Prosper announced that it is extending its referral program through December 31, 2007. It was originally supposed to end today. To date 13,000 new Prosper members have signed up through the referral program.
Full details on the referral program can be found at Prosper's Referral Program website. When referring a borrower members receive 0.5% of the loan amount. When referring a Lender members receive $25. The new lender also receives $25 once their first loan is funded.
See our previous coverage of the referral program here.
Friday, August 31, 2007
P2P lending in a credit storm
Techdirt is one of my favorite sites. I subscribe to their daily emails, am a member of their Insight Community and love their news analysis. Mike Masnick in particular provides some great economic analysis of niche topics like the RIAA, DRM, piracy, copyright, laws, and the entertainment industry. Today they tackled peer to peer lending sites in an article called Peer-To-Peer Lending Sites Weather Credit Market Storms and got it all wrong. Here's what Techdirt's Joe Weisenthal had to say. It's short so I'll quote the whole thing:
"Will all of the turmoil in conventional credit markets spur greater interest upstart peer-to-peer lending exchanges? It seems possible, since, in a way, sites like Prosper and Zopa are the antithesis of the highly impersonal, securitized industry that's facing so many problems right now. From the outset, these P2P lending sites have emphasized diversification, manageable risks and direct relationships between lenders and borrowers. Whereas traditional loan brokers are closing their doors left and right, these sites continue to do brisk business. Lenders aren't seeing mass defaults, because the standards have been high since the beginning. Of course, the scale is different. You still can't finance a house through one of these sites, but for other needs, they may work just fine. Between the lack of available credit to consumers and a desire to diversify investments on the part of individuals, this moment in the business cycle offers these sites an excellent chance to really prove their worth."
Let's take a closer look at each of his points.
"From the outset, these P2P lending sites have emphasized diversification, manageable risks and direct relationships between lenders and borrowers. "
First, what are the peer to peer lending sites we are talking about? Right now there are only two peer to peer lending sites available to lenders or investors in the U.S. - Prosper and Lending Club. The article mentions Zopa but Zopa has yet to launch in the U.S.
I'm not sure of any way that Prosper has emphasized diversification. In fact, Matt wrote an article last month about this - Most Prosper lenders do not diversify their portfolio. Clearly diversification is one of the keys to successful lending but since the minimum amount that can be committed to an individual loan is $50 most lenders never reach an appropriate level of diversification. 70% of lenders on Prosper have less than 20 loans. If one loan defaults they lose 5% or more of their total investment. (Of course, the amount lost is reduced as the loan matures.)
Lending Club, on the other had, has emphasized diversification since their launch three months ago. The minimum loan amount is $25 instead of $50. They have a program called LendingMatch which is supposed to help borrowers diversify based on their risk preferences. If you use LendingMatch you are required to start lending with $500 and pick your level of risk tolerance on a scale of 1 (less risk) to 5 (more risk). As you move to a 5 the average interest rate on your loans move up and the credit grade of your borrowers goes down.
As far as emphasizing direct relationships, Prosper and Lending Club try. Prosper has a group program that is supposed to bring a community feel to lending. Angry lenders on the Prosper forums don't think it's working. Lending Club uses the Facebook platform to build connections between lenders and borrowers. The potential benefit of the connections is greatly mitigated by the desire and requirement for anonymity for lenders and borrowers as I discussed in this article.
"Whereas traditional loan brokers are closing their doors left and right, these sites continue to do brisk business."
Is this true? There are different ways to define brisk business, of course. On the surface, it appears business is booming. Over $84 million has changed hands on Prosper. Prosper just received $20 million in venture capital and Lending Club got $10 million. Lending Club has hit several quick milestones since their launch in May - $100,000 then $250,000 and they are now at $881,600. Loanio and GlobeFunder are preparing to launch this fall. Zopa is expanding to the U.S. However, a look at loan growth on Prosper shows a different story. This graph, from Eric's Credit Community, shows loan growth is slowing. Lending Stats also has a nice graph showing the same trend.
As for lenders, Prosper does give the ability to diversity to a new asset class. It is different than other investments in significant ways. This could be valuable as lenders try to weather the sub-prime storm. It's unlikely, however, that peer to peer lending sites will fare much better than the sub-prime market at large. Matt, in his article about the effects of a recession on Prosper recommended, "...don't put all of your investment money into any one asset class. You should start with an emergency fund in something like a money market or savings account that can be easily accessed if needed for an emergency. Then any remaining money can be diversified among several different asset classes - stocks, bonds, real estate, foreign markets, and Prosper. The allocation percentages should be based on your risk tolerance and investment timeframe. The longer term (10+ year) money can have a higher percentage in stocks, the mid-term (5-10 year) money can have a higher percentage in Prosper, and the shorter term (<5 year) money should be mostly in cash accounts or bond funds."
Techdirt raises some good points. I think we will see new activity in the peer to peer lending markets in this 'credit market storm' from borrowers and lenders. This activity, however, cannot solve many of the underlying problems that are driving this storm. Borrowers who are going to default with a bank are still going to default on peer to peer sites. Lenders who invest in these borrowers are going to lose money and will tend to favor borrowers with better credit. The same borrowers would be eligible for credit from banks.
