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[discussion]Collateralless loans and banking - microfinance approach
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Kell Ark
Venture Inc
#1 - 2012-09-11 20:16:18 UTC
I`d like to share my idea regarding banking in EVE economy. AFAIK there were few banks, which gave loans. They demanded collateral, worthy more than 100% of loan. It was reasonable from one point of view - banks need some basis, on which they justify their credit operations. In RL it`s either collateral or track record. There is a big risk of scamming, otherwise. From another point of view it exclude a lot of people, who need money, but can`t provide it - either they don`t have it (case of broken or new players) or need it themselves.

If you have valid collateral, you can sell bonds on MD more or less effectively. But if you don't` have anything of value, you want to earn trust, to get a loan on without collateral. And to get trust he have to have track record. As of now, there is no exit.

But possible solution exists - it used by microfinance institutes in developing countries, and proven quite successful. Imagine, that you create a bank, where each player has an initial credit rating equal, say, 5 mil ISK. If recipient of a loan successfully takes and repays loan, his credit rating increases, and he can get another bigger loan.

Main points of this approach is diversification and win-win approach. Diversification allows you to lend money to many capsuleers - with 5 bil available, you`ll be able to provide 1000 loans. Even if half of them will scam you, another will pay you back. And you`ll have a list of potentially trustful clients. Even probability of scamming 5 mil should be rather low, cause scammer will lose potential source of money, mark himself as scammer and have a puny income.

But if both sides appropriately behave themselves, each side receives benefits - credit and interest income respectively.

So far I can think of few requirements for receivers of loan:

Non-trial account
Certain level of SP (about 500-750k SP should be enough)
At least 1 month of playing
Weekly income must cover principal and interest.


I think this idea worth a try and I`ll be happy to hear you feedback about it.
Kiwis23
Kiwis Corp
#2 - 2012-09-11 21:04:39 UTC
Who would EVER want to borrow 5 millions?...
When I thin of borrowing, it should be around plex ammount, so 500 mil let's say. and nobody will risk that ammount just to get names of pottential borrowers.
Occulta Cantet
Imperial Academy
Amarr Empire
#3 - 2012-09-11 23:08:05 UTC
Not a bad idea. It probably would help new players, such as myself, more than a vetern. The ability to access such funds would increase my extremely minor market presence and would net me more than I am making now. It was also help me make contacts and gain reputation. So from someone who stands to gain from this idea, I give it two thumbs up!
HK16
The Frog Pond
Ribbit.
#4 - 2012-09-12 02:17:53 UTC
I would say 50 mil would be a better amount. It would give a new player enough isk to get on their feet with missioning or whatever they are trying to do. Plus its still a small enough amount that it isnt worth scamming.
Kell Ark
Venture Inc
#5 - 2012-09-12 04:10:45 UTC
Kiwis23 wrote:
Who would EVER want to borrow 5 millions?...
When I thin of borrowing, it should be around plex ammount, so 500 mil let's say. and nobody will risk that ammount just to get names of pottential borrowers.


Don`t forget, that we are speaking about lending without collateral for players with no public track record. I`d say, that probability of scamming 500 mil under this circumstances is much higher, than you you lend 5 mil.
Your point, that older players wan`t be interested in micro loans is right. Reason for them to take loan is to build trust with bank and get large credit limit in future.

HK16 wrote:
I would say 50 mil would be a better amount. It would give a new player enough isk to get on their feet with missioning or whatever they are trying to do. Plus its still a small enough amount that it isnt worth scamming.


More is better, I agree. But it`s also a matter of how much players you can support with available funds. In example, mentioned in first post, with 5 mil loam you can support 1000 players, with 50 mil loans - only 100.
Vera Algaert
Republic University
Minmatar Republic
#6 - 2012-09-12 06:34:42 UTC  |  Edited by: Vera Algaert
Even a newbie during his first week in EVE would not need a 5m loan to do anything - iirc the last time I rolled an alt just doing the tutorials and the epic arc left me with around 15m ISK.

Microloans in real life are large enough to open up new opportunities to the borrower (they just look small to you because you live in a rich country) and are often secured by the borrower's reputation within his own community (a group of people from the same village/community all get microloans, if one of them defaults the rest has to pay back her loan in addition to their own). They are also almost exclusively issued to women (think on that).

