Prosper Archive

Are the big P2P lending companies (Zopa, Prosper and to some extent Lending Club) starting to make Citibank a bit nervous? While the immediate answer is no, I have to believe that eventually it might account for a small percentage of loans that the big banks would have normally been able to sell. Over time, this small percentage could account for billions of dollars worldwide. I wrote a 3-part series about social lending earlier this year which is a great primer if you are new to this market.

Typically personal loans have some of the highest interest rates which is the category that P2P lending falls into. Yesterday I noticed the advertisement below for a personal loan at Citibank. The terms are very simple and the interest rate is 10.05% which is extremely low. This low interest rate plus no collateral or down payment make me really wonder if they want to lock up as many personal loans as possible before Prosper/Zopa hit the U.S.

Here is the ad on citi.com:

social lending earlier this year. Companies such as Zopa and Prosper are expanding across international lines as the market continues to grow. Lending Club is a new entrant into the social lending market and currently works exclusively within the Facebook platform. To find out more about Lending Club, I spoke with Founder and CEO, Renaud Laplanche.

Allen: Can you provide a brief background about yourself?

Renaud: I grew up in France, was trained as a lawyer, completed my MBA in London Business School and worked for New York law firm Cleary Gottlieb in Paris and in New York for a few years, then founding TripleHop Technologies, the software company that designed MatchPoint, in 1999 and sold it to Oracle in 2005.

Allen: What is Lending Club and where did the idea come from?

Renaud: When I started TripleHop, I charged the first few expenses on my credit card. In 3 months, I had accumulated $20,000 on my card, and realized I was paying 18% interest despite my good credit score. This was before raising any capital for the company, so I refinanced the expenses with a small loan from a group friends from my sailing club, at a 10% interest rate. This experience set the founding principles of Lending Club:

• Most people are paying high interest rates on personal loans and credit cards, because they don’t have the time to shop around for better rates.
• Technology can be used to match lenders with borrowers, and identify connections among people through social networks and online communities. These connections build up trust on the lender side and responsibility on the borrower side.

Allen: How does the service work?

Renaud: Lending Club essentially disintermediates the banks. Banks typically collect deposit from the public and pay 1% to 5% in return through savings accounts and CDs, then turn around and lend that same money out to borrowers at a 13% rate or more through unsecured personal loans and credit cards. We have created a platform that lets borrowers and lenders meet directly online and trade money at an average rate of about 10%. As a way to help build confidence on the lenders’ side, we have decided to limit access to borrowers with at least a 640 Fico score and less than 20% debt-to-income ratio. This combination will result in low defaults and excellent net returns for the lenders. The flip side is that we have to turn down a fair number of borrowers.

Allen: What’s the team like at Lending Club?

Renaud: It is an interesting mix of technology and finance geeks :) We have many experienced finance professionals from Mastercard, Wells, GE Capital, First Data, a group of bright engineers from Oracle, user experience folks from Razorfish, and marketing people from eBay. The result is the highest performing team I have ever seen working together.

Allen: Who is your typical customer?

Renaud: Quite frankly we are still figuring this one out. An analysis of our current base might be misleading because traffic is currently gated through Facebook. We anticipate, however, that most borrowers will be 22-34 year old urban professionals. Lenders population break down into multiple segments: we’re seeing a lot of people loading $200-$300 into their Lending Club account (but that might very well be people "tryign it out"), quite a few $1,000 – $5,000 investments, and also a few larger investments from "super-lenders". Lenders’ demographics are all over the place at this point.

Allen: Who are your competitors?

Renaud: Prosper is really the only other person-to-person lending marketplace available in the US at this point, but we do not feel competitive with them at all. Both Prosper and Lending Club can be very successful, and the success of both companies will be much more dependent on how fast we can grow the p2p lending space together rather than how well we compete against each other. With 2.4 trillion dollar in personal consumer debt (other than mortgages), it is a big market out there.

Allen: Prosper and Zopa are available outside of Facebook. Since you are exclusive to FB, do you think this hinders your ability to generate continued loans?

Renaud: We’re definitely generating less loans than we could, because traffic is cureently gated through Facebook. The Facebook-only launch was the perfect way to test the power of the affinity model, using connections among users to increase trust and desire to help each other, and to gather a lot more user feedback before opening up further. We will be announcing more partnerships and expanding beyond Facebook soon.

Allen: Do you have a monetization plan? If so, can you share some details? Are you funded?

Renaud: Lending Club charges an origination fee of 0.75% to 2% to the borrowers and a servicing fee of 1% to the lenders. That’s how we monetize the loans.

Allen: Can you share some details about your marketing plan?

Renaud: We will be expanding beyond Facebook and will be announcing a number of partnerships before the end of the year. Tactically, we have a few more "surprises" coming up, like the video contest that you have seen running for the last couple of weeks that generated lots of attention on YouTube and elsewhere.

Allen: What’s coming in the next 3-6 months for Lending Club?

Renaud: There is so much I can reveal at this point; all I can say is that you should expect many changes, annoucements and bold moves. Our expansion beyond Facebook will materialize in several ways.

Allen: What’s been your biggest lesson learned since you started Lending Club?

Renaud: Sharing problems openly with the community works. We have been very open from Day 1 about the issues we are having with our high decline rate (we are declining about 70% of all applications) and as a result were contacted by several lenders and borrowers with very interesting thoughts about how to better handle this issue, and will be coming up with concrete steps towards a solution as a result in the next few weeks.

Allen: Where do you see Facebook moving this year? Do you believe the growth it has experienced will continue?

Renaud: I think Facebook’s growth will be very dependent on their ability to appeal to the 25-34 age range. It seems that this portion of their user base is rapidly growing; I certainly hope that will continue to be that way.

Allen: Since Facebook is a closed environment, do you believe Lending Club has a cap on how many loans you can actually offer?

Renaud: Facebook says it has 29 million users right now. You can make a lot of loans among 29 million tech-savvy, college-educated people.

Allen: What advice do you have for those thinking about starting a web application?

Renaud: Make it social, lively, open to the community. All these things work.

Allen: Which RSS feeds are you reading these days?

Renaud: I get sailing news, and the usual suspects like Techcrunch, Read/WriteWeb, Mashable and CenterNetworks. I also get finance news from Kiplinger and NetBanker.

• Part 1 – Overview of Social Lending
• Part 2 – Review of Zopa and Prosper
• Part 3 – Why of Social Lending

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!