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We’ve written about social lending several times before including our 3-part series looking at Zopa, Prosper and LendingClub. Jim Bruene at NetBanker has put together a good financial analysis of the social lending scene for the first quarter of 2008. LendingClub and Prosper share their loan information while Zopa does not.
From Jim’s analysis, "In Q1, Prosper and Lending Club combined for more than $30 million in originations, up $10.7 million (55%) compared to about $20 million in Q1 2007." Jim goes on to note that for the lower risk loans, LendingClub actually passed Prosper in total volume.
Lending Club is announcing today that loans can now be made nation-wide. Previously several states in the nation weren’t able to participate in the social lending program. I believe Lending Club is the only social finance site within Facebook. Recently Zopa opened operations in the U.S. but unlike Lending Club which uses traditional loans, Zopa uses CDs for safety but also limits the ability to earn and therefore limits lender risk.
Lending Club is also releasing some loan data today:
- Lenders have earned an average 12.2 percent annualized return after fees and losses
- Defaults on the loans have remained under one percent (allen’s note: most likely because they require a 640 fico.)
- Late payments are below 0.25%
- 489 approved loans in the six-month period
- Average rates vary from 7.82% to 17.37%
After we broke the story that Zopa was en route to the U.S., their plane has finally landed at JFK and they are now open for business in the U.S. The big question that everyone was puzzled about was how they would federally insure loans. That question has been answered.
Loans that are federally insured will be through the Zopa CD up to currently 5.1% depending on which loans you back inside the CD. Zopa describes the CD as, "A Zopa CD is guaranteed and insured way to earn a fixed rate of return for a fixed term. Compare it to a "certificate of deposit" at a bank or a "termshare certificate" at a credit union. But it’s different, too. Because your Zopa CD directly benefits the borrowers you pick by reducing their monthly loan payments."
So there is the entire program. It’s different than Lending Club and Prosper and Zopa in the U.K. because it works completely on loans that are backed by CDs which are taken through a variety of credit unions in the U.S.
If the best I can do is a 1-year term at 5.1%, why not just go to a local bank or ING Direct who currently are at 4.7% with no hassles? I guess it’s all about the idea of not only making a return on the CD but also helping someone in the Internet community.
Zopa, the social finance lender, has spoken for months about their U.S. launch. Today I received additional information on the launch. They say that the launch will be in just a "few days". Perfect timing for the holiday season.
Here are the features they claim will be different than the U.K. version:
Looks familiar, right? Lots of real people taking money out and putting money in. But Zopa in the USA will be very different, too. Here are just some of the ways we’ll be different from the sites that exist today:
- No risk for investors.
Your funds will be federally insured. No more worrying about whether your borrowers will pay your loan back.
- Pick who you want to help.
Investors will choose exactly who they want to help.
- Set your rate.
Investors will choose how much they want to earn, up to a ceiling.
- No waiting.
Borrowers will get their loans immediately upon approval.
- Lower your monthly payment.
Borrowers can actually reduce their loan payments after they’ve borrowed. They’ll do that using rich profiles…
How will we do all this? By using some very cool technology and a terrific partnership with leading credit unions.
I’ve highlighted the option that could be "game-changing" for the social finance and social lending movement. From what I gather, neither competitor Prosper nor Lending Club provide any sort of federal insurance for the loans created on the respective site. Isn’t a loan all about risk? I have no further details at this point but I do have a mail into Zopa to try to learn more.
We’ve written extensively on social finance and social lending. Our 3-part series on social lending is a great place to start if you are new to the area. I remain confident that social lending will continue to grow in 2008.
When I was a little kid growing up on the mean streets of Brooklyn, the corner candy store had a big sign with photos of anyone who stole from them. Then as I grew up, the video store had a sign with the bad checks they received with the name of the person in large type for all of the customers to see. And we all remember the Seinfeld episode all about a bad check to a grocer.
So what happens today when a person gets stiffed on a social finance site such as Prosper, Zopa or Lending Club? You guessed it – they blog about it! And if the blog is popular, it will be worse than a bad check posted on a wall. (of course if the person is a scammer, they won’t care)
Yesterday Andy Swan posted about just such a deadbeat. He notes:
I loaned the guy $500 through Prosper. Apparently he is involved in some type of credit crunch situation. Probably some type of adjustable rate mortgage that just rolled over to 24% APR on his delinquent ass.
Now he’s stiffing me and everyone else on Prosper that fell for his enthusiasm and sparkling smile. I just hope he’s driving around in a sweet ride with a hot girl and the money’s not rotting away in some casino coffers right now.
In hindsight, the “endorsements” from his friends should have been a tip off.
You can click over to the profile and photo of the man called "Slim123". I am confident we will see more of public humiliation payment tactics as social finance and social lending explodes.
For more information about social lending and social finance, check out our 3-part series.
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.