"Will all of the turmoil in conventional credit markets spur greater interest upstart peer-to-peer lending exchanges? It seems possible, since, in a way, sites like Prosper and Zopa are the antithesis of the highly impersonal, securitized industry that's facing so many problems right now. From the outset, these P2P lending sites have emphasized diversification, manageable risks and direct relationships between lenders and borrowers. Whereas traditional loan brokers are closing their doors left and right, these sites continue to do brisk business. Lenders aren't seeing mass defaults, because the standards have been high since the beginning. Of course, the scale is different. You still can't finance a house through one of these sites, but for other needs, they may work just fine. Between the lack of available credit to consumers and a desire to diversify investments on the part of individuals, this moment in the business cycle offers these sites an excellent chance to really prove their worth."
Let's take a closer look at each of his points.
"From the outset, these P2P lending sites have emphasized diversification, manageable risks and direct relationships between lenders and borrowers. "
First, what are the peer to peer lending sites we are talking about? Right now there are only two peer to peer lending sites available to lenders or investors in the U.S. - Prosper and Lending Club. The article mentions Zopa but Zopa has yet to launch in the U.S.
I'm not sure of any way that Prosper has emphasized diversification. In fact, Matt wrote an article last month about this - Most Prosper lenders do not diversify their portfolio. Clearly diversification is one of the keys to successful lending but since the minimum amount that can be committed to an individual loan is $50 most lenders never reach an appropriate level of diversification. 70% of lenders on Prosper have less than 20 loans. If one loan defaults they lose 5% or more of their total investment. (Of course, the amount lost is reduced as the loan matures.)
Lending Club, on the other had, has emphasized diversification since their launch three months ago. The minimum loan amount is $25 instead of $50. They have a program called LendingMatch which is supposed to help borrowers diversify based on their risk preferences. If you use LendingMatch you are required to start lending with $500 and pick your level of risk tolerance on a scale of 1 (less risk) to 5 (more risk). As you move to a 5 the average interest rate on your loans move up and the credit grade of your borrowers goes down.
As far as emphasizing direct relationships, Prosper and Lending Club try. Prosper has a group program that is supposed to bring a community feel to lending. Angry lenders on the Prosper forums don't think it's working. Lending Club uses the Facebook platform to build connections between lenders and borrowers. The potential benefit of the connections is greatly mitigated by the desire and requirement for anonymity for lenders and borrowers as I discussed in this article.
"Whereas traditional loan brokers are closing their doors left and right, these sites continue to do brisk business."
Is this true? There are different ways to define brisk business, of course. On the surface, it appears business is booming. Over $84 million has changed hands on Prosper. Prosper just received $20 million in venture capital and Lending Club got $10 million. Lending Club has hit several quick milestones since their launch in May - $100,000 then $250,000 and they are now at $881,600. Loanio and GlobeFunder are preparing to launch this fall. Zopa is expanding to the U.S. However, a look at loan growth on Prosper shows a different story. This graph, from Eric's Credit Community, shows loan growth is slowing. Lending Stats also has a nice graph showing the same trend.
From a peak of over $8.5 million in April, loans on Prosper have dropped month by month. From roughly $8.5 million to 7.5 million to 7 million to 6.5 million with each passing month. This is despite a new aggressive referral program which has created more than 5,000 new borrowers and lenders.
Although the drop started in May, it cannot be explained away by competition from Lending Club since Lending Club is still under $1 million in loans. The trend is most likely due to a realization among lenders on Prosper that high risk loans have a high default rate and are not a wise investment. To be fair, the August numbers may still improve. It's the last day of the month right now and loans can take a week or two from the time they close to the time they actually originate. The trend does show, however, that lending on P2P networks may not be as brisk as news reports indicate.
"Lenders aren't seeing mass defaults, because the standards have been high since the beginning."
Unfortunately, standards haven't been high since the beginning. At one time Prosper allowed people with no credit to borrow. This was a disaster and they stopped that experiment. Default rates for high risk borrowers, as Matt pointed out in his article about risk and diversification, are very high. According to his article, 45% of HR borrowers are late or in default and 28% of E borrowers are late or in default. This translates into a negative expected rate of return for borrowers. Prosper now warns lenders of the risk when lending to HR or E borrowers.
"Of course, the scale is different. You still can't finance a house through one of these sites, but for other needs, they may work just fine."
Very true, P2P lending sites are better suited for other needs such as consolidating credit card loans or funding a start-up.
There is, however, potential for peer to peer mortgage lending. Circle Lending is a peer to peer lending site that facilitates mortgage loans among family and friends. The big difference between Circle Lending and other peer to peer lending sites is that it's not a good option for investors, just family and friends who want to help out someone they actually know. There has been some media attention into the possibility for Prosper to facilitate small mortgages - those under $50,000 where other mortgage lenders can't help. In addition, there is a new start-up which we wrote about, Equity sharing - Prosper for real estate, which uses a P2P lending model for mortgages.
