URL = http://Prosper.com
May 2007 Profile by Open Business at http://www.openbusiness.cc/2007/05/20/the-emergent-field-of-p2p-finance/
"Who: Prosper’s CEO and co-founder, Chris Larsen, was formerly the CEO, Chairman and Founder of E-LOAN, an online consumer lender “dedicated to providing consumers with a fast, transparent, and low cost way to obtain mortgage, auto and home equity loans.” Borrowers: Prospective borrowers register with the site and allow the company to review their credit history. Then they post a loan request of up to $25,000, along with an upper limit for the amount of interest they are willing to pay. Loans are not secured by collateral and are paid off over three years at a fixed rate, with no prepayment penalty. Once the bidding is complete, and if enough lenders bid enough money to finance the loan at a single rate acceptable to the borrower, Prosper transfers the money to the borrower’s account and establishes a monthly repayment system that withdraws money from the borrower’s checking account. Should a borrower default, Prosper hires a collection company on the lender’s behalf and alerts credit bureaus.
Lenders: All of Prosper’s loans are 3-year unsecured loans. People who want to lend set the minimum interest rate they are willing to earn and bid in increments of $50 to $25,000 on loan listings they select. People who lend can easily diversify using “standing orders”, which automatically make many small loans to different borrowers. Lenders essentially deposit their money with Prosper — which holds it in an interest-bearing account with Wells Fargo— and either review the loan requests individually or fill out a form permitting Prosper to allocate money to borrowers who meet certain criteria. Chief among those criteria is the borrower’s rating from the credit reporting bureau Experian, but borrowers can also join or create groups with defined interests or characteristics that, they hope, will make them more attractive to some lenders.
Community: Unlike Zopa, there is a greater emphasis on personally selecting and lending to particular borrowers. Loans can be fully funded by one person, so it is possible to lend an individual up to $25,000 (in Zopa the limit is just £200.) As a result there is much more interaction between lenders and borrowers. The ‘groups’ are an important part of this process, and make the service seem less like just another financial instrument.
Among the groups on Prosper are aficionados of the Porsche 914 model, associates and employees of a Berkeley cafe and Vietnamese-American students. Prosper’s group leaders receive a commission on the group’s lending and borrowing activities, which they sometimes share among the group. When you join a responsible group with a good payment history, you get a good reputation by association, and lenders are more likely to offer good interest rates. But, belonging to a good group puts some pressure on you, too. If you stop making your loan payments, you not only tarnish your own reputation, but the group’s as well. If you’re part of a group, the theory is that you’ll perform better as a borrower than if it was an impersonal bank or credit card company.
Typical transaction: Loans requested range widely between about $2000 and $25000. The average loan amount as of April 2007 is just shy of $5000. Most lenders lend between $50-200 to any one borrower, and the vast majority of lenders have a total portfolio size of less than $2000.
Business model: Prosper generates revenue by collecting a one-time 1% or 2% fee on funded loans from borrowers (depending on credit grade), and assessing a 0.5% or 1.0% annual loan servicing fee to lenders.
Establishing trust: Prosper obtains the borrower’s Experian credit score, and assigns one of seven credit grades, from AA to HR. Borrower credit grades are posted with their listing to help lenders plan their bidding. Further information is also provided, such as delinquencies, number of credit lines, debt-to-income ratio and debit or credit card utilisation. Additional data, which is self-reported by most borrowers when registering, includes occupation and income. This information combines with the personal and group interactions that Prosper enables, to give lenders and borrowers a credible sense of risk and trust in other people.
Performance: Prosper has 270,000 members and $61 million in loans to date. Their open API has spawned dozens of websites focused on Prosper users, and these communities and Prosper groups are very active. Prosper has raised approximately $20 million in investment for further expansion.
Problems or limitations: Like Zopa, Prosper’s contractual and enforcement structure is founded on specific territorial laws. Growing the network transnationally is impracticable due to regulatory considerations. Given the size of the US banking market this is not a fundamental problem, but it is necessarily a brake on growth, especially given the geographically dispersed nature of many online communities and affinity groups." (http://www.openbusiness.cc/2007/05/20/the-emergent-field-of-p2p-finance/)
By Cuna News
From Cuna News at http://www.cuna.org/newsnow/06/system052406-9.html?:
"Prosper.com, which has been operating since February, uses the eBay approach to loans, enabling its users to bypass traditional financial institutions--including credit unions--in the person-to-person loan process (Salon.com May 22).
To list a loan on the site, borrowers determine how much they want to borrow and the maximum interest rate they want to pay. They provide personal information such as annual income, bank account number and Social Security number. They authorize Prosper to collect financial data from credit agencies. Prosper shows potential lenders the data, including a credit grade, the number of credit lines the borrowers opened in the past decade, number of delinquencies, and a ratio of debt to income. Prosper.com manages the loan. Borrowers pay 1% of each loan; lenders pay 0.5% on the money owed to them. Participants are urged to join "affinity" groups. It's easier to get a loan when one is a member of a group, and the rates received are better. The theory is that membership in a group instills some financial discipline because defaulting on a loan adversely affects others in that group.
Some experts say such lending sites could topple the credit industry, bringing transparency and fairness to the market. The premise is that borrowers shut out of the traditional loan market can find money at reasonable rates. Lenders can get a better rate of return than they would on some other investments. Critics question the risks involved for both borrowers and lenders, the site's adherence to equal opportunity regulations and the idea that people would risk their own money to lend to someone with a poor financial history. However, the site already is proving that people do loan to others in need. Some say the site would be one of the ways the Internet might transform the credit industry into a fairer, more equitable business.
