P2P-Banking.com

Smava.de, offering p2p lending in Germany, today successfully closed it’s second VC round. Earlybird and Neuhaus Partners invested 4 million Euro (approx 5.5 million US$). Earlybird did already invest 4 million Euro in Smava in the first round. Smava CEO Alexander Artopé announced that Smava will use the money for product development, marketing and internationalization.

Smava funded a loan volume of 535,000 Euro in September generating revenues (1percent origination fee) of 5,350 Euro plus an undisclosed amount (my estimate:<1,000 Euro) in commissions for insurance products.

The growth of the funded volumes per month can be seen in this chart.

German p2p lending service Smava has sent its lenders an email asking them to produce short videos telling their personal experiences using Smava. Smava offers 50 Euro (approx. 75 US$) for each user generated video that is sent to Smava and published.

Three (older) videos by Smava lenders can be viewed here.

Demand at Boober.nl is slowing. When I checked today only two loan listings were open. The following curve showing unique loan requests definitly shapes in the wrong direction. Boober lenders discus this development in this forum thread.

(Source Booberwatch.nl)

Since the launch 15 months ago, about 2.4 million Euro (about 3.8M US$) loan volume has been funded through Boober.

German Smava.de has funded about the same volume (2.3 million Euro) but after a slower start 14 months ago, lately the volume growth accelerated moderately.

(Smava loan volume, Source: Smava loan stats at Wiseclerk.com).

On Smava as well as on Boober average borrower interest rates have risen considerably since the start. This reduces the attractiveness for borrowers.

German p2p lending service Smava.de made some changes:

• Borrowing for business purposes is now allowed. The borrower still is an individual person but is no longer limited on private purposes of the loan
• Borrowers may borrow up to 25,000 Euro (approx 39,200 US$), previously the maximum was 10,000 Euro
• Maximum amount any lender can invest in the marketplace is raised to 100,000 Euro (previously 25,000 Euro)
• Loan terms are now selectable 36 or 60 months (previously only 36 months); the insurance pools (Anleger-Pools) are seperated by credit grade and term. This complicated construct will influence lenders when deciding to bid on loans that are otherwise comparable but differ in loan term, since the level reached in the insurance pools directly impacts each payment rate.
• Bad debt sales rates have been lowered for lower credit grades (previously it was 22.5% to 25%, now it is 15% to 25% depending on credit grade)

(Source: P2P-Kredite.com)

Since it's launch in February 2007 Smava has funded 457 loans with 2 million Euro (approx 3.14 million US$) loan volume. 8 loans have defaulted and currently 9 loans are late.

German p2p lending service Smava.de launched one year ago. Since the launch of Smava 393 loans were funded for a total loan volume of about 1.7 million Euro (approx. 2.6 million US$).

Lender’s viewpoint

In a february survey 33% of lenders answered to be very satisfied with Smava and 63% were satisfied. 48% said their ROI met expectations while 19% said it exceeded expectations.

So far a 7% ROI is realistic. Only 3 loans have defaulted and 11 are (less then 30 days) late. In the past Smava cured the majority of late loans. The Anleger-Pool mechanism spreads the losses of a default across all loans of a credit grade. Therefore when 1 in 100 loans in credit grade X defaults, the lenders invested in the defaulted loan still receive 99% of the principal, while for lenders in the current loans returns are lowered by 1%.

Technically and on the process level Smava functions as promised.

Borrower’s viewpoint

Provided the borrower has a credit grade of at least ‘H’ (95% of the German population have credit grades between ‘A’ and ‘H’ so about 5% are excluded) and he has a sufficient income, chances for obtaining a loan through Smava are good. About two third of the listings were funded. The fee of 1% of the loan amount that Smava charges borrowers is low.

Marketplace development

Smava’s growth has picked up in the last month (see chart).

(Source: smava loan stats, Wiseclerk.com, 03-21-08)

So far Smava has not reached a broad appeal. While press release state 25,000 registered users, only 650 have invested money and roughly 450 wrote a loan listing. Looking at the distribution of lenders by amount invested, the top 50 Smava lenders funded about 700,000 Euro (or about 40% of total loan volume). Currently lenders are limited to a maximum of 25,000 Euro investment.

Attracting new borrowers has been the bottleneck for Smava’s growth so far. An increase of money supply by lenders with no matching demacnd increase led to slightly falling average interest rates in the last weeks (see chart). Before rates increased, especially for credit grade ‘F’ caused by sharpened risk awareness following several late payments.

