You mentioned in your post that you don't think payday lenders charge a reasonable fee for their services. Well, that is one of the reasons we decided to create our peer-to-peer payday loan platform. You can see it at www.yadyap.com [The site isn't fully active yet, but they have a blog on Wordpress]
YadYap will offer an auction system that will allow lenders to bid on payday loan requests from borrowers. This platform will determine the true cost of a payday loan, and the rates will be bid according to the market.
Indeed, Yadyap (Payday reversed) is working to use competition to reduce fees. From their Wordpress blog:
What do you do when you want to get the best rate for a car loan, mortgage, or any other loan? Well, like many other people you may visit Lending Tree “when banks compete, you win.” Or any other website that creates competition between lenders. Other great examples now are Prosper and Lending Club. Why do you do this? Because you will get the best rate that the market is willing to give you. Now consider someone with an immediate need for a small amount of money so that a check they just wrote does not bounce, or so they can make their car payment. There are two problems. First, they do not have the time to shop around, and second there is not a marketplace for Payday loans. YadYap will solve this issue by creating 24 hour auctions where multiple bidders will place offers to fund a payday loan request. Now, where would you go if you needed a payday loan?
One of the reasons EBayworks so well is because of their rating system. Who in their right mind would sell a product to someone on line who they know nothing about and trust that it would be a smooth transaction? When you transact on EBay you can see that the other person has for example a 99% positive rating, and you are ready and willing to do business with them. YadYap will bring this same philosophy to payday loans. Lenders will be able to see if the borrower has other outstanding payday loans, and will be rated according to how they have performed on previous YadYap loans.
I certainly commend Jared for attempting to translate the social lending model (like Prosper.com) to payday loans. Introducing additional competition into the market will generally bring prices down. Prices are one of my primary objections to payday loans. Additionally, you obviously know your industry better than I do.
However, I foresee two possible problems.
One, as demonstrated by the NY Times article I quoted from, a lot of the people relying on payday services don't have bank accounts. In my view, this makes it likely that a lot of these folks also won't have easy access to computers, and won't have high internet literacy. In the NY Times article, face to face interaction seemed to play a large role in fostering sufficient trust of Nix's operation. In addition, will folks who don't have a bank account be willing to essentially use an online lender? What does your outreach plan look like?
Two, you are assuming that there are investors out there who are able and willing make sufficient loans to your customers. Money is tight in general. In addition, you run the risk that investors perceive your clients as risky. You say that payday loans last 2-4 weeks, giving your site far more liquidity than Prosper, where an investor might tie up their capital for 3 years unless they can resell the loan on a secondary market. All well and good, but you will need to assemble some sort of track record on default rates. If your default rates are too high, then I don't see a lot of people risking their capital. How do you plan to address this?
Obviously the P2P industry is still in the early stages of its evolution. I do hope you can pull this off, and I would encourage you to consider partnering with credit unions.