Untangling Peer-To-Peer Lending, Crowdfunding, and Microlending

In my previous post, I provided a short overview of the evolution of the lending space and the role of banks herein. Over the past years, especially as a result of the financial crisis and arising regulations, banks have pulled back from issuing loans. This has paved the way for alternative financing solutions like Peer-to-Peer lending, crowd-funding and micro-lending.

The most significant similarity between these three services is that there is no involvement of traditional financial institutions. In this post I will discuss their most important features, explain which markets they serve, and show what their key differences are.

Peer-to-Peer Lending

The core concept of Peer-to-Peer (P2P) Lending is a that a group of investors lend to one person or business without the interference of traditional financial institutions. Usually the investors are individuals who are not related to and do not know the borrower. The development of the internet has enabled this new form of lending: an online marketplace that completely facilitates the loan transaction.

An interesting trend in the P2P Lending space is the increased participation of institutional investors and banks. P2P Lending companies can operate more efficiently thanks to the use of new technologies and less overhead cost, thereby making these marketplaces very interesting for both borrowers and investors. According to Charles Moldow, a partner at Foundation Capital, P2P Lending Platforms have a 400 basis point advantage compared to traditional banks.

A notable player in the field in Europe is Zopa (located and operating in the UK). In the United States, LendingClub and Prosper are the first P2P lending platforms who service the US market. Funding Circle and OnDeck also facilitate small business loans through their marketplaces.

A new and truly unique P2P Lending platform is our company, BTCJam! By using bitcoin as a transaction protocol and a global credit-scoring model, BTCJam is the only P2P lending company that operates worldwide.

 

Crowdfunding

Crowd-funding is based on the same principle as P2P Lending: funding takes place by a group of investors. There are significant differences between the two:

First, crowd-funding is typically used for specific projects or ideas and not for personal loans. The second distinct difference is that investors who contribute to a project do not get interest–instead they’ll receive rewards, special perks, or gifts. For example, they may get the first release of an album or the product they supported.

A new development within the crowd-funding industry is the so-called “Equity-Based” crowd-funding: as a reward, investors receive unlisted shares of the company. Equity crowd-funding has been a popular way of raising capital for companies in Europe and Australia for several years. In the United States, equity crowd-funding is only accessible for accredited investors, but this could change soon based on the JOBS Act. The JOBS Act would let non-accredited investors gain access to equity crowd-funding which would dramatically expand the possibility for startups and entrepreneurs to raise capital. Seedrs is an Equity crowd-funding marketplace that operates only in Europe and has been very successful.

A well-known crowd-funding platform is Kickstarter; people have pledged over $1 billion, funding 65,000 projects. Kickstarter is not equity crowd-funded, which prohibits individuals from making long term equity on the products they invest in.

 

Microlending

The main goals of micro-lending are to financing poverty stricken areas of the world and reach underbanked communities. The loan amount is usually very small and the purpose of the loan is usually for personal use. Many of these loans help to finance medical bills, small businesses, education, and agricultural development.

In P2P lending and crowd-funding, there are multiple investors contributing to the loan, whereas in micro-lending, you often see that also the borrowers team up. Loans are provided to a group of people who will vouch for each other, thereby, minimizing the risk of default.

The first micro-lending initiatives did not have profitability as a driver, but over the years some micro-lending institutions have argued that doing good shouldn’t stand in the way of making profit. Opinions remain divided on the subject.

Grameen Bank is one of the first and leading Microcrediting organizations. Besides micro-lending it also offers other financial services. Kiva created an online marketplace to connect investors with borrowers in developing countries. Kiva works with local field partners who assess, distribute, and monitor the loans.

In the chart below I summarized the characteristics of the three financing solutions. The alternatives to traditional banking loans all serve different markets and it’s strongly recommended to research which solution suits your needs.

image – Isabelle de Clercq 

The Evolution of the Lending Space

Nowadays there are dozens of ways to attract money for either personal or business purposes. Besides traditional financial banks, there are various alternative financing solutions that have experienced tremendous growth in the past decade, all serving different groups and targeting their specific needs. When considering these alternatives, you have to think, what is the origin and development of lending?

