Social Lending in Europe: Structures, Regulation and Pricing Models

Social Lending (SL) links borrowers and lenders on website markets, creating virtual financial communities. SL is in fact an alternative credit market that uses website platforms to link borrowers and lenders without the interpolation of traditional financial intermediaries. This web credit market was originally promoted in 2005 to support microcredit programmes in developing countries, involving large groups of investors resident in industrial countries in social initiatives. The efficacy of these solutions immediately cleared the way to similar initiatives in all so-called developed countries, especially in response to the financial crisis and the emergence of new pockets of poverty and financially excluded people. In Europe, SL has developed not just in order to channel funds to poor people, but more to meet the needs of those customers who are victims of financial exclusion or simply don’t want to use the traditional banking channels. In short, SL platforms aim to grant funds to customers who do not have, or who do not want, access to traditional financial markets. Are these SL platforms able to charge less than banks and financial intermediaries? The basic SL pricing model lets borrowers and lenders establish the price of the loan. The more sophisticated platforms ask for minimum entry requirements and fix a set of rules for loan pricing. The pricing methodologies may differ from one platform to another because of different degrees of pricing ethics behind the philosophy of the platforms. The aim of this chapter is to analyze the pricing model adopted by the more advanced forms of SL platform. The analysis focuses on the European SL market, with a particular focus on the Italian experience, and aims to estimate the final price charged to borrowers. To attain this aim, it was first necessary to outline the main SL features by building a taxonomy of the main platform typologies; this has been done by observing the operational models adopted by all 33 European platforms currently (2011) active in Europe. The analysis of the pricing methodologies adopted by the selected platforms has been conducted starting from a SL pricing model proposed by the authors. To estimate the price charged to borrowers, the chapter surveyed 19 out of the 33 European platforms; the results show a great variability in the interest rate charged to customers which, in many cases, including that of Italy, is below the average interest rate applied by the traditional financial intermediaries on personal loans. Nevertheless, the lack of regulation has allowed a great diversification of pricing models and, at the same time, a lack of transparency into the pricing methodologies adopted; there is evidence of a significant variability in the fees and commissions applied to clients. An overview of the SL regulatory framework in the main European countries allows better comprehension of the phenomenon. In this respect, the chapter also contains some possible regulatory proposals.