The microloan concept does not translate well into EVE because the problems it attempts to solve do not exist in this game. In EVE the only question is "Will I be rich today or will I be rich in two weeks?".

Poverty traps (e.g. "no work -> no food -> too weak to find work") only exist at a very high level and are entirely due to matters of character (e.g. I tend to spend all my money on pvp ships instead of accumulating a capital stock - as a result I stay poor despite investing a lot of time into income generation) rather than institutional issues (lack of insurance, credit, ...).
In real-life microloans do not have the purpose of building a credit history, their purpose is to enable an initial accumulation of capital - which can lead to further capital growth (animals are awesome, they reproduce on their own) and will shield the borrower to some degree from negative shocks (a draught, illness, ...).

[Predatory microloans also exist (copy the concept of some humanitarian organization, then increase interest rate twentyfold) and have the sole purpose of acquiring cheap workers through debt bondage.]

What does work in EVE is to provide small loans to scammers who need to build a reputation fast (so they can get their hands on more money) and are willing to pay for it. Setting up a business with the explicit purpose of facilitating such rep grinding is a douche move.

Your proposal is lacking in details and not well thought through:

How do you scale up loans after the first round of 5m loans is completed?
Your whole idea requires people to pay you high interest rates based on the expectation that doing so will enable them to get a larger loan in the future. Getting from 5m to a point where a loan would be worth scamming is a long way - how do you envision this progression to look like and at what point do you intend to drop the hot potato into the MD community's lap?

How much time do you expect to spend managing 1000 different borrowers (who will be late on payments, quit EVE, want to repay their loans at diffrent points in time, ....)? How does this effort compare to the rewards?

What percentage of loans would you expect to default, how long do you expect a 5m loan to run?

.
Kell Ark
Venture Inc
#7 - 2012-09-12 18:24:07 UTC
2 Vera Algaert
You mention a lot of topics, I`ll try to answer them in order Big smile

  • Microloans concept doesn`t apply completely to EVE, you`re right about that. And it goes without saying, that players have many ways to earn ISK. I view loans as support service. Sometimes one doesn`t want to spend 5-6 hours, but rather to buy new ship now and pay later. Then, he would use both own and credit money.
  • It also doesn`t help them to scam, as they build reputation with bank only, not on public market. If he`ll attempt to run public bond, he`ll need to build reputation anew



Quote:

How do you scale up loans after the first round of 5m loans is completed?


For now, I imagine credit limit progress to be like 5 - 9 - 16 - 26 - 42 - 68 - 96 mil (1st loan - 5 mil, 2nd - 9 mil, etc). It`s based on assumption, that initial loan will be 5 mil.

Quote:
How much time do you expect to spend managing 1000 different borrowers (who will be late on payments, quit EVE, want to repay their loans at different points in time, ....)? How does this effort compare to the rewards?


About 1-2 hours daily, I think. I have financial background in RL and also know know programming enough, to work with API and work with data effectively. Of course, It`s just my assumption :)

I also think about making standard offer with predetermined terms, like “Loan 5 mil for 4 weeks, weekly repayment”. Such products aren`t very versatile? but thay are easier to manage.

Quote:
How does this effort compare to the rewards?

If my calculations right, I expect to increase capital 4-5 times in a year. It`s worth an effort - for me.

Quote:
What percentage of loans would you expect to default, how long do you expect a 5m loan to run?

I expect about 15% of loans to default in the beginning, later this number should decline, as appropriate number of trusted clients is gathered.
I expect to run loans for 2 or 4 weeks.

PS.
Quote:
Your proposal is lacking in details and not well thought through

It`s not well thought through, rather I didn`t write all technology and assumptions I have, because it would take a lot of time and space to write them all. It`ll be more convinient to answer specific questions.
De Guillaume
THORN Syndicate
Northern Coalition.
#8 - 2012-09-13 16:54:49 UTC
so the whole idea is to help people build trust. I mean the best scammer would ofc build trust to a point where he is able to access enough isk to then scam it all. Its been done a lot.