"Between the lack of available credit to consumers and a desire to diversify investments on the part of individuals, this moment in the business cycle offers these sites an excellent chance to really prove their worth."
There is a lot of truth in this statement. Lack of available credit will push borrowers to other places such as peer to peer lending sites. However, their luck might not be much better. Due to recent defaults, lenders on Prosper and other sites are getting wiser. Sub prime borrowers are not getting funded at the same rate they were months ago. Lending Club does not permit borrowers with a score below 640 to request a loan. Except for very small loans (under $5,000), sub prime borrowers are already very nearly shut out of the peer to peer lending market. Despite all this, Prosper still makes a lot of sense for many borrowers with good credit who are looking for an unsecured loan.As for lenders, Prosper does give the ability to diversity to a new asset class. It is different than other investments in significant ways. This could be valuable as lenders try to weather the sub-prime storm. It's unlikely, however, that peer to peer lending sites will fare much better than the sub-prime market at large. Matt, in his article about the effects of a recession on Prosper recommended, "...don't put all of your investment money into any one asset class. You should start with an emergency fund in something like a money market or savings account that can be easily accessed if needed for an emergency. Then any remaining money can be diversified among several different asset classes - stocks, bonds, real estate, foreign markets, and Prosper. The allocation percentages should be based on your risk tolerance and investment timeframe. The longer term (10+ year) money can have a higher percentage in stocks, the mid-term (5-10 year) money can have a higher percentage in Prosper, and the shorter term (<5 year) money should be mostly in cash accounts or bond funds."
Techdirt raises some good points. I think we will see new activity in the peer to peer lending markets in this 'credit market storm' from borrowers and lenders. This activity, however, cannot solve many of the underlying problems that are driving this storm. Borrowers who are going to default with a bank are still going to default on peer to peer sites. Lenders who invest in these borrowers are going to lose money and will tend to favor borrowers with better credit. The same borrowers would be eligible for credit from banks.
Wednesday, August 29, 2007
309 late loans sold in Prosper debt sale
Over the past week Prosper conducted their third debt sale. Prosper's policy is to default loans and sell them once they are more than 3 months late. However, in order to conduct a debt sale they need to pool a significant number of loans together to attract the needed buyers. This results in infrequent consolidated debt sales of loans that are anywhere from four to ten months late on payments.
The first debt sale was in Dec 2006 with 51 loans sold.
Here are the details from this third sale:
In the second Loan sale it seems the primary determining factor was homeownership, and some lenders had changed their bidding strategy to factor that in. One lender who goes by the name of PrintAns commented in the Prosper forums, "I hadn't viewed homeownership as good or bad when picking the listings until the last bad loan sale. When they sold bad loans more was given for loans where the borrower was a home owner. I now use home ownership part of my criteria."
In a way it seems unfair for Prosper to be changing the rules of the game, but in reality it is the debt buyers that change their criteria and the amount they are willing to pay for different types of loans based on the changing economic conditions in the marketplace. It probably doesn't help that liquidity for all types of debt purchasing has been drying up throughout the economy.
John Witchel, Prosper's CTO, commented about the debt sale process on his blog several months ago. He specifically mentions two challenges they face in these debt sales. The first is that Prosper is a new and different asset class, and the debt sales are typically geared more toward established asset classes like credit card debt. The second challenge is volume. It takes a certain volume to attract debt buyers, which is the primary reason for the infrequent timing of the debt sales.
The first debt sale was in Dec 2006 with 51 loans sold.
- 27 - 30%: Homeowners with any credit grade
- 15 - 18%: Non-homeowners with a credit grade of D and above
- 3.0 - 3.7%: Non-homeowners with a credit grade of E and HR
- 16 - 19%: Homeowners
- 2.4 - 3.3%: Non-homeowner
Here are the details from this third sale:
- Eligible loans were 122 days past due as of July 26, 2007, provided the loan was not part of any bankruptcy filing
- 309 loans were sold
- Price range: 1.8% - 26% as a percent of principal balance
- AA-A = 23%
- B-D = 13.3%
- E, HR, NC = 8.1%
In the second Loan sale it seems the primary determining factor was homeownership, and some lenders had changed their bidding strategy to factor that in. One lender who goes by the name of PrintAns commented in the Prosper forums, "I hadn't viewed homeownership as good or bad when picking the listings until the last bad loan sale. When they sold bad loans more was given for loans where the borrower was a home owner. I now use home ownership part of my criteria."
In a way it seems unfair for Prosper to be changing the rules of the game, but in reality it is the debt buyers that change their criteria and the amount they are willing to pay for different types of loans based on the changing economic conditions in the marketplace. It probably doesn't help that liquidity for all types of debt purchasing has been drying up throughout the economy.
John Witchel, Prosper's CTO, commented about the debt sale process on his blog several months ago. He specifically mentions two challenges they face in these debt sales. The first is that Prosper is a new and different asset class, and the debt sales are typically geared more toward established asset classes like credit card debt. The second challenge is volume. It takes a certain volume to attract debt buyers, which is the primary reason for the infrequent timing of the debt sales.
