P2P-Banking.com

When Prosper.com went in the quiet period the company announced on its blog:

If you’re a borrower seeking a loan, you will still be able to create a new loan listing, which we will endeavor to fulfill through alternative sources.

The way this works is that Prosper refers loan applicants to other lending companies. After answering a few questions, borrowers seeking a loan a channeled to Firstagain, Lendingtree, Freedomfinancialnetwork or Creditkarma (and potentially others - the mentioned ones are the ones I was shown).

Should a borrower use the services of one of the linked companies then Prosper is paid a referral fee.

However apparently not all visitors of the site seem to be redirected. Potentially members or former users with cookies are not shown these options.

Options shown for potential borrowers

One of the downsides of p2p lending service Prosper.com are high default rates. Results from collection attempts are low.

In an attempt to test alternatives to the existing collection process Prosper in January selected 66 cases of nonpaying borrowers and turned them over to the law firm Hunt & Henriques to pursue these cases in court.

Fred 93, one of the lenders on these loans researched the status of the court cases himself, dissatisfied that Prosper did not inform him on the status, which he says Prosper initially promised to do monthly.

According to Fred93’s findings, Prosper.com so far lost 6 cases and won 1 case.

P2P lending is spreading internationally. While the biggest loan volumes are generated in the US market, many p2p lending websites have been established in other international markets.

The services can be divided in three categories:

1. p2p lending marketplaces (e.g. Prosper, Zopa, Lending Club, Smava) - participants driven mainly by economic motives
2. social lending services enabling micro financing (e.g. Kiva, MyC4) - participants driven mainly by social motives
3. other concepts (e.g. Virginmoney which is special in the way that it does not do the matchmaking between borrowers and lenders, but supports the process between persons that already had offline relations- slogan “We manage loans between family and friends“)

Sites funding student loans can fall into any of these three categories or combine motivations.

P2P-Banking.com has created the following overview table listing services that are in operation and ranked them by loan volume. The loan volumes are not directly comparable for they are cumulative since launch of each service and represent different time spans.

Asked for a figure, a Microplace spokesman pointed out “…it is important to note that MicroPlace is not a P2P site.  We are a platform that offers investments to the retail public.“. No loan volume was quoted, but he stated “investments purchased on our site have enabled over 26,000 microfinance loans.”

In total approx. 685 million US$ have been funded through peer to peer lending/social lending services so far worldwide.

This image may be reprinted on other internet sites, provided it is not altered or resized and the following text (including the direct link to this article) is given as source directly below the image:
Source: P2P-banking.com

If you are a representative of a p2p lending service and want your service to be included in the next update of this table, please send me an email with information about your company.

Prosper.com announced that it is entering a quite period:

Prosper has started a process to register, with the appropriate securities authorities, promissory notes that may be offered and sold to lenders through our site in the future.

The registration filing is a necessary step toward making the secondary lending market available to the community. This is something many of you have been asking for, and we believe the liquidity of a secondary market will make Prosper even more vibrant.

Until we complete the registration process, we will not accept new lender registrations or allow new commitments from existing lenders. If you’re an existing lender, your current lender agreements will be unaffected; your existing loans will continue to be serviced; you’ll be able to track and monitor your loans; and you’ll be able to withdraw funds from your Prosper account.

See Prosper blog announcement. Prosper seems to be copying the route Lendingclub.com already successfully completed.

Further coverage at Prosper Lending Review and Personal Loan Portfolio.

The study “What’s in a Picture? Evidence of Discrimination from Prosper.com” by the economic professors Devin Pope and Justin Sydnor finds:

We analyze discrimination in a new type of credit market known as peer-to-peer lending. Specifically, we examine how lenders in this online market respond to signals of characteristics such as race, age, and gender that are conveyed via pictures and text. We find evidence of significant racial disparities; loan listings with blacks in the attached picture are 25 to 35 percent less likely to receive funding than those of whites with similar credit profiles.  conditional on receiving a loan, the interest rate paid by blacks is 60 to 80 basis points higher than that paid by comparable whites. Though less significant than the effects for race, we find
that the market also discriminates somewhat against the elderly and the overweight, but in favor of women and those that signal military involvement.
Despite the higher average interest rates charged to blacks, lenders making such loans earn a lower net return compared to loans made to whites with similar credit profiles because blacks have higher relative default rates. This pattern of net returns is inconsistent with theories of accurate statistical discrimination (equal net returns) or costly taste-based preferences against
loaning money to black borrowers (higher net returns for blacks). It is instead consistent with partial tastebased preferences by lenders in favor of blacks over whites or with systematic underestimation by lenders of relative default rates between blacks and whites.

Their conclusion:

Yet the data tell a very different story that suggests that this peer-to-peer lending market actually treats the races more equally than would be expected in a market with accurate statistical discrimination.

I would interpret this conclusion as a negation of p2p lending leading to racial discrimination. However Ron Shevlin at MarketingROI comes to different conclusions.

