlands February MyC4 Although US Aid considers these direct P2P lending Denmark May sites, our detailed examination of the cash flow Boober movement indicates that cash does not move from Italy November lender to borrower for loans and vice versa for Kokos Poland repayments. Indeed, each of these players is an February intermediary, taking a commission for its operations. Monetto Poland March The only exception to this intermediary role that we BabyLoan France have found so far is the US based Virgin Money. January Virgin Money took over what used to be called A case study approach, through review of academic Circle Lending. This site is essentially the only literature and press reports, is adopted to explore facilitator that we have found which permits direct European websites. Some non-European examples movement of funds between borrowers and lenders. are presented when the model adopted is notably This is because the borrowers and lenders already different. In our sample represented in Table 1, know each other before coming to Virgin Money. Boober, aimed initially to build a European network They come to Virgin Money's platform only to through Netherlands, Italy, Belgium, Germany and obtain legal documentation and to build credit Spain. Boober in the Netherlands has apparently histories of loan repayments. ceased operations, while Boober in Italy, a joint venture between Centax and Boober International, is 1 Donjoy in Korea and Propser in the US entered in 2005 and 2006 currently operating. Since the size of our sample is respectively, but we are looking only at Europe. 8 Innovative Marketing, Volume 6, Issue 2, 2010 1.2. Legal forms of microcredit online lending. microfinance lending. In this they follow the same There are a number of differences between principles as other models such as MicroPlace or Commercial online lending and microfinance online Investors Without Borders in the US and Dhanax lending, as embodied by the US based Kiva, and GlobeFunder in India.
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