Saturday, August 25, 2007
WSJ: Become a loan shark
Jonathan Last wrote a humorous article about Prosper, Need a Loan? Usury for Beginners, for the Wall Street Journal which details his own experience becoming a Prosper lender. Not only does he become a lender, he becomes a loan shark. Here's an excerpt:
"Yes, we all have lofty goals, like helping the infirm, reaching out to shut-ins or starting a catering service. But what we've always wanted to be may seem, to some, a bit less commendable. For instance, I've always wanted to be a loan shark. There's something luridly poetic about outlaw lending: Getting the juice ticking at 30% on some hard-luck mope; making profits off of the backs of the union guy who lost it all at the race track or the stock broker with the expensive drug habit; sending minions like "Bobby Bats" out to do collections. It's like being a banker, only cooler.
Thanks to Prosper.com, my dream has come true, sort of."
So how does he do?
"In the end, I purchased three loans, all of which went to the type of high-risk borrowers that normally resort to getting in hock to degenerates like me. The first was to someone named "Shannon" who said he (or she) was starting a small-town newspaper. The second was to a Yahoo! employee who runs a side business selling refurbished electronics equipment.
The third was to a down-on-her-luck single mom who had no assets and needed cash to get out of credit card debt. She has an ex-husband who did her wrong, and the picture of her 5-year-old son was awfully cute. This cold-blooded loan-sharking racket is harder than it looks. I could imagine myself being tough on the first two borrowers because, deep down, I thought that there was a chance that they could make good. But the single mom seemed hopeless. I gave her the loan anyway. All told, the average interest rate I was getting on the loans was 19.84%. Not usurious, perhaps, but high enough to make me feel pleasantly evil.
...My career as a bad-boy money-lender was deflated even further when I received my first payments, which totaled $4.60 ($4.55, once Prosper took their cut). All three borrowers made their first collection. I didn't even get to have anyone roughed up. Not that I could have afforded it -- even Bobby Bats must make more than $5 an hour."
Oddly, the WSJ article does not have a date but it appears to have been published almost a year ago. Google News shows it was published six hours ago (so maybe it is republished) and it's new to me so I thought I would share it. The author, Jonathan Last, who goes by the username LoanBruce still doesn't have an excuse to rough up any borrowers - his three loans are still current.
What is a loan shark really? According to the very authoritative Wikipedia a loan shark "is a person or body that offers illegal unsecured loans at high interest rates to individuals, often backed by blackmail or threats of violence. They provide credit to those who are not willing or are unable to obtain it from more respectable sources, usually because interest rates commensurate with the perceived risk are illegal." Well, these loans certainly aren't illegal, so I guess LoanBruce isn't quite a loan shark.
Luckily for LoanBruce, all his high risk loans are still current. I thought it might be fun to take a look at the three loans that are making LoanBruce nearly 20%.
$4,999 at 19.75% for "A Well Respected Publisher"
"My name is Shannon and this is a relist for a personal/working capital loan for my new publishing business. For over 10 years, I've been the creative mind at a newspaper business in Dallas/Ft. Worth, Texas and have now moved on to become a publisher myself. I'll be continuing a very successful classified advertising/newspaper business under a new name which has been respected by the community and is also very charitable to numerous national organizations. I have a great working crew (commissioned), equipment (PCs, phones, Macs, office furniture), and retained many advertising clients who are ready to do business in 2007."
$15,000 at 16.86% to "Consolidate Profitable Business Running on Credit Cards"
"My name is Christopher...I own a small business selling refurbished electronics & cell phones...We have recently experienced an enormous growth spurt in quarter over quarter sales and expect the trend to continue in 2007."
"You can see more about this business by visiting www.auctioncleveland.com. If you research my sales for December 2006 we had over $60k in eBay sales and $10k in outside eBay sales. We expect January to be approximately $85-$90k gross revenue @ 35% margin. I carry a 100% feedback rating on eBay which should help show I am a serious and trust worthy business. Show me ANY other company that can transact over 5000 transactions and receive NO negative responses to their service and I will show you an AA credit rating. I turn over inventory very quick and need keep larger inventories. We have the infrastructure to scale but not enough cash to float the inventory costs. I currently have $40k in cash and would like to borrow another $15k to expand inventory for three to six months."
$1,500 at 26% for "A New Year"
"I am a 45 year old single mother with a 5 year old son. I have worked in administrative services for the last ten years at the same company."
"I got married in 2001. My husband had terrible credit history, so when he wanted to start his own limo business, we put the loan for his Cadillac under my name. I got pregnant; we moved to a new apartment with more space. I foolishly picked a place that was way out of our price range. My husband's limo business was doing well, so although things were tight, we were still managing to stay on top. After 9/11, the travel business came to a halt and we started falling behind on car payments. My son was born in September, and when I had to go back to work, we had to put my son in daycare ($1000+ a month). In 2003, I filed for bankruptcy. I still had the Cadillac loan in my name, I had tried to consolidate my credit card bills, which was a huge mistake, and my ex wasn't paying child support...I am still having a hard time paying my bills...The reason I am looking for this loan is because I want to try to get ahead a bit, or at least break-even."
