The new wave of Peer to Peer Lending providers allow ordinary citizens to lend and borrow money with one another, online, in a convenient, secure and legally compliant manner.  But is there a way to leverage this new financial service by combining it with a highly networked (and highly internet savvy) political support structure?

We present 2 potential synergistic use cases for “Peer to Peer Campaign Finance” – plus a handy dandy flowchart outlining one example case.

Political campaigns, by ubiquitous necessity, collect the majority of their contributions via credit card.  A contribution made via credit card is nothing but a “loan” made to the contributor by the issuer of the credit card, with the proceeds of the loan then being transferred to the campaign (or, if you’re charging lunch, to a restaurant).  This type of loan arrangement does not appear to constitute a violation of the federal prohibition on making a contribution in the name of another person or allowing one’s name to be used to effect such a contribution – everybody does it, regardless of political affiliation, and has done so for years, and will continue to do so.

But, as often occurs, new technologies and new paradigms present… new opportunities.  The advent of online Peer to Peer Lending makes it possible for individuals (or groups of individuals) to make similar types of loans to one another – without the mediation of a bank or credit card issuer.  Given that the interest rates and payment terms on each loan can be set by the individuals involved, rates and terms are often more favorable than those offered by traditional credit providers, and, additionally, affordable credit can be directly extended to those who might not otherwise have access to it at the time.

• Case 1:   Peer to Peer Lending as a convenient, fixed-rate, 36-month alternative to Credit Card contributions.
  • Potential contributors sign up with a Peer to Peer Lending marketplace and request a loan.
  • Individuals (including, potentially, fellow supporters of the borrower’s cause of choice) bid on the loan request.
  • A loan is issued to the borrower at an interest rate set by the individual lenders who have bid on the loan.
  • The borrower is then able to use the proceeds of their loan to make their chosen contribution.
  • Borrowers repay the loan over a fixed schedule (normally 36 months) with a fixed monthly payment at an interest rate which was set by the individuals who bid on the loan, and which is not subject to change.

• Case 2:  Peer to Peer Lending as a convenient means for indirect support of a particular cause.
  • Individuals sign up with a Peer to Peer Lending marketplace provider to lend.
  • Loan requests by borrowers who support a common cause with the lender are identified.
  • Individual lenders bid on the loan requests of borrowers with whom they identify.
  • A loan is issued to the borrower from the funds of the lender (or a group of lenders).
  • The borrower is then able to use the proceeds of their loan to make their contribution.
  • The individual lenders are repaid over 36 months according to the terms of the loan.

Flowchart example – one potential P2P Campaign Finance implementation, “The Obama Loan“:

It is important to note that while there are strict federal guidelines about, for example, how much one individual can contribute to a particular political campaign cause in a particular year (for example, during a general presidential election, one may only directly contribute $2300), there are NO limitations on how much one can lend out to other individuals via a Peer to Peer Lending platform.

Think about that for just a minute. Happy 2008 Election!

Prosper.com’s latest site update announcement (August 14, 2008 – details on their blog) included the following very brief note which signals a major shift in market dynamics – and, potentially, depending upon details which were not released (and are not apparent – and, note to Prosper, therefore not transparent), has implications even to the overall platform concept:

Faster Listings for Qualified Borrowers
In an effort to get higher-quality borrowers through the Prosper loan application process more quickly, we’re testing a streamlined listing process where some borrowers post listings without adding a title, picture, or description. You’ll start seeing these listings on the marketplace, with titles like “My personal loan for [category]“.

