Money360 the kick in the ass that banking needs

money360Money360’s June $500-million expansion announcement accurately illustrated why the upstart company has made a name for itself in a hurry.

“The current real estate credit market is broken. Good borrowers can’t get financing because banks are not lending. Private lenders have capital to invest, but can’t find the right opportunities.”

It’s a scenario characterizing a national epidemic.

Since the financial crisis of 2008, that scenario has presented a massive, looming wall against which everything from households to business startups shatter. Sadly, it’s become a familiar refrain in the United States.

With regulatory changes imposed by the U.S. Treasury in response to the near-collapse of the American economy four years ago, the credit requirements of some banks shot through the stratosphere, leaving small businesses, families, and much — too much, as we’ve heard throughout the last U.S. election — of the middle class struggling.

Sandwiched between a fiscal elite concerned only with serving itself and a growing epidemic of poverty, the middle class has found itself facing a void. Knowing this, it’s not surprising that organizations like Money360, the latest example of “democratized” banking, have flourished in the years since. It’s a void that peer-to-peer lending is intended to fill.

We hear “peer to peer” and we think of music, video games, movies, and everything else shared digitally since those heady days of Kazaa and Napster. But since 2006, online lending platforms like Prosper and Lending Club, both based out of San Francisco, California, have presented a new model for raising capital, whether we’re talking about seed money in the tens of dollars or larger sums in the thousands.

Originally, there was no third-party intermediation in this model. Without the presence of a middle man in the lending/borrowing chain — and, notably, without the higher associated costs of that model — users dealt with one another directly.

Also from California, Money360 is the latest company to enter this marketplace, with higher standards for lenders to better support borrowers, many of whom find themselves utterly unrepresented by the big banks.

The peer-to-peer lending marketplace has been one with growing pains. 2008, of course, had its effects on the business that Money360 is beginning to shake. On one hand, the Securities and Exchange Commission in the United States required that loans be registered as securities, forcing some organizations into a “quiet” period of restructuring while compelling others to leave the market entirely. Another effect was that, technically, the process of peer-to-peer lending stopped being strictly “peer to peer.”

Nonetheless, peer-to-peer lending in its present form has skyrocketed in popularity since the Great Recession. The common image of the American economy, especially over the last four or five years, has been that of a swollen banking hierarhcy presiding over a powerless serfdom of consumers at all economic levels. P2P banking is the remedy, some say. And though the lending practices of organizations like Prosper, Lending Club, and Money360 fall under increased investor scrutiny, their very success is the result of increased public scrutiny about big banks, those fiscal behemoths considered “too big to fail.”

Put simply, when Money360 talks about a “revolution,” as odd as that word can be to hear in banking terms, they may not be talking simply about business branding.

“After growing five-fold in two years,” wrote Online Banking Report, referring to fiscal years 2009 through 2011, about Money360, “we expect continued strong growth of nearly 40% compounded annually through 2021.” In hindsight, it’s difficult to imagine this being said 10 years ago about a model where real estate lenders, in Money360’s case, are dealing directly with the borrowing public. But in 2012, with half a billion dollars in revenue waiting to go around, the money speaks for itself.

If nothing else, fiscal moderates, still jittery from standing at an economic precipice for the past four-plus years, call Money360’s model “intriguing.” At the other end of that scale is praise, some of it philosophical, some strictly pragmatic, of peer-to-peer lending as more in keeping with the small-time, entrepreneurial spirit that gave rise to much of modern commerce, an act of bringing finance back to a human scale. Banks of the 21st century, after all, hung over from the unregulated lending binge of the late 1990s and much of the last decade, are considerably more comfortable hedging their bets on larger organizations and established businesses, not individuals or other up-and-comers of the marketplace.

“Borrowers who are otherwise being turned down by banks,” writes Evan Gentry, CEO of Money360, “are taking advantage of our unique ability to match them with private lenders who make loans secured with real estate and who will directly manage the loan.” Knowing the difficulties much of the public are currently having in terms of credit, scores and income documentation, with Gentry’s model, have less to do with securing the lending-borrowing relationship than simple direct negotiation.

Notably, what makes Money360 different in achieving this from other peer-to-peer lending models, some of which charge a fee for first-time lenders, is its accessibility and efficiency. Lenders, while incurring a 1.5 percent servicing fee on loans, can register without cost, and the company’s proprietary LoanMatch technology — which searches the company’s growing database according to loan size, location, asset type, loan terms, borrower characteristics, and other factors — connects prospective lenders and borrowers along a set of very detailed parameters, a way of establishing human relationships before the business dynamic kicks in.

There’s also the money itself.

As of last summer, the hard numbers indicate that Money360’s idea of how the marketplace should work is clearly a bold one. Much higher than other P2P lending sites, Money360 currently requires a minimum loan amount of $200,000 US, while its minimum individual investment for lenders is set around $50,000 US. This, of course, enables Money360 to continue accruing interest at a much higher level, even in the instance of low overall loan volume. With the competitiveness of the mortgage and real estate market in terms of rates, though, the need for a high initial investment on the part of lenders, in time, could prove to be a challenge. How viable will this model be over time?

According to Money360, that’s the entire point. With higher-valued loans backed up by real estate assets — some of which are fifty to a hundred percent larger than those offered by competitors — rather than debt consolidation, Money360 likely has the avoidance of cost overruns like those that have affected Prosper and LendingClub in mind. Raking in 27 million in fiscal year 2010, Prosper, according to some estimates, lost 10 million of that revenue to the lower costs set for investment and loan value.

Though Money360 may have stiffer requirements of those footing the money in the first place, the key concepts of profitability and sustainability, which have proven themselves so far with Money360’s 2012 expansion, are what propel its success. Instead of small-time investors, Money360 has found that long-term, higher-value loans are what sets it apart from others.

Aside from the hard numbers, there’s also the opportunities opened up for communities by borrowers and lenders dealing more directly with one another. The unfortunate side-effect of the banks’ cold feet since 2008, something painfully evident at all levels of the economy, is their reluctance to invest in riskier, outside-the-box thinking, the sort of entrepreneuring that can accelerate everything from community building to new technologies. With a more level playing field, so to speak, the hope is that direct, face-to-face fiscal relationships will bring risk back to the game, and with the risk, more innovation — in short, the sort of thinking that could fundamentally kick-start the economy all over again. Will peer-to-peer lending play a greater role in the restoration of our economies than is otherwise apparent today?

Perhaps the revolution Money360 comes from a very simple part of the equation: that with the big banks, money gets lost as quickly as it trades hands. Money360, according to Gentry, is entirely about streamlining the lending and borrowing market in the interest of individual consumers, not those gargantuan financial institutions. “Right now,” he told MortgageNewsDaily, “people don’t know where to put their money. The private lending market is very fragment and disorganized.”

For Money360 and organizations like it, patching those holes may have a bigger knock-on effect than can be anticipated, even in 2012.

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