"Yes, we all have lofty goals, like helping the infirm, reaching out to shut-ins or starting a catering service. But what we've always wanted to be may seem, to some, a bit less commendable. For instance, I've always wanted to be a loan shark. There's something luridly poetic about outlaw lending: Getting the juice ticking at 30% on some hard-luck mope; making profits off of the backs of the union guy who lost it all at the race track or the stock broker with the expensive drug habit; sending minions like "Bobby Bats" out to do collections. It's like being a banker, only cooler.
Thanks to Prosper.com, my dream has come true, sort of."
So how does he do?
"In the end, I purchased three loans, all of which went to the type of high-risk borrowers that normally resort to getting in hock to degenerates like me. The first was to someone named "Shannon" who said he (or she) was starting a small-town newspaper. The second was to a Yahoo! employee who runs a side business selling refurbished electronics equipment.
The third was to a down-on-her-luck single mom who had no assets and needed cash to get out of credit card debt. She has an ex-husband who did her wrong, and the picture of her 5-year-old son was awfully cute. This cold-blooded loan-sharking racket is harder than it looks. I could imagine myself being tough on the first two borrowers because, deep down, I thought that there was a chance that they could make good. But the single mom seemed hopeless. I gave her the loan anyway. All told, the average interest rate I was getting on the loans was 19.84%. Not usurious, perhaps, but high enough to make me feel pleasantly evil.
...My career as a bad-boy money-lender was deflated even further when I received my first payments, which totaled $4.60 ($4.55, once Prosper took their cut). All three borrowers made their first collection. I didn't even get to have anyone roughed up. Not that I could have afforded it -- even Bobby Bats must make more than $5 an hour."
Oddly, the WSJ article does not have a date but it appears to have been published almost a year ago. Google News shows it was published six hours ago (so maybe it is republished) and it's new to me so I thought I would share it. The author, Jonathan Last, who goes by the username LoanBruce still doesn't have an excuse to rough up any borrowers - his three loans are still current.
What is a loan shark really? According to the very authoritative Wikipedia a loan shark "is a person or body that offers illegal unsecured loans at high interest rates to individuals, often backed by blackmail or threats of violence. They provide credit to those who are not willing or are unable to obtain it from more respectable sources, usually because interest rates commensurate with the perceived risk are illegal." Well, these loans certainly aren't illegal, so I guess LoanBruce isn't quite a loan shark.
Luckily for LoanBruce, all his high risk loans are still current. I thought it might be fun to take a look at the three loans that are making LoanBruce nearly 20%.
$4,999 at 19.75% for "A Well Respected Publisher"
"My name is Shannon and this is a relist for a personal/working capital loan for my new publishing business. For over 10 years, I've been the creative mind at a newspaper business in Dallas/Ft. Worth, Texas and have now moved on to become a publisher myself. I'll be continuing a very successful classified advertising/newspaper business under a new name which has been respected by the community and is also very charitable to numerous national organizations. I have a great working crew (commissioned), equipment (PCs, phones, Macs, office furniture), and retained many advertising clients who are ready to do business in 2007."$15,000 at 16.86% to "Consolidate Profitable Business Running on Credit Cards"
"My name is Christopher...I own a small business selling refurbished electronics & cell phones...We have recently experienced an enormous growth spurt in quarter over quarter sales and expect the trend to continue in 2007.""You can see more about this business by visiting www.auctioncleveland.com. If you research my sales for December 2006 we had over $60k in eBay sales and $10k in outside eBay sales. We expect January to be approximately $85-$90k gross revenue @ 35% margin. I carry a 100% feedback rating on eBay which should help show I am a serious and trust worthy business. Show me ANY other company that can transact over 5000 transactions and receive NO negative responses to their service and I will show you an AA credit rating. I turn over inventory very quick and need keep larger inventories. We have the infrastructure to scale but not enough cash to float the inventory costs. I currently have $40k in cash and would like to borrow another $15k to expand inventory for three to six months."
$1,500 at 26% for "A New Year"
"I am a 45 year old single mother with a 5 year old son. I have worked in administrative services for the last ten years at the same company.""I got married in 2001. My husband had terrible credit history, so when he wanted to start his own limo business, we put the loan for his Cadillac under my name. I got pregnant; we moved to a new apartment with more space. I foolishly picked a place that was way out of our price range. My husband's limo business was doing well, so although things were tight, we were still managing to stay on top. After 9/11, the travel business came to a halt and we started falling behind on car payments. My son was born in September, and when I had to go back to work, we had to put my son in daycare ($1000+ a month). In 2003, I filed for bankruptcy. I still had the Cadillac loan in my name, I had tried to consolidate my credit card bills, which was a huge mistake, and my ex wasn't paying child support...I am still having a hard time paying my bills...The reason I am looking for this loan is because I want to try to get ahead a bit, or at least break-even."
