P2P-Banking.com

P2P lending holds great promise: more transparency, purposeful direction of investments and economic advantages for borrowers and lenders. Some even talk of democratization of financial processes.

But are advantages and risks evenly balanced between borrowers and lenders?

For the borrower p2p lending fulfills most promises and the only risk is that the desired loan goes unfunded. Most services have a simple fee structure with no hidden fees and the borrower only pays fees when he does receive the wanted loan. And within a time frame of a few weeks after sign-up the borrower reaches his goal – once his loan is funded and the money is transferred to his account. Platforms with auction mechanisms can even benefit the borrower further in supplying the loan at a lower interest rate then the maximum he set.

The lender on the other side is promised an attractive return on investment but faces multiple risks:

• borrower fails to repay the loan
• (identity) fraud
• p2p lending company fails and ceases to service loans (e.g. Boober Netherlands)
• unreliable forecasts of ROI and default rates
• on some services: open/undefined tax and legal issues
• on some microfinance services: currency exchange risks
• on some microfinance services: risk of MFI failure

There is also an information asymmetry. The borrower usually has most of the information he needs in advance and the information he has is accurate. Should the information be not accurate (e.g. wrong information on at what interest rates he can be funded) then he can retry at no additional costs only incurring a delay. The lender has information, which is partly based on estimates or forecasts that might prove unreliable and other parts of the information might be untrue (e.g. borrower reported income or borrower description of purpose of the loan). For privacy reasons it might also be a subset of the information the p2p lending service itself has on the borrower (e.g. town of residence omitted, or income or jobs listed only in categories instead of values).

The lending experience of the lender is further hindered by the timeline. The problems may impact him at any point in time of a several year loan term. And he either has no way to terminate his investment immediately or if there is a secondary market he might be only able to do so by accepting economic disadvantages in return for the option to selling off.

The situation of the lenders in this comparison to the borrowers is worsened by the alignment of interests of the p2p lending service company with the borrowers. This is due to several factors:

• in most models borrowers pay the larger part of the fees and are thereby important for the revenues
• in some markets attracting borrowers is the limiting factor for growth
• for obvious image and marketing reasons the p2p lending company is not eager to share information on fraud and (in some cases) default details
• for the same reasons companies are slow to react and change their lender information when real default levels are much higher then fore-casted (or even advertised) default levels (examples are Prosper, MYC4)

This imparity results in different levels of satisfaction with the p2p lending service for lenders and borrowers. While those p2p lending services that offer (unmoderated) discussion forums have only few unsatisfied borrowers voicing their opinion (and then mostly on technical issues) lender concern and critic rises over time on some of these services (to the extend that Prosper even deleted it’s forum at one point in time).

(more…)

As reported in the previous post, Lendingclub.com is open for new lenders. However lenders have to meet two requirements:

Resident in one of 15 approved states:

The Notes are presently being offered and sold solely to residents of the states of Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Louisiana, Minnesota, Mississippi, Montana, New York, Rhode Island, South Dakota, West Virginia, and Wisconsin, and are not presently being offered or sold to residents of any other state, the District of Columbia, any other territory or possession of the United States, or any foreign country.

Compliance with Financial Suitability Standards and Investment Limits

I confirm that I (a) have an annual gross income of at least $70,000 and a net worth (exclusive of home, home furnishings and automobile) of at least $70,000; or (b) have a net worth (determined with the same exclusions) of at least $250,000. In addition, I agree that I will not purchase notes in an amount in excess of 10% of my net worth, determined exclusive of my home, home furnishings and automobile.

I think Lendingclub probably will be adding more states to the list of approved states over the next months.

If you sign up at Loanio.com as a new lender using this link, the peer to peer lending service Loanio will credit you $25. This promotion may be time-limited, so sign-up now, even if you want to start lending later.

Today a new MyC4 release went online. The new version allows multiple standing orders which can be targeted by country, provider and/or industry of the borrower. There are several small improvements in usability, e.g. display of borrower APR.

MyC4 users have transfered 507,000 Euro in funds, but so far only 214,000 Euro of those have been loaned. Demand in loan opportunities is lagging behind investor's cash looking for investments. The majority of lenders (investors) still is Danish – MyC4 is located in Denmark, but the number of investors in other countries is rising.

So far I am satisfied with MyC4. I have invested in more than 50 active loans – true microloans – sometimes my share is as low 10 Euro – and so far everything is going smooth. Another 16 bids are on open listing opportunities.

Note: Most of the following is an observation of lenders opinions voiced in the Prosper forums (with sources given). The opinions voiced in the cited threads are the opinions of the individual lenders who posted them.

Looking into the lender section at the Prosper.com forums part of the posting lenders seem to be in open rebellion. Titles of threads from the last two days include "FLASH:Prosper bans $100.000 lender", "Prosper Mng. Living Under a Rock", "Shooting the Messenger", "What happens if Prosper goes under?", "I am done lending on Prosper", "Hello Prosper Moderator", "Lender's WHO are DONE with Prosper", "My letter to Prosper", "Open letter to John Witchel" 

Topics include lack of communication from prosper, failure to adress process problems, banning lenders, closing threads, … .

Posts call for "Class Action Lawsuit", informing Venture Capital firms who funded Prosper about the situation as the lenders posting see it and the call for withrawing funds.

One main cause for the unrest are the low ROIs large long term lenders are experiencing. This post says there are 203 lenders which have loans over 6 month old and more the 25K invested. For these the post says the average estimated ROI is 1.91%.

The result is that some long time lenders churn Prosper.com and stopped investing, while new lenders continue to pour in money.

As the following chart shows the count of lenders who have bid within the last 30 days stalls since April. 

(Source)

A few lenders now express their very legative opinion on Prosper prominently in their signature in every post they make in the Prosper forums. Example

As lenders have started to make fun of Prosper employees or using avatars to create the appearance of beeing a prosper moderator without any apparent reaction of Prosper in their own forums, users start to speculate if Prosper will be forced to close the forums to avoid the negative publicity.

Browsing the Zopa forums today, I noticed that negative posts by lenders are on the rise. This is quite different from the mostly positive feedback in earlier months.

Lenders are:

• unhappy with bug-fixing progress,
• say there are accounting problems,
• complain about lack of communication (here, too),
• lack of progress in product development in past year.

While the staff in many cases does not immeadiately solve the voiced problems, at least they are much more responsive in the forum compared to the Prosper staff in the Prosper forum.

Some of the complaints may turn out to be misunderstandings. Bear in mind, that only a tiny minority of the Zopa lenders are active posters in the Zopa forum, therefore it is quite possible that a fast majority of Zopa's lenders is still very satisfied with the service.

Users suspect problems may have risen, because Zopa stuff could be tied up with issues concerning US launch.

Every once in a while, I read a post in the Prosper forums that provides lots of insights. Today I found this post interesting where several lenders debate the advantages and disadvantages of investing in Prosper.com and long-term lenders share their opinion. Suggested reading for new lenders.

Yesterday the new lender signatures were introduced by wiseclerk.com. Based on an idea from  nonattender this new tool allows to transform key lender stats figures into an image, which can be used in a posters signature at the prosper forum.

Example of the image (size decreased, original is larger):

The image shows the amount invested, the current number of loans, the roles and, if the lender is in the top 500 the rank by money invested.

Once created the images will update daily automatically.

The discussion thread on this new tool was a hot topic. After several suggestions, a couple of hours later a further signature tool, this time for the borrowers was offered.

Example of borrower signature (size decreased, original is larger):

We will see how this further develops.