Short news update on Prosper.com developments:

• Changes at the Prosper management team: John Witchel (former CTO) and Tom Pigoski are no longer listed as part of the management team. A comment on this blog post indicates that John Witchel has left the company while Tom Pigoski is on family leave. Chris Denend is now CTO.
• Prosper says it will enable faster listings for qualified borrowers. In a streamlined process some borrowers may post loan listings without adding a title, description or picture.
• Reading statistics published by Prosper? Have a good look on the definitions! In the market survey results, published on Aug. 12th, it looks like on some parameters the year to date figures for 2008 are rising compared to 2007. However looking in the definitions, Prosper compares 7 months in 2008 to 6 months in 2007. (quote:
  2008 Year-to-Date: January 1, 2008 through July 31, 2008.
  2007 Year-to-Date: January 1, 2007 through June 30, 2007.)

The Prosper study I featured yesterday lists the Prosper fees. While it does not attempt to calculate the revenues of Prosper.com it gives some indications regarding the operating costs:

According to Mendelson (2006), the primary costs of Prosper consist of …, (2) a $4 fee for identity authentication, credit pulling, and bank-account setup per active borrower, (3) customer service at the average rate of four interactions per loan and $2 per interaction, and (4) a fixed overhead cost of approximately $3 million per year. …

Given these estimates, it is difficult to measure Prosper accounting in precision. However, there is no doubt that Prosper’s revenue does not cover its full cost (as of February 2008). The difference is met by a large stock of venture capital.

Regarding the Prosper revenues, Mike did a calculation estimating the November 2007 revenues at 114,000 US$. If this is correct, it did not even cover fixed overhead.

Prosper changed fees since that last calculation.

The new study "Dynamic Learning and Selection: The Early Years of Prosper.com" by Seth Freedman and Ginger Zhe Jin, both at the Department of Economics, University of Maryland analyses Prosper data in a time frame from April 19th 2006 to December 31st 2007.

The study analyses the development of the Prosper.com marketplace and how lenders refined their strategies as a result to own experiences and changed settings.

They write:

Overall, we conclude that Prosper is evolving from a comprehensive market to a market that primarily serves the borrowers who have access to traditional credit. This implies that Prosper will compete head-to-head with the traditional banks rather than pick up a missing market. Assuming away any cost in information processing, we estimate that the average rate of return of a Prosper loan is 6% if Prosper loans continue to perform according to what we have predicted from their existing performance. From the lenders point of view, this number compares favorably to 6-month certificate of deposit and 3-year Treasury bill, but less favorably to the rate of return implied by the S&P 500 in the same time period.

Other findings are that high interest loans yield lower returns due to high default rates and that the probability for defaults of Prosper loans peak at month 10 and the edge down.

The main uses of Prosper loans are:

33% of all previous Prosper listings have mentioned credit card consolidation, which is higher than the mention of business (23%), mortgage (15%), education (22%), and family purposes (20%) such as weddings.  

Cited from the conclusion chapter of the study:

The first two years of Prosper has enlivened the concept of P2P lending, but the road towards success is full of challenge. While it is tempting to expect P2P lending to alleviate credit rationing for near- or sub-prime risks, we find Prosper evolving from a comprehensive market toward a market that primarily serves borrowers who have access to traditional credit. This implies that Prosper will compete head-to-head with the traditional banks, rather than pick up a missing market. This pattern is not unique to Prosper. …

How can Prosper compete with traditional banks? Our study suggests that the microfinance approach, as implemented through Prosper groups, has failed to select good risks or enhance loan performance. But on the up side, lenders are learning fast about the pitfalls of P2P lending thanks to the transparency of Prosper. Our calculation suggests that, if the loans continue to perform as what we have predicted from the market performance, Prosper loans could yield an average return of 6%.

See related post on the Prosper blog.

A recent Bankrate.com article gives an update on the development of p2p lending in the US.

Chris Larsen of Prosper.com sees the current financial situation as a chance for p2p lenders:

Home equity used to be the cash management tool for the credit-worthy borrower, and that has really, really dried up. In many ways, Prosper's three-year, 25,000 US$ loan is a pretty good proxy for what people were using home equity for — improving their home, starting a sole proprietorship, college costs and certainly for replacing credit card debt.

Javelin Strategy & Research is quoted that credit card debt is the main reason people want to use p2p lending:

We're forecasting that P2P lending specifically for credit card balances will grow from 38 billion US$ in 2007 to 159 billion US$ by 2012

The final advice of the article is:

Prospective borrowers and lenders would do well to thoroughly research P2P companies before jumping at the chance for a lower rate on a loan or a higher return on an investment. …

Prosper.com announced yesterday that the offers received for late loans to be sold off as defaults were to low to be acceotable. Doug Fuller, Vice President of Operations says, that with offers at 1.5 cents for the dollar, Prosper believes "the prudent course of business is NOT to sell them at this time". More on the Prosper blog post.