Thursday, August 23, 2007
Prosper beats the S&P 500 (on AA loans with no delinquencies)
Prosper sent out an email campaign to all Prosper members with the following news:
"Did you know that the average loan on Prosper is outperforming the 2-year return on the S&P 500? Smart lenders like you have already discovered that lending on Prosper is a great way to earn a market-beating return!"
Some people on the Prosper forums claim the ad is misleading. You have to read the fine print of the email to realize that what Prosper is calling average performance is computed using just the performance of AA loans with no delinquencies which is a very small part of the overall marketplace. They also selectively picked date ranges that ensured the best performance relative to the S&P 500.
Here is what their fine print says:
[1] Rate of return shown is the average net annual return on Prosper loans originated between 7/22/06 and 7/22/07 to borrowers with AA credit grades who have 0 delinquencies and 0 to 2 credit inquiries on the their credit record, as of 8/23/07. For more information, go to http://www.prosper.com/lend/performance.aspx.
[2] Avg. annual return of the Standard & Poors 500 Stock Index from 8/16/05 to 8/16/07.
[3] APY on FDIC-insured Citibank, N.A. 1-year Certificates of Deposit as of 7/23/07.
[4] Annual Percentage Yield (APY) on FDIC-insured E*TRADE Money Market accounts as of 7/23/07.
Overall, I think it is encouraging to see that sector of Prosper doing so well. In our posts on this blog we have tried to steer lenders toward A and AA loans to earn the best performance. However, Prosper does need to get better about creating straightforward marketing. Earlier marketing campaigns claimed that you could make up to 29% returns on Prosper which was also misleading since no one is earning those kinds of returns after fees and defaults.
"Did you know that the average loan on Prosper is outperforming the 2-year return on the S&P 500? Smart lenders like you have already discovered that lending on Prosper is a great way to earn a market-beating return!"
Some people on the Prosper forums claim the ad is misleading. You have to read the fine print of the email to realize that what Prosper is calling average performance is computed using just the performance of AA loans with no delinquencies which is a very small part of the overall marketplace. They also selectively picked date ranges that ensured the best performance relative to the S&P 500.
Here is what their fine print says:
[1] Rate of return shown is the average net annual return on Prosper loans originated between 7/22/06 and 7/22/07 to borrowers with AA credit grades who have 0 delinquencies and 0 to 2 credit inquiries on the their credit record, as of 8/23/07. For more information, go to http://www.prosper.com/lend/performance.aspx.
[2] Avg. annual return of the Standard & Poors 500 Stock Index from 8/16/05 to 8/16/07.
[3] APY on FDIC-insured Citibank, N.A. 1-year Certificates of Deposit as of 7/23/07.
[4] Annual Percentage Yield (APY) on FDIC-insured E*TRADE Money Market accounts as of 7/23/07.
Overall, I think it is encouraging to see that sector of Prosper doing so well. In our posts on this blog we have tried to steer lenders toward A and AA loans to earn the best performance. However, Prosper does need to get better about creating straightforward marketing. Earlier marketing campaigns claimed that you could make up to 29% returns on Prosper which was also misleading since no one is earning those kinds of returns after fees and defaults.
Lending Club featured in Business Week
Business Week has just published an interesting article called Profiting from Social Networking which looks at the challenge of monetizing Facebook applications such as Lending Club. Lending Club is one of the four most popular applications in the business category and, according to Buisness Week, may have "the most successful business model."One application Business Week looks at is HedgeStop.com. "The application has yet to offer features unique to Facebook. There seems to be no reason users shouldn't simply go right to HedgeStop.com." I made a very similar point in my Lending Club/Facebook analysis. Facebook adds very little added value to Lending Club outside viral marketing potential. Most of the Lending Club activity takes place outside of Facebook; it's simply required to verify login credentials and does offer some potential group associations.
Facebook Senior Platform Manager Dave Morin would disagree with me and thinks applications like Lending Club should focus solely on the Facebook application. From the Business Week article:
It's a common mistake, says Facebook Senior Platform Manager Dave Morin. According to him, too many companies still see applications as marketing rather than as new business. They bring users to an application either to advertise to them or to build a connection they hope will subsequently send users off Facebook and to their main business—a company Web site, say, or its online store. Instead, companies should be trying to make the application into a self-sustaining business that generates revenue through the service it provides on Facebook. "The applications that are the most successful are the ones that integrate seamlessly into Facebook," Morin says, a model that conveniently supports Facebook's own business ambitions.
Business week considers Lending Club "the closest to developing the most appropriate business model." Here is a portion of the article which discusses Lending Club:
Says Lending Club CEO Renaud Laplanche, "Person-to-person lending works best in an a environment where people feel connected to one another, lending to friends and friends of friends." He also claims that peers trust peers to give better rates than a bank. So far, the site has attracted 13,163 users. With its 3% transaction fees, Laplanche estimates that by the end of August, the company will have moved $1 million since its June launch. But the revenue for the company in the same three-month interval is only $30,000. Given the minimal costs of maintaining the Web site and its relatively small staff of 21 people, this may be enough for now, but as the application grows, its infrastructure costs will expand. Raising the company's commission, however, would quickly jeopardize its value proposition to users.
