Peer to Pauper

It’s Christmastime. And what would Christmas be without a thick slice of financial fraud.

Amid the cash-wires from Nigeria and offers of an inheritance from a Yemeni fourth cousin comes a new scam candidate: peer-to-peer lending, or P2P for short.

The concept seems simple: make loans directly to the borrower with some of your investment capital, and earn a much higher return than you could with a bank CD. By cutting out the middleman, everybody wins. Or not.

Sites like prosper.com or lendingclub.com claim that they can match investors and borrowers and cut out the bank, with its 3% lending margin and its management, bureaucracy, and offices. But the sites don’t mention things like losses, deposit insurance, regulatory compliance, or other similar items. In fact, they are the kind of things that the 3% margin goes to pay.

But there’s another caveat about P2P lending that the web sites don’t mention: fraud. Because the lenders and borrowers don’t know each other, the chances for chicanery are legion. If this lending medium takes off, the scam artists will set up fake web sites and lending networks in order to pocket the investors’ cash. And with the anonymity of the internet, such cons will be easier than ever.

There’s are reasons why banks are regulated. Controlling fraud is one of them.

Douglas Tengdin, CFA

Charter Trust Company

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