Prosper.com CEO Chris Larsen was co-founder in 1996 of E-Loan, one of the first Internet loan brokers." (http://www.cuna.org/newsnow/06/system052406-9.html?)
By P2P Weblog
"Prosper launched in September 2006 and is based in San Francisco. The P2P lender has 200,000 members and has funded over $40 million in loans.
Prosper features developer tools to allow other companies to build on their lending platform. They invite its use for academic research, investment analysis, and even start-ups. An API is provided as a WSDL based web-service for ad-hoc querying of the Prosper Marketplace. Proper also provides Data Export for a complete snapshot of all listings, bids, user profiles, groups and loans ever created on Prosper
Prosper collects a one-time 1% or 2% fee on funded loans from borrowers and a 0.5% or 1.0% annual loan servicing fee from lenders.
CEO and co-founder Chris Larsen was the CEO and Founder of E-LOAN. Prosper has raised $20 million from Accel Partners, Benchmark Capital, Fidelity Ventures, and Omidyar Network." (http://www.p2p-weblog.com/50226711/p2p_lender_profile_prosper.php)
Why Prosper failed in the U.S.
1. John Paul Lewicke:
"Their fundamental problem is that they didn't have a scalable model for collections, which resulted in shockingly high default rates(up to 44%) and negative returns for the average lender. A lot has been written about how Prosper was constrained by US securities laws and how alternative underwriting models might reduce the overall loss rate, but there's one simple reason why proper loan servicing matters: even if a P2P/distributed lending system can provide superior underwriting vs. existing lenders, below average loan servicing can more than erase that edge. The centralized nature of loan servicing in the current US P2P lending services is one of the largest drags on their cash flow and loan performance.
There are several components to loan servicing, many of which can create perverse incentives for the loan servicer. http://www.calculatedriskblog.com/2007/02/tanta-mortgage-servicing-for-ubernerds.html has a good description of how loan servicing works in an established market. The root problem is that lenders have much more at stake than servicers, and so it's a lot easier for a servicer to just collect money for performing loans while doing very little for non-performing loan. By all signs, this is what happened at Prosper -- they tried a couple of fairly ineffective collections agencies, didn't do timely loan sales, and only have initiated legal actions against a handful of delinquent borrowers ( See http://www.prospers.org/blogs/media/blogs/Fred93/open-letter-number-2.pdf , http://fred93blog.blogspot.com/ , and http://www.prospers.org for details).
While part of the problem is that incentives are mis-aligned and Prosper is mainly focused on their loan origination activities, most of it stems from the fact that it's very hard to let the lenders have greater control over the collections process. If lenders systematically collect and share too much personal information about a prospective borrower, various state and federal privacy laws can apply. When borrowers default or are in arrears, the Fair Debt Collection Practices Act applies and the loan servicer could be held liable for lenders' overly vigorous collections efforts.
Another issue is that the cash flow implications of having to service loans are not very healthy for a fledgling P2P lending startup. Having to directly pay for attorney fees and similar issues is a backloaded cost that makes it harder to establish a positive cashflow loop of customer acquisition -> transaction -> fulfillment.
In typical agile-banking style, I think the solution to these issues is not one perfect monolithic startup that happens to get everything right, but instead an ecosystem of partnering services working on a common standard." (agile banking list, http://groups.google.com/group/agile-banking?hl=en, Jan 14, 2010)
2. By MacGregor Campbell:
"To borrow money through Prosper, for example, you set up a profile and apply. The website assesses your creditworthiness, then assigns you a grade and an interest rate. Lenders can then weigh up these criteria to decide whether to finance your loan. They review borrowers' profiles much as one might review profiles on a dating site, and can finance anything from $25 of a requested loan to the whole thing. Your monthly payment goes directly into the lender's bank account, including interest. Every part of the process takes place online.
It was an attractive gambit: people were more likely to get loans, it was all very convenient, and lenders could get a better interest rate. It should have worked beautifully.
But the whole thing was derailed by an early, crucial mistake. Galvanised by the crowd-sourced success of efforts like Wikipedia, Prosper CEO Chris Larsen believed that his role was simply to provide the technological infrastructure to match lenders and borrowers. Instead of providing guidelines for borrower risk - such as interest rates and credit scores - he thought Prosper should be a "libertarian open marketplace" that relied entirely on the wisdom of the crowd. "That was probably asking too much of the crowd," he admits.
The fallout was harsh. Two years after it formed, Prosper was being ruined by defaulters: up to 20 per cent of borrowers were walking away with no repercussions. That ratio was staggering compared with the single digits banks report, and unlike a traditional bank, Prosper had no insurance to repay jilted investors. After an investigation in 2008, the US Securities and Exchange Commission, the country's primary financial regulator, forced the company to shut its doors.
The experiment had failed. Even P2P lenders who hadn't used the risky crowd-sourcing model felt the sting of Prosper's problems.
But by 2009, though Prosper managed to relaunch, bank loans had dried up." (http://www.newscientist.com/article/mg21228421.300-bank-says-no-ditch-the-bank--borrow-from-the-crowd.html)
See our entries on
- Lending Prosper Blog, http://www.topicpoint.com/lendingprosper/
- Discussion forum on borrowing and lending at Prosper, http://www.borrowlend.com/
- Prosper community, http://fanafifoundation.blogspot.com/
- Financial expertise for Prosper, http://www.savagenumber.com/
- The Online Banker reports on Prosper's first year, http://obr.typepad.com/financial_innovations/prosper/index.html