Facebook, where users expect applications to augment their social experience with little effort and at no cost, may be a tough environment for companies whose ultimate goal is making a buck, especially since so many companies are still trying to work with traditional ad models. Ultimately, the most successful applications are those whose business model, brand identity, and natural users match the culture and demographic on the network. As such, the top applications may not provide plug-and-play solutions for every brand hoping to enter Facebook. But the lessons they teach about the need for authenticity and relevancy are universal tenets for marketers in the Web 2.0 age.
The figures are interesting and help explain the need for venture capital. It's hard to cover salaries with only about $10,000 in revenue per month. At least $8,000 has gone to the video contest. Of course, Lending Club is very young and they are growing rapidly. Revenue will grow too.
Wednesday, August 22, 2007
Lending Club receives $10 million in venture capital
Tomorrow Lending Club will announce that is has received $10.26 million in Series A funding led by Canaan Partners and Norwest Venture Partners. Since its launch three months ago, nearly $1 million in loans have traded hands on the peer to peer loan marketplace. According to TechCrunch, Jeff Crowe and Dan Ciporin (former CEO of Shopping.com) are also joining Lending Club's board of directors.Rex Dixon, director of social media content, says Lending Club will use this money to expand beyond the Facebook platform. GigaOM also writes about the Facebook connection, "It may turn out to be a new way of proving your model: Launch an application on the Facebook Platform, see if it works, and if it does, take your hard data to a group of VCs and raise capital to grow your business." As I wrote about in an earlier post, I think the Lending Club/Facebook association is overblown. The technical challenges of moving from Lending Club to a broader audience seem very small and would probably cost little money. I would have to guess that Lending Club plans to launch a significant marketing campaign with the funds and hire more people.
The peer to peer lending market is hot right now. In June Prosper secured an additional $20 million in venture captial (for a total of $40 million) and will expand to Japan. Globefunder has raised 1.5 million in seed capital and Loanio is expected to launch this fall.
Update: Lending Club has now announced the VC on their blog. According to their CEO, Renaud Laplanche, "Facebook now has over 6 million active user groups which are prime targets for financial services. However, Facebook users are younger than the average online population, and our strict screening criteria (640 minimum credit score, less than 20% DTI) led us to decline about 75% of all applications, as younger borrowers tend to have a lower FICO score. We are coming up with new tools to help the “declined” borrowers understand the importance of good credit and take specific actions to improve their credit score. We will be using the funds to expand beyond our current Facebook application."
Eric's Credit Community creates Prosper group leader tool
Eric's Credit Community, a great resource for Prosper data and statistics, has created a group listings tool to help group leaders promote their loans on webpages. It's very simple, just enter the short name of the group and html code is generated which can be cut and pasted into any webpage. Unfortunately, Blogger will not accept the script but here is a screenshot of what the widget looks like using the P2P-Loans Group as an example.
Sunday, August 19, 2007
PhD candidate publishes empirical analysis of Prosper
Sanjeev Kumar, a Doctoral Candidate at the University of Michigan, has written an interesting paper about Prosper called Bank of One: Empirical Analysis of Peer to Peer Financial Marketplace. He just presented the paper at Americas' Conference on Information Systems and has made a copy of the PowerPoint presentation here. It's a fascinating academic study on Prosper and may be the first of it's kind. Here is the paper's abstract:
Peer to peer financial marketplaces provide a platform for individual lenders and borrowers to interact and transact. These marketplaces disintermediate the traditional financial services business models. In this exploratory paper we study the operation and effectiveness of one such marketplace: Prosper.com. We analyze six months of lender, borrower and loan repayment data to answer preliminary research questions about lender behavior, market effectiveness and antecedents of loan default. We show that lenders mostly behave rationally and charge appropriate risk premiums for antecedents of loan default. We also show that there are mismatches between risk premiums charged and relative importance of factors that drive loan default. We then explore the dynamic process of lenders adjusting their lending strategies to reduce these mismatches. We analyze the effectiveness of the group reputation used in the marketplace and show that it is not effective in promoting good borrower behavior. Our analysis provides a base for future research in this exciting and evolving context. Our results provide directions for practice applications as well as future research in design of financial marketplaces, investing and risk mitigation strategies and improving the effectiveness of peer-to-peer financial marketplaces.
Kumar attempts to answer the following research questions:
The results are certainly interesting. One thing that catches my eye is the homeowner determination. Based on Matt's analysis, homeowners are actually a greater risk of default than non-homeowners. Yet, according to the dataset Kumar used, being a homeowner is not a significant variable but Prosper lenders bid down homeowner loans. A careful look at Kumar's dataset could help increase returns for lenders.
Later this week I intend to provide a deeper look at Kumar's paper but for now check out his PowerPoint.
