The holidays are over, your bank account is decimated, and your goodwill toward men is going bad. It's easy to write off the reason for the season once the first credit card bill of the new year arrives, but don't get caught up in anti-consumer backlash just yet. There's a way to take care of your money and your conscience at the same time.
The term microfinance has been around since the 1970s, coined to describe efforts to involve the world's billions of poverty-level inhabitants in their local economy. This year, Dr. Mohammad Yunus, a Bengali economist, won the Nobel Peace Prize for his pioneering work as founder of Grameen Bank, which has offered billions of dollars in small really small business loans to indigenous entrepreneurs throughout South Asia.
Microfinance has only recently become relevant to the average American household, which now has nearly $9,200 in credit card debt, according to CardWeb.com. Internet 2.0 has changed the way small loans can be distributed to your neighbor next door, a stranger in Kentucky, or a butcher in Kenya, and not surprisingly, a pair of San Francisco-based startups are at the forefront of the microfinance revolution.
Prosper.comProsper.com is housed in rather opulent space on the top floor of a 22-story high-rise off Market Street. Unfurnished offices and a bullpen of young programmers give the place a somewhat scrappy air, but $20 million in venture capital proves how strongly Silicon Valley believes in online peer-to-peer lending. CEO Chris Larsen, who also founded E-loan in 1996, likes to call Prosper "eBay for money."
Anyone in need of cash military vets, single moms, young couples can join a borrowing group then request online the amount they need and the annual percentage rate they're willing to pay. Borrowers are typically looking for a loan of less than $5,000 to help with college tuition, get dental work, or, most commonly, repay credit card debt. They can also post personal stories and pictures, to help seal the deal with lenders who bid on fulfilling the terms of the loan.
With an average APR that hovers around bank lending rates and, at least at this early stage, a default rate of less than 1 percent, Prosper makes a more profitable, compassionate investment than a savings account for lenders, a more interactive, supportive loan source for borrowers.
"Small loans died in America, mostly for cost reasons, and the credit card industry took on the mantle of unsecured credit," Larsen says in a recent phone interview. "That's become a trillion-dollar business and mostly a pretty bad deal for consumers. Technology enabled us to bring [small loans] back. We're completely cutting out the traditional way of getting financing through an elite institution and putting it directly in the hands of people."
Larsen is quick to point out the global, historical basis for peer-to-peer lending that became part of the model for Prosper. America was built on the savings-and-loan industry funding local business ventures think Its a Wonderful Life and Vietnamese hoi, community lending groups that discourage defaults through tarnished reputations and lowered social status, have existed for centuries.
"The big picture here is how do you mash those two things together, get those really tight, ancient systems around accountability and familiarity and at the same time capture sort of the American capital market's notions of liquidity and diversification," Larsen says. "If you can nail both of those, in our view, that's the optimal credit system of the future."
Prosper's members are handpicked by borrowing group leaders who carefully review each applicant's credit history. When someone in the group defaults, the entire group's reputation is tarnished and its credit rating drops.
It seems to be working. In the 10 months since its founding, Prosper has facilitated 5,412 loans totaling approximately $25.7 million. That's a lot of average-Joe types rebuilding credit, since payment information is logged at national credit-reporting bureau Experian. It's also a lot of Joes making extra cash by helping them out. You can be one or the other or both, by logging on to www.prosper.com.
Kiva.orgMeanwhile, over in the Mission, in the same squat, brick building that houses the NoisePop office, Kiva.org is taking Internet-based microfinance to quite literally a completely different place. Kiva is a nonprofit that links investors around the world with small businesses in poverty-stricken areas.
By partnering with microfinance institutions in 17 different countries, Kiva singles out budding businesspeople and posts their plans on the site. Users can read about a seamstress in Uganda who needs a new sewing machine, a cabby in Croatia looking to repair his car, and a fruit seller in Ecuador hoping to expand her inventory. U.S. dollars go a long way in the developing world, and so far Kiva has a 100 percent repayment rate.
Unlike Prosper, the loans funded through Kiva are interest-free, so the $25 you send to a water lettuce farmer in Cambodia will come back to you exactly as you sent it, sans profit.
"For me it's a really bad investment but a really great donation," Kiva president Premal Shah says over lunch at Atlas Cafe. "It's a donation based on mutual dignity. It's not poverty porn, based on this patron relationship. That was the 1980s' treatment of poverty. There are two billion people on Earth who earn less than two dollars a day. Most of these people are self-employed entrepreneurs, meaning they sell fruit, they're tailors. They don't walk into a company and get a paycheck, they eke it out."
Founded a year ago with scarce seed money secured from corporate donations and a few investors, Kiva recently hit the million-dollar mark with its loans.
"People are feeding their kids with these loans," Shah says. "The measurement of success isn't the acquisition of a VCR, it's super-basic: 'I'm able to plan for my health, get anti-malarials.' It's basic survival."
Online journals maintained by Kiva's field officers allow investors to see exactly where their money is going. Transparency is a key word for both Kiva and Prosper, which is not surprising, given Larsen's high-profile advocacy for financial institutions disclosing their offshore outsourcing programs to consumers.
Like Larsen at Prosper, Shah speaks with the zeal of a true believer, and the two companies share a mutual respect. Larsen says they're both "trying different ways to crack the code." Even with scrutiny, it's hard to find a downside to either venture.
"This is an awesome time, man," Shah says. "You know the Chinese proverb, 'May you live in interesting times?' We're doing something right now that I believe will outlive ourselves, Kiva, and Prosper."
Benevolence isn't typically the bottom line in the financial realm, but both companies function on the notion that altruism and asset management can coexist. Microfinance in its various forms is an economic revolution and its ramifications have just begun to be felt. A new year is the perfect opportunity to make some waves yourself.