If the idea is to keep the bank loaning very small amounts, then it might work but if a trusted person is able to gain more and more isk, eventually he will scam it.

keep it small and it could be a good idea and work.

Has you ever went so far as chose to go even use want to look more like do?
Barakach
Caldari Provisions
Caldari State
#9 - 2012-09-13 17:13:48 UTC  |  Edited by: Barakach
De Guillaume wrote:
so the whole idea is to help people build trust. I mean the best scammer would ofc build trust to a point where he is able to access enough isk to then scam it all. Its been done a lot.

If the idea is to keep the bank loaning very small amounts, then it might work but if a trusted person is able to gain more and more isk, eventually he will scam it.

keep it small and it could be a good idea and work.


Their "trusted" amount of money would have to be no greater than the last loan plus interest. If they take out 100m and pay back 10% for 110m, then their new loan cap is 110m.

There would never be a great benefit to scam... I think... noon time thinking is not one of my strengths.

edit: I'm an idiot.. had a few sec to think about it... yeah.. noon time thinking...
Privateer NoBody
Doomheim
#10 - 2012-09-13 17:28:43 UTC
I think you sort of have a good idea but it's aiming in the wrong direction.

For new players the best thing is to get into a corp, vets give stuff away and can give guidance on professions and training.

I think some form of uncollaterlaised crowd sourcing model may have more legs, Proton Power and some very obvious scams on MD have illicited a good chunk of money through having many people risk small amounts and the op being amusing.

e.g. I have a ton of BPOs spare and say someone can use them for free (locked down in station), if someone wanted a couple of hundred mill to get them going they could raise it easily from multiple investors putting in small amounts
Ji Sama
Akira Industries
#11 - 2012-09-13 17:30:55 UTC
Well we have seen this kinda of credit line for some time in my country. Its called fast loans or SMS loans, and everyone can get it.

The way they have set it up is that you pay interest + fee, and you can only loan like 200 dollars the first time.
Then you pay back the 200 dollars + fee + interest, and is cleared to loan 300 dollars.
After you pay back the 300 dollar loan + fee + interest you are then allowed to loan 400 dollars and so fourth.

The trick (and I have not researched this throughout as the interest + fee is just to crazy for me, and I would go to the bank or FFF if I needed money.) is; to keep the principal low, and the fees and interest high. That way, when a person "loans" from the service, and lets say they chose to not pay back, when they loan lets say 300 dollars. They have almost already paid the company the 300 dollars in fees and interest.

Loan 200 dollars at 20% + 20 dollar fee i.e. 260 dollars to be paid back. (total of 60 dollars in profit)

Next.

Loan 300 dollars at 20% + 20 dollar fee i.e. 380 dollars to be paid back (total of 140 dollars in profit)

Next.

Loan 400 dollars at 20% + 20 dollar fee i.e. 500 dollars to be paid back (total of 240 dollars in profit)

And so fourth.


So for this to work you need to look at the calculations, so if lets say 25% defaults/scams, then you are secured + still getting a profit from the 75% that didn't default/scam!



Hope this made any sense, typed it pretty fast, and have to run now :)
Drago Wolfbane Skorvalk
Great Black Hole of Eve
#12 - 2012-09-14 00:22:54 UTC
Privateer NoBody wrote:
I think you sort of have a good idea but it's aiming in the wrong direction.

For new players the best thing is to get into a corp, vets give stuff away and can give guidance on professions and training.

I think some form of uncollaterlaised crowd sourcing model may have more legs, Proton Power and some very obvious scams on MD have illicited a good chunk of money through having many people risk small amounts and the op being amusing.

e.g. I have a ton of BPOs spare and say someone can use them for free (locked down in station), if someone wanted a couple of hundred mill to get them going they could raise it easily from multiple investors putting in small amounts



This ^
Mu-Shi Ai
Hosono House
#13 - 2012-09-14 03:47:32 UTC
No. No solution exists. Banks in EVE are fine RP, I suppose, but the ship has long since sailed on those sorts of emergent gameplay actually meaning something beyond that. Banks are simply pointless without laws and muscle to back them up. Neither can or ever will exist in EVE.