Social lending the next Web 2.0 phenomenon - Part II

Yesterday I wrote an article about a report that was just published about social lending. Since the article became very popular over the past day, I thought it might be interesting to take a deeper look at Zopa and Prosper to see what they offer to both the borrower and the lender.

My belief is that social lending is working for the same reasons that MySpace, Facebook and the other social networking sites do. There is something "in it for me" when I help someone get the funds they need to do whatever it is they want to do. Both Zopa and Prosper state that even after bad debt, their rates are better than any bank can give you as a lender. The big difference between Zopa/Prosper and a bank savings account is that with the bank, there is virtually no risk. On these social lending sites, there can be huge risks, including the possibility of losing all of your money.

I also believe that if this takes off to a large extent, then the big banks will certainly create their own social lending sites. Citibank could easily create a one-off social lending site that could probably put some real pressure on Zopa and Prosper. In addition, and as others have suggested, when the large financial institutions will lower their rates to try to push these new social lenders out.

With that said... on to the reviews!

Zopa is based in the UK and is currently looking to startup in the U.S. They have over 100,000 people signed up, though I am not sure if that is active borrower/lenders or just users in the system. They claim a very small percentage of loans have gone bad. Their web site is very Web 2.0 in its design and style. They even have some "social" stats:

• The average age of a Zopa member is 36.
• 5900 people registered on Zopa this month.
• Most members are from London.

Here is their overview of why you should signup as a lender on Zopa:

• Great returns
• It's human
• It's safe

And their list for why you should be a Zopa borrower is:

• Low, low rates
• Deal with Zopa lenders rather than banks
• Repay early at no extra cost

And the idea at Zopa is pretty simple... For lenders:

• You setup an account and decide how much money you are willing to loan and at what percentage
• You also decide to what credit level you are willing to loan the money to
• When a borrower wants a loan of over £500, the loan is split among many lenders to reduce the chance of losing your money -- I like this feature a lot!

For borrowers, it is pretty simple as well:

• You setup an account and look at offers from the lenders above
• Once you are satisfied with the offers, you enter a legally binding contract with same
• If you miss a payment, your account will go to collections the same as with any bank loan

Final thoughts on Zopa:

Zopa pushes the social aspect of borrowing and lending over the actual transaction itself. There is a certain "fun" component to lending and borrowing on Zopa. You get that feeling the minute you load their home page and see the little people and learn more about them and their stories. I wonder if the "fun" component will become an issue if more loans are defaulted on.

Prosper describes themselves as: eBay + PayPal + Match.com = Prosper.com. Prosper takes a little bit of a different take than Zopa in terms of how they show their "social" side. It feels more like eBay as they suggest. Picking one listing at random, right now on their home page they show a man who is looking for a $6,000.00 @ 27% (28.75 effective) with a Credit grade: D and a Debt to income: 44%. She states he is looking to pay off her high rate credit cards. Even if he was delinquent with his cards, I can't picture any being higher than 29.99%. You can see her full profile here. Frankly, I am not sure that I like the idea of all of this information being made public. At least require me to login first.

Using this example, you can see that Prosper works because the stories are real. A bank typically only cares about your credit score and risk. Here this woman explains why she needs the money, her story almost makes you feel drawn to her in a way that you believe you must help her, otherwise you are not a good person.

For an even better example, go read this bid request and tell me if it doesn't bring a tear to your eye.

Like Zopa, they spread the requested amount across many lenders to reduce risk. I like this. One question that came up at the NY Tech Meetup when Prosper presented was about whether payment history is reported to the credit reporting firms. We know bad history is always reported. Jane from Prosper had no answer for the question. I just absolutely hate when companies report only the bad. Frankly, it should be against the law.

Final thoughts on Prosper:

Prosper pushes the "feeling" you get when you help someone with their financial needs. The site does push the match.com aspect of the site in terms of building a bond with the borrowers and lenders.

Overall final thoughts

I guess in summary, I would look at using Zopa or Prosper from the lender perspective the same way I would look at any other risk investment such as stocks, bonds and other annuities. Just because you want to help a woman get a set of boobs, does not mean you should not contemplate losing your money. If she defaults, you won't get the silicon back!

From a design perspective, I prefer the style of Zopa. It feels more "social" and welcoming to the eye. The little people they use seem to feel like Sims and works well. And I think Prosper wins on the "feeling" for the borrowers. So overall it is probably a wash.

Also, a lot of the feedback on digg and so forth about my other article, discusses the idea that a VC-style social lending site might work very well in the current environment. I think looking for $5k or £5k is a lot different in terms of requirements than if a startup is looking for $150k or £100k. But it just might work for smaller startups!