How It All Beganimage

The first traces of lending and borrowing go back to 12.000BC. Our ancestors implemented a system where they swapped goods in exchange for foodstuffs or tools. In Japan, for example, rice was used as the predominant form of currency for thousands of years. 3.000 years later, societies began to use coinage as a transaction method and pictographic tablets of clay to record economic transactions. Borrowers would receive a loan in coins (ie: to buy a cow) and the lenders would receive payments in goods (ie: milk). Eventually it was the ancient Romans that laid the foundation for the banking system, formalizing the administrative aspect and creating rules and regulations for financial transactions.

From the Romans to Medieval Times

In Roman times lending was primarily carried out by private individuals. Over time, large wealthy families replaced individual lenders as their own sort of “institution.” The Jewish played a significant role in the development of the banking industry in Europe and Africa since charging interest was forbidden by Christians.

Charging interest was commonly used in ancient times, but with the rise of new religions its moral basis became questionable and sometimes forbidden. Jewish people were not allowed to charge other Jews interest, but this restriction didn’t apply to people of other faiths. In contrast, the Christian church initially banned interest and kept this policy for centuries.

From the Middle Ages and thereafter, lending and other financial services were more formalized. These activities became predominantly carried out by budding banking institutions. Although the first bank was established in Venice, Italy, the banking industry spread to northern and western European countries soon after. The English and the Dutch established the first modern banks in the late 17th century, which were in many ways similar to how we know banks to be today.

21st Century

For decades, banks have been the main resource for capital investment; unfortunately, their reach does not go far enough. Banks have proven to be hesitant to service higher risk groups such as: start-ups, entrepreneurial enterprises, and people with an irregular income. To add to this, the strictness and limitation of banks worsened after the financial crisis of 2008. Financial institutions abruptly cut back on issuing loans, therefore, making it significantly harder, and in some cases impossible for people to get loans.

In reaction to the turmoil banks were facing and the new restrictions they implemented, alternative-financing companies stepped into the lending space. The three main new resources for people and businesses to attract capital are: peer-to-peer (P2P) lending, crowd-funding and micro-lending. These concepts have similar characteristics, the most importantly, they all avoid the intervention of traditional financial institutions. Often there are significant differences, which are sometimes forgotten, therefore, leading to confusion and misuse of the terms.

In the next blog post I will discuss these three alternative financing solutions, their key characteristics, and main purpose.

image – Isabelle de Clercq 

BTCJam Hires New Chief Product Officer

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We are happy to announce that Gustavo Guida is joining BTCJam as Chief Product Officer. Gustavo is a seasoned entrepreneur with over 15 years of experience running marketplaces.

In 1999, months after graduating in Economics, Gustavo co-founded Bondfaro, a price comparison company in Brazil where he worked as CPO. In 2006 the company merged with Buscape, creating one of the largest e-commerce players in Latina America. Gustavo was Buscape’s Product Senior Vice-President and managed Customer Service and the Product pipeline for the company that had back then over 10 million monthly unique visitors and was servicing millions of dollars in transactions per month. With offices in Rio de Janeiro, São Paulo, Mexico City and Buenos Aires, the company was finally sold to Naspers in 2009.

After working briefly at Naspers and investing in a few start-ups, Gustavo co-founded the medical booking platform HelpSaude.com. The company recently merged with NetCom, turning the resulting company the absolute leader in medical bookings in Brazil. Gustavo moved to the Board of Directors and is still a shareholder and a believer of the company.

At BTCJam, as CPO, Gustavo will be mainly responsible for Product Design and Customer Service. He will work remotely from Rio de Janeiro and will move to San Francisco soon to work at our SOMA office.

“Since my first contact with BTCJam, I became fascinated with its business model. By using bitcoin protocol, BTCJam can connect investors and borrowers from all over the world. The result is the empowerment of borrowers to fulfill their needs while at the same time, providing excellent returns for investors. I am very excited to join BTCJam and help the company to revolutionize finance on a global scale!” – Gustavo.

