Capitalizing on one’s social capital

Two recent examples enabling individuals to capitalize on their social capital: 1) a Facebook application (called Market Lodge) that pays friends a 10% commission for bringing in new customers; and 2) (the eBay of loans) that lets lenders and borrowers explore, in making peer-to-peer loans, whether they have friends in common.

Market Lodge: to some extent, using friendships to attract new customers is an age-old marketing approach. (Recall discounts or free records if you got someone to join a CD club like BMG, or MCI’s Friends and Family approach, where you got cheaper phone calls by bringing more of your friends onto MCI, etc.) But this seems like the first effort to try to marry the hyperactive online social networking with marketers’ realizations that friends can often sell friends on a new product better than advertising or strangers. This is all the more true in a day-and-age when people are more wary of advertising. (See my earlier post about “buzz agents” who get surreptitiously paid to recommend products to their friends.) borrows some of wisdom from microcredit associations (based of the innovation of the Grameen Bank by Nobel prize winner Muhammad Yunus) that shows that people are less likely to default on loans to their friends, especially if it is going to impede their friends in getting future loans. But rather than forcing social lending circles, Prosper takes an eBay approach by removing the middleman and letting peers agree directly to make loans to peers. See my earlier comments on peer-to-peer lending. Prosper cleverly calls this “bringing together George Bailey and Gordon Gekko.” Interview with founder, Chris Larsen, here and also in today’s WSJ. Prosper interestingly agrees to take back loans if fraudulent lenders get through their screens; what looks like high risk and cost on Prosper’s part may be much lower because of the need for lenders to help explain their social ties (and hence make themselves more vulnerable to being caught). Chris Larsen also notes: “One thing that works really well is friends bidding on borrowers’ loans — that can result in a 35% to 50% improvement in default rates on those loans.”  One wonders whether the default rate is lower because the borrowers pay up more, or whether the lenders are less likely to foreclose on the loan of a friend than banks would be with a stranger.


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