(Source: smava loan statistic, Wiseclerk.com, 03-21-08)

Smava charges borrowers a fee of 1% of the loan amount. There are no fees for lenders. Total revenue of Smava in the first year therefore was 17,000 Euro (1% von 1.7 million Euro). Prosper, Lendingclub and Zopa have much bigger p2p lending volumes per year. Boober’s loan volume in the Netherlands is about the same size as Smava’s but in a market with only one fifth the size (by inhabitants). First priority of Smava must be to accelerate growth.

German p2p lending service Smava.de yesterday introduced an optional insurance for borrowers. Borrowers can take out an insurance together with their loan. In the case of death, disability or unemployment (through no fault of one's own), the insurance will pay the repayments. To offer the residual debt insurance (see a definition of residual debt insurance), Smava partnered with an insurance company. The costs for the insurance paid by the borrower are:

• death hazard only: approx. 0.5% of loan amount
• death and disability: approx. 2.5% of loan amount
• all three: approx 4.7% of loan amount

It will be interesting to see how many borrowers are willing to opt in to the insurance.

Lenders profit because this lowers the default risk. Unfortunately at the moment lenders can not on a borrower's loan listing whether the borrower selected insurance or not.
11 months after launch defaults at Smava are still rare. Only 3 of 368 loans have defaulted and only 2 are currently late. A chart shows the development of the Smava interest rates since start.

A year ago Boober.nl launched as first peer to peer lending service in the Netherlands. While Boober faced some hardship (especially on regulation issues) the first year of Boober can be called a success for the company. So far Boober has funded over 2 million Euro in loans in the Netherlands. Compare this to the 1 million Euro Smava.de has loaned in the much larger German market in the last 10 months.

But not all lenders are satisfied with the results. The PIVN an association of lenders, on Jan. 14th called for an investment stop. The main cause are fee changes. Richard van den Toorn, Secretary of PIVN, told P2P-Banking.com:

It's not going very well with Boober, although they claim otherwise. The
PIVN (association of investors) has indeed given an advice not to invest
in new loans until some of her demands have been met. Reason for giving
such an advice is that Boober changed their payment-policy for the
investors radically, without consulting the PIVN first. It's so much the
height of their fee …, but that they are making sure the
benefits are going to Boober first, leaving the investors [lenders] with the risk of
remaining payments from the borrower. (more…)

As P2P-Kredite.com reports the first 2 loans at German p2p lending service Smava.de have defaulted. Since the Start in March 2007 a loan volume of 1 million Euro (approx. 1.4 million US$) has been funded at Smava. The amounts of the two defaulted loans are 4,000 and 6,000 Euro resulting in a default rate of about 1%. At Smava loans default 40 days after they are late and are sold in a debt sale for a fixed rate of 25% (22% on lowest credit grades) to a collection agency.
2007 has been a very good year for Smava lenders as defaults (and late payments) have been significantly below expected rates.

On most peer to peer lending services (Prosper, Lendingclub, Smava, Boober) the identity of the borrower is hidden to the lender. Only the service itself knows the identity of the borrower. Therefore the lender has no means to check if information given is accurate and has to trust the platform.

The service has to

• ensure that it takes adequate measures to verify the identity the borrower has stated at registration is correct
• instill trust to the lender that the fraud risk of borrowers impersonating under a false identity is minimal, non-existant or while existant not covered by the lender.

Prosper gives a "100% Identity Theft Guarantee" and in case of identity theft repurchases the fraudulent loan:

Prosper reserves the right to buy back loans at any time. If Prosper buys back a loan, the outstanding principal balance will be returned to lenders and the loan will be marked as "repurchased".

Prosper typically repurchases loans in accordance with Prosper's 100% Identity Theft Guarantee, under which Prosper has agreed to repurchase loans from lenders if the loan is found to involve identity theft of the named borrower's identity.

Prosper is committed to providing a safe and secure marketplace, and works with law enforcement authorities to prosecute to the fullest extent perpetrators of identity theft.

Rateladder had one of his loans repurchased today. But how often does this occur?

Looking at the Wiseclerk Prosper loan stats by status, the column Repurchased shows a value of 400000 US$. Out of the total loan value of 96 million US$ that is about 0.4%. Not all of the repurchased loans are due to identity fraud.

Prosper checks identity by several measures like checking documentaion supplied by the borrower, calling him, verifying bank adresses, sending postcards to his adress… There have been several discussions on this topic with details on the Prosper forum.

Other services use other measures. German Smava.de uses the PostIdent-process a service that requires the registering service to produce a government id (passport) in person. The Postident process is used by nearly all German online banks and is considered quite safe.

P2p lending services can tolerate only a low level of identity theft cases. The innovative approach of p2p lending requires that lenders trust the concept and the service. Fraud cases endanger that trust.

Reuters has a video on German p2p lending site Smava.de. This is the first video I saw that's in english language. Features Alexander Artope, co-founder and CEO of Smava.