Now we're all private banks

With banks reining in their lending, and the financial crisis seeping through to high streets around the world, where can consumers turn if they want to take out a small loan? One German company is offering peer-to-peer loans, writes Toby Mitchenall

Berlin-based smava has allowed members of the German public to borrow a total of more than €4 million in small loans since its inception in March 2007, but it is not a bank. smava bills itself as “Germany's leading social lending marketplace”and brings would-be individual lenders and borrowers together, creating an unintermediated money marketplace for small loans for anything from home repairs to driving lessons. Think eBay but involving only cash.

“Peer-to-peer”loans, as they are known, not only allow borrowers to access small sums – which banks may consider too small to provide – but also give individuals with cash to invest access to a new asset class.

When applicants apply to borrow money, they are rated by one of Germany's established credit checking agencies. The risk and return is then priced into the interest rate and lenders are invited to commit money. Revenue for the site is generated through a one-time one percent fee from the borrower when the loan is funded, while lenders use the service for free.

Paul Jozefak is managing partner at Neuhaus Partners, a German venture capital manager which recently committed to smava's second financing round, alongside fellow German venture firm Earlybird. “The current system does not properly serve a significant portion of the market,”he says, referring to those refused loans either because their credit score is too low or the amount sought too small.

Following its latest financing round, smava's management, led by founder and managing director Alexander Artopé, will initially focus on consolidating the company's German operations, while at the same time building a platform in Poland.

Beyond these markets, Russia and other Central and Eastern European countries are on smava's radar for expansion. “The fundamentals of these markets are the same as in Germany and Poland: there is a gap in the market and noone filling it,”says Jozefak.

smava is not the first venture-backed company to seize on the opportunity of social lending. One of the pioneers was UK-based Zopa, which was founded in the UK in March 2005 and last year began operations in Italy and the US. Zopa, which is financed by Skype backers Bessemer Venture Partners among others, has reported surging user numbers as a result of the credit crunch in which banks have reined in lending and investors have lost faith in banks.

In a nascent industry such as peer-to-peer lending, a high level of brand familiarity can be invaluable when the industry suddenly takes off (again eBay springs to mind). So will smava use the new finance to stamp its name on the industry with a marketing push? Yes, but not yet.

“Currently word of mouth is driving growth very well,” says Jozefak, adding: “We will continue to build up a track record, build up data banks and enhance the reliability of the process. A marketing push will most likely follow next year.”

smava is quite typical of a Neuhaus Partners portfolio company, says Jozefak. “It is the right size, ready for internationalisation and has an excellent co-investor in the form of Earlybird. It was not a difficult investment decision to make,” he says.

But Jozefak is mindful of the risks involved in a venture like smava, one of which is the danger that a well-funded competitor, such as a bank, will see the market and grab a share.

The main challenge, however, is winning the “hearts and minds”of consumers and bringing them round to a new, and arguably scary, way of investing and borrowing. Judging by reports of Zopa's success in the UK, this should not take too long to achieve.