While there were no further details about the exact criteria for this new “streamlined” process, depending upon how Prosper has structured this process on the backend, the following cases (or a blend/mixture of these cases) are quite likely to qualify for this new “credit details only” listing type:

• Loans which have a near certainty of funding (based upon a comparison of the exact loan characteristics with the available pool of lender “portfolio plan” dollars which are waiting to be automatically bid on exactly such loans.)
• Loans which have a high probability of funding (based upon the funding of past loans of similar characteristics.)
• Loans which have a high credit quality and are therefore more subject to competition from traditional credit outlets (lowering the barrier to entry for prime/near-prime borrowers who are accustomed to instant approval)

A number of lenders have mentioned to me, in private, that they feel this change robs them of the contextual information, contained in the usual “Why do you want a loan?” narrative, written by borrowers, which they believe is necessary to make an informed decision about whether or not to lend to a particular borrower. I understand, and, having done most of my bidding on Prosper manually (without the use of standing orders or portfolio plans – and only after reading the listings), share this concern (and certainly hope that making a “traditional” listing will always be an option for all borrowers, regardless of credit grade – given that a compelling listing always has great potential to attract more bidders and lower a borrower’s final rate) — but — and this is a very important “but” – I do see the efficiency gain inherent in this change, both for lenders who wish to deploy capital more quickly and for borrowers who place a premium on their time – and for a platform which desires to increase originations, especially if those originations are to prime-ish borrowers plucked straight out of the mouth of VISA or MasterCard.

At the same time, though, and, specifically, to address, head on, the major complaint which has arisen (and which will, no doubt, become more plaintive as more of this type of listing populate the marketplace – and more lenders realize there’s been a subtle, but potentially dramatic, shift), I do not see how this change in any way alters Prosper’s positioning as a “Peer to Peer” lending and loan platform. The loans are still funded, in an open auction process, by a mixture of individual lenders – and the loans are still taken out by individual borrowers. And that still sounds like Peer to Peer Lending to me.

While the change certainly will make some percentage of listings less “personal”, and may, therefore, make interaction with the platform somewhat less “social” (or, at least, somewhat less “voyeuristic”), I fail to see how the absence of a kitty picture (and a legally non-binding paragraph about what kind of cabinets the borrower intends to install in their kitchen – to hold their estimated budget’s X dollars of food per month for which they don’t, in reality, actually budget) somehow means that the loans, or the platform, are no longer “peer to peer”.

That said, there is a certain, almost Old World, charm to the idea of “Social Lending” – a very different, if tangentially related, concept – wherein lenders select borrowers to fund based upon some affinity or connection that they might mutually share – and which connection, on Prosper anyway, can only be established through the perusal of a borrower narrative, in the traditional listing format. The days of Social Lending, at least on Prosper, and at least for many prime borrowers, may now be on their way to an end – which is a shame, given that even prime borrowers often benefit, rate-wise, from bids placed by the non-marginal percentage of lenders who enjoy the fun of clicking through listings, looking for that special one that clicks – and upon which they feel comfortable – or even good about! – clicking “Bid Now!”.

(The other side of this coin is that it’s very often possible to exclude borrowers – and therefore not bid on bad loans that may fit your credit screens or fall into your portfolio plans – based upon reading narratives that might make a highschool math or english teacher cry – or make an honest street hustler blush at the sheer brazenness. No longer being able to avoid loans – even many prime/near-prime loans – that clearly make zero sense is a tangible and real loss of informational edge.)

I’ll have more to say on these topics in the coming days – but hope, in the meantime, that Prosper will clarify its position, specifically regarding whether borrowers who qualify for this new streamlined process will retain the option to create a traditional listing, how such an option will be presented to those borrowers (who may not understand that they will be, informationally, “pricing themselves out” of receiving many bids from “social lenders” should they opt for the “streamlined” listings), and, if Prosper is feeling up to it, giving some guidance re: the vision for the marketplace as a whole – and where it may be headed – especially given the (seemingly) contradictory, Hydra-like, directionality of late: the scaling back of listing details – to which many lenders have become accustomed to rely on – for some unknown subset of loans, coupled with, at the same time, enhanced emphasis on “social” features (such as Family & Friend Lending).

Are we on the way to a more granular marketplace – a more “streamlined” prime-ish market and a more “social” sub-prime-ish market – or are we just… confused? Pending some sort of vision statement, we’re left to speculate. And that’s not a comfortable position for anyone.