Prosper - a social lending marketplace
This evening I’ve been looking over Prosper (formerly known as CircleOne), a social lending site similar to Zopa, which provides an eBay-like marketplace for borrowers and lenders to transact loans.
Prosper manages credit scoring, loan servicing, and provides social and economic incentives for borrower groups to build their reputation as good lending risks. All loans are 36 months with no prepayment penalty, and Prosper charges a 1% origination fee from the borrower, and 0.5% loan servicing fee from the lender. Groups with good reputations can get some incentive payments for loan performance and lower rates over time.
In addition to using credit scoring, social lending and finance approaches can be effective and much less risky than the borrowers might otherwise appear. Informal lending clubs are common among many Asian and other immigrant communities, and something like this might provide an online venue for a more transparent and widely accessible model. It’s harder to bail out on a debt if everyone knows about it and is also a creditor.
Aside from the philosophical and community aspects, looking at this from the lender’s perspective, it looks like it would behave sort of like buying 36-month bonds with a call option. It’s not like you can do a lot of due diligence on the borrowers, and for the amounts involved it’s not going to be worth the effort, so some combination of reputation and diversification is needed. If there were lots of good-but-unrated credit risks in the borrowing pool, you could build a portfolio of sub-prime loans and possibly achieve something in the range of junk bond returns.
Returning to the philosophical, I like the idea of community and socially based lending, because it values good reputations and provides social incentives for people to perform. On the other hand, it looks like a lot of work for a prospective lender. If they’re looking purely at a financial investment, it’s a lot easier going after a portfolio of bonds or a bond fund, so I think you’d have to want to support the model to participate. The borrower’s case looks much more straightforward, since consumer credit tends to be readily available, but expensive. The listings posted on the site so far include a number of “pay off my credit card” loans, which seems quite sensible.
In a slightly different context, it would be interesting to see something similar which matched borrower groups in relatively poor and developing areas with lenders in relatively wealthy areas. Grameen Bank has done amazing things with microfinance in Bangaladesh, in the sense of helping the borrowing communities building new businesses and opportunities for themselves and making a positive economic return for the bank.
In another different context, it would be interesting to see some kind of market making approach for investing in and financing speculative early stage startups. This wouldn’t work for capital intensive projects, but perhaps there’s some standard terms that could be worked out for asset-light software startups (aka web 2.0). The levels of funding required are too small to justify the level of effort, and there is (or should be) a high mortality rate, which would argue for a lighterweight way to build portfolios of small investments.
(via TechCrunch)
See also:
Zopa - eBay for money?
February 7th, 2006 at 9:38 am
Hiya - Dave from Zopa here - thought I’d drop you a line in the light of Prosper’s launch.
We think Prosper is very interesting - a different take on the same underlying business model of P2P finance. The community side of the model is particularly interesting, and something we’ll be watching carefully to see how it develops. We’ve been talking internally about offering a similar service through Zopa, and we could do so relatively easily if it looks like Prosper are onto something.
Another company that’s worth looking at is Kiva who lend money from US consumers to developing world entrepreneurs - we’ve been talking to them recently, and it sounds like it’s going well.
One final area that we’re also exploring is the small biz / start up funding world - we need to find an alternative to a purely debt financed model (Some sort of revenue share upside?) to give lenders the required potential for return, but we have some ideas in that space. regulation is a pain as you might guess.
Anyway, we’re looking forward to taking on Prosper in the US - we’re currently planning a Q2 US launch in their home town of SF - which will fun, and we welcome them into this space - it was getting lonely.
Cheers, Dave
February 7th, 2006 at 6:38 pm
Dave - thanks for the note. It’s been a while since I looked over the Zopa site, and it’s developed quite a lot since I looked last year.
A couple of things which are attractive on Zopa’s current offering: I see you’ve added interest payments on committed funds for lenders, and have more than one loan duration (12 and 24 months). I think it’s also helpful that you explain what happens if you go out of business before the loans terminate, just in case.
I think the social community aspect of Prosper may work in its favor, though. As I mentioned, lending circles and clubs have been around for a long time, with varying degrees of risk and return. In one model I’m familiar with among Korean immigrants, all participants are both lenders and borrowers, so there’s a high social cost for default or late payment.
I think a potential problem with Prosper’s offering is that they only have 36 month loans. As a lender, this makes it look a little like a CD (term deposit) or a bond, but with higher exposure to the risk of an individual default. If you build a portfolio of positions in loans, it would behave like a medium duration bond fund, but at the beginning it seems like you’d be relatively exposed to individual loan risk, since there aren’t that many market participants.
This isn’t the way the target participants are likely to look at this, but it would be a shame to have people scared off by an individual loan default that wiped out all of someone’s lending deposit because they didn’t adequately diversify.
February 9th, 2006 at 3:42 am
Thanks for the compliments - it’s been a busy year and we’re finally getting close to being able to say that we’ve done everything we wanted to do for launch. (Maybe we were a bit over ambitious in our launch planning!) BTW - that interest on unlent money was a complete pain in the a*** to build - so I’m glad you appreciate it!
We’ve done a lot of research that suggests lenders just aren’t up for the Prosper model in large numbers, but yeah, the social / group / community stuff has been shown to work in other parts of the world, I just don’t know if Prosper have the right mix of peer pressure and reward / punishment mechanisms. One to watch.
February 13th, 2006 at 9:42 am
[…] Ho John Lee has written largely about Prosper, but talks about the potential for sites like Zopa and Prosper to extend into microfinance (in the Grameen Bank model), or into start up financing. Niki Scevak agrees with the microfinance angle and talks about P2P lending and micro finance as being “one the of best ways…of solving world poverty.” […]
February 17th, 2006 at 11:30 am
I like the idea of groups. What’s more I think it can be developed beyond groups of people who already know each other or live in the same community.
I work for PRIME, a UK charity that has a loan scheme for older people setting up in business because they can’t get a regular job. There are now quite a few similar loan schemes targeting different disadvantaged groups, all based roughly on the US Community Development Finance Institution (CDFI) model.
The way the schemes generally work is they get the bulk money of a regular commercial bank, but have a number of charitable guarantors to pick up the tab between them if borrowers default.
To keep the default rate down the CDFIs often offer some kind of initial training, scrutinize borrowers plans in front of a loans panel and often insist on regular continuing mentoring throughout the length of the loan.
The reason these schemes aren’t more common is guarantors are hard to find, for obvious reasons. The panels are also rather costly. But the training and the mentoring aren’t that difficult for non-profit organisations with any community support to put in place.
In the Prosper model as I understand it a CDFI could simply set itself up as group. To keep its reputation high it could then use it existing training and mentoring programmes and loans panels. The guarantors would not be required - removing the biggest bottleneck.
The only problem would come if borrowers fail the loan exchange’s credit scoring checks, which many might. Still, this takes place at the beginning of the process so it probably wouldn’t affect the group’s reputation. This depends on the performance of the borrowers who get through, who may have perfectly respectable repayment patterns and who should be in regular contact with their mentors.
October 20th, 2006 at 4:05 pm
[…] 去年才创站的英国网站Zopa，是一个让人与人之间互相作小额借贷的平台网站，这家公司最厉害的是它以社会经济学的研究为底，有一套公式去计算每人用钱的习惯与还钱的可能性，来让这些平常向银行借不到钱的也能向其他人取得小额贷款，并且还将贷款切割成许多小小部位以分散风险。另外，在美国也有一间Prosper.com，除了强调信用评比累积外，另外还利用「添加组」的观念来解决信用问题，大致的概念是，假如你身处一个组，就得更负责任的去还债，不然整组的信用都会受害。 […]