By the way, we are hiring! Take a look at the opening positions we have.

Milestone: One Million in Loans Serviced On BTCJam in June Alone

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BTCJam is proud to announce that we have hit a milestone of one million dollars (bitcoin equivalent) in loans serviced in the month of June alone! On top of that, we now have over 4,000 loans repaid since November 2012.

It has been an honor to pioneer global peer-to-peer lending powered by bitcoin. From doing experiments with anonymous loans to where we are at today, we are eternally grateful to our supporters and members. It is incredibly humbling to see many businesses get their initial liquidity on BTCJam, watch others fund their projects from America to Argentina to the Philippines, and have people use BTCJam as means of consolidating their fiat debt.

At BTCJam, we have unwavering dedication to provide the optimal platform for our members. We want users to be able to borrow at reasonable rates that they choose while still enabling investors receive healthy returns. We thank all of the investors that have supplied the liquidity that funded over $1,000,000 (bitcoin equivalent) in loans, and thank you to all the borrowers who have repaid over 4,000 loans!

Grow your bitcoins on BTCJam!

– The BTCJam Team

Introducing the Leaderboard!

BTCJam is very excited to present the Leaderboad – see who grew their Bitcoins the most!

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With the leaderboad, you can now view your NAR (Net Annualized Return) in comparison to other investor’s NAR from around the world! Start investing today to get onto the leaderboard!

Leaderboad rules:

  • The user must have invested at least 0.1 BTC or 50 USD
  • The user must have invested in at least three different listings.
  • The user must be registered for at least 30 days.

The leaderboad will be updated daily.

Learn more about NAR here.

Announcing New Connected Wallet Features

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That’s right. It’s here, it’s fast, it’s efficient, it’s a connected wallet where you can automatically withdraw and add funds to your BTCJam account from Coinbase without having to leave BTCJam. We are happy to present the first of many new features that will come with connected wallets.

  • You can withdraw from Coinbase without leaving BTCJam
  • Your automatic payments can withdraw from your Coinbase wallet to make a payment

If you have a connected Coinbase wallet, you can view your balance and withdraw from that wallet in the Add Funds window on your BTCJam dashboard. For our borrowers, you no longer have to stress about adding your funds to BTCJam from your wallet provider! Enabling automatic payments and withdrawals from your Coinbase wallet will be automated to make payments for you.

Go to your settings to configure your wallet!

Wallet providers, we are looking to add more add wallets! Read our partners page here.

What is Phishing and How to Detect It

What is Phishing?

Phishing is an attempt to steal your identity.  Some of our users have received e-mail that appears to be from BTCJam, but is really designed to trick them into revealing private information. This type of scam is called “phishing”. Under false pretenses, criminals try to get you to disclose sensitive personal information, such as credit and debit card numbers, account passwords, or Social Security numbers.

– These emails may be sent to thousands, usually at random, and appear to be messages from well-known companies.

– The phishing email contains links or buttons that take you to a fraudulent website.

– The fraudulent website typically mimics the company referenced in the email, and aims to extract your sensitive personal data.

Email addresses can be obtained by these criminals from many places on the Internet. Lists of emails may be purchased, or even guessed, If you receive a fraudulent email that appears to be from BTCJam, this does not mean that BTCJam’s computer systems have been breached.

Never open attachments, click links, or respond to emails from suspicious or unknown senders. If you receive a suspicious email that appears to be from BTCJam, report it and delete it.

How to Spot a Fake Email

  1. The sender’s address may include a seemingly official address that mimics a genuine one. It is easy to alter the sender’s email address so do not initially trust it.
  2. Typos and poor grammar are common from fraudsters, and not because they do not know how spell – it is so the phish will not be blocked by email filters.
  3. The fraudster will try to instill a false sense of urgency that usually tells you to check your account right away or something critical will happen if you do not give the information.
  4. These emails will include fake links that lead to other sites. Please hover over the link before clicking it to check if the URL leads to BTCJam.

At BTCJam, protecting our members is a top priority. Remember to report a suspicious or fraudulent email to support@btcjam.com