Peer to peer financial marketplaces provide a platform for individual lenders and borrowers to interact and transact. These marketplaces disintermediate the traditional financial services business models. In this exploratory paper we study the operation and effectiveness of one such marketplace: Prosper.com. We analyze six months of lender, borrower and loan repayment data to answer preliminary research questions about lender behavior, market effectiveness and antecedents of loan default. We show that lenders mostly behave rationally and charge appropriate risk premiums for antecedents of loan default. We also show that there are mismatches between risk premiums charged and relative importance of factors that drive loan default. We then explore the dynamic process of lenders adjusting their lending strategies to reduce these mismatches. We analyze the effectiveness of the group reputation used in the marketplace and show that it is not effective in promoting good borrower behavior. Our analysis provides a base for future research in this exciting and evolving context. Our results provide directions for practice applications as well as future research in design of financial marketplaces, investing and risk mitigation strategies and improving the effectiveness of peer-to-peer financial marketplaces.
Kumar attempts to answer the following research questions:
- Do lenders follow rational lending practices while lending on the marketplace? That is, what factors affect their lending strategy and whether they are in line with rational expectations?
- Do lenders follow efficient lending practices while lending on the marketplace? That is, what are the antecedents of loan default and whether lenders charge appropriate risk premiums for factors that drive loan defaults?
- What is the impact of group reputation systems on borrower and lender behavior?
- Is the marketplace evolving to achieve higher lending efficiency? That is, are lenders adjusting their lending strategies and charging appropriate risk premiums as more information becomes available on antecedents of loan defaults and the relative importance of these factors that drive loan defaults?
The results are certainly interesting. One thing that catches my eye is the homeowner determination. Based on Matt's analysis, homeowners are actually a greater risk of default than non-homeowners. Yet, according to the dataset Kumar used, being a homeowner is not a significant variable but Prosper lenders bid down homeowner loans. A careful look at Kumar's dataset could help increase returns for lenders.Later this week I intend to provide a deeper look at Kumar's paper but for now check out his PowerPoint.
Saturday, August 18, 2007
Prosper improves lending and borrowing experience
Prosper just announced some significant site and policy updates. Loan listings now include borrower's past activity, borrowers can make payments with their Prosper cash balance, borrower activity including all past activity will be reported to TansUnion in addition to Equifax, and the referral program has been extended through the end of the year. These changes have been well received by the Prosper community after the recent controversy.
Here's an excerpt from the announcement:
Listings now include borrower's past Prosper activity
Borrowers taking a second (or third or fourth?) Prosper loan will now have their Prosper payment activity recorded on the listing page and on their member page. This includes total loans, principal borrowed, on time payments, total number of loan payments which brought a loan current which were made at less than and more than one month past the due date, total payments billed, credit grade history with dates, and credit grade change.
Here's an excerpt from the announcement:
Listings now include borrower's past Prosper activity
Borrowers taking a second (or third or fourth?) Prosper loan will now have their Prosper payment activity recorded on the listing page and on their member page. This includes total loans, principal borrowed, on time payments, total number of loan payments which brought a loan current which were made at less than and more than one month past the due date, total payments billed, credit grade history with dates, and credit grade change.
Advanced search and standing orders have also been updated to allow lenders to search and bid on loans that meet certain criteria in these departments.
Borrowers can make payments with Prosper account
Borrowers can now make payments on their Prosper loans using funds from their Prosper cash balance, if they have at least $25 available.
Borrower activity reported to TransUnion
Borrower payment activity is now reported to TransUnion, one of three major U.S. credit reporting agencies. Payment activity is already reported to Experian. We hope to start reporting to Equifax, the third major credit reporting agency, shortly.
All historical Prosper loan activity to date, including payments, delinquencies, and defaults on active and ended loans will also be reported to TransUnion.
Improved messaging on listings cancelled during review
One big point of frustration for borrowers whose listings are cancelled during review is that they don't receive a specific reason for why their listing was cancelled. This can range from the serious (name on bank account doesn't match borrower's) to the benign (hasn't yet verified bank account ownership).
From now on, when a borrower's listing is cancelled during review, the borrower will receive a message with a specific reason (or reasons) why their listing was cancelled, whether they may re-list or not, and possibly a note from customer support about what they should do before their next listing to ensure that the listnig will not be cancelled. Lenders will also receive a message with a specific reason.
Loan numbers tied to listing numbers
Borrower loans are now tied to their listings, both on the borrower's member page and in the API. On the borrower's member page, you can see each loan's balance and payment performance in a simple table.
Invite friends from Outlook, Gmail, Hotmail, AOL, Yahoo mail, etc...
When you invite your friends to Prosper (and earn referral awards), no more need to copy and paste their email addresses into the "Email address" field. Just click the "Add from my address book" button, and go to town.
Search help pages
Now you can search the Prosper help pages using keywords.
Referral program extended to Dec 31, 2007
The referral program has been extended until Dec 31, 2007. Invite a new borrower and earn 0.5% of his or her loan value when their loan gets funded, or invite a new lender and you both get $25 when your friend funds his or her first loan.
Over 5,000 members have successfully referred a friend since the program started in June. Everyone who refers a friend by August 31 will receive a stylish black Prosper T-shirt, and also be entered in our "Prosper in Las Vegas" sweepstakes.
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