Prosper (USA)
peer-to-peer lending
News Highlights:
Highlights:
• Existing technology
• Has lending license (trying to get banking so they can offer interest)
• English version only
• Expanding into Asia (with big Japanese partner)
• Supposedly has Facebook app, although I haven’t seen it highlighted
• Interest rates set with market (like eBay)
The company has said that in its first year it processed more than 7,200 loans, broken into 295,000 pieces.
Summary
Prosper is an online auction website where people can buy loans and request to borrow money. Borrowers set the maximum rate they wish to pay, and loan buyers set the minimum rate they wish to receive. Prosper matches borrowers with loan buyers, verifies borrowers' identity and personal data before funding loans, and manages loan repayment. These unsecured loans are fully amortized over three years, with no pre-payment penalty. Prosper generates revenue by collecting a one-time fee on funded loans from borrowers, and assessing an annual loan servicing fee to loan buyers. The idea for the service is derived from group banking concepts, such as rotating savings and credit associations. Other motivating ideas derive from the concept of microlending.
Prosper publishes performance statistics on the website; these are available to the public at large. All transactions are in US dollars; lenders and borrowers must be US residents. Prosper launched on February 5, 2006. Prosper Marketplace, Inc. (the company's official name) was founded by Chris Larsen, who also founded E-loan, and John Witchel. The company is based in San Francisco, CA, and is backed by Accel Partners, Benchmark Capital, Fidelity Ventures, Omidyar Network, DAG Ventures, and Meritech Capital Partners.
Wikipedia article source
Credit Grades
Prosper rates prospective borrowers for creditworthiness by assigning a Prosper "credit grade" based on the borrower's [Experian]'s Scorex PLUS (SM) credit score. Prosper credit grades are (starting with the highest) AA, A, B, C, D, E, and HR ("high risk"). Lenders considering a bid on the borrower's loan listing have access to the borrower's credit grade, along with summary credit data from the prospective borrower's credit history, including number of current delinquencies, amount currently delinquent, delinquencies in the past 7 years, and other data.
Here is a table that shows the equivalent credit scores for Prosper credit grades:
| Grade: |
AA |
A |
B |
C |
D |
E |
HR |
| Score: |
760+ |
720-759 |
680-719 |
640-679 |
600-639 |
560-599 |
520-559 |
In addition to credit data, lenders also see the borrower's group membership, if any, friendships with other Prosper members, endorsement from those friends, past listings, and prior Prosper loans. Both borrowers and lenders are anonymous (identified only by screen names) to protect their privacy.
Business Model
Prosper has a transaction-based business model, in which the company collects revenue by taking a fee on its customers' transactions. Borrowers who receive a loan on Prosper pay 1-2% (depending on their credit grade) of the principal amount at the time the loan is funded. Lenders who make a loan on Prosper pay a 0.5-1% (depending on the borrower's credit grade) annual servicing fee.
Liquidity of Purchased Loans
There is no secondary market for Prosper loans, and lenders have no access to funds invested in loans until borrowers repay. Lenders must wait until $25 accumulates in their account before they can withdraw funds. To overcome this limit, lenders may transfer money into the system, bringing the balance to $25 or more, so that they may initiate a withdrawal. With funds in transit a minimum of 4 business days, the loss of interest on the idle funds limits the lender's profit.
Criticisms
Interest on Deposits, Transfer Speed
Prosper does not pay interest on idle funds due to rules associated with pooled accounts. Persons transferring money to Prosper wait 4 business days before transferred funds can be bid, and then up to 1 to 2 weeks for the auctions to complete and loans to be funded for interest income to begin accrual. A lender's cash balance in his or her Prosper account can be transferred at any time to a linked external checking or savings account.
Loan Performance & Collections
Prosper's performance statistics report that as of April 21, 2007, 636 of 6570 active loans over three months in age, or 9.68%, are "1+ months late". Over 400 (over 6%) of these are "three plus" months late, and Prosper's best collection agency has historically cured only a tiny fraction of those. As a group, E and HR borrowers have resulted in negative return on investment for loan buyers. Lenders and group leaders who contact late borrowers requesting payment (even if legally licenced to do so) will be banned from the site.
External links
Videos:
Excellent video – interview of Prosper – 1 hour Q&A discussing how site works
http://www.youtube.com/watch?v=hGq3hv1RTao
• Highlights from video:
o State by state licensing
o Main driver of traffic to site has been (free) news press in Wall Street Journal, Time, Economist, etc
o Then its their responsibility to create convergence.
o For interest rates…don’t micro manage process…let market determine
o If prosper disappears, someone else takes over. Loan security company. But, loans are in lenders name, so they own the asset.
o More…
How the site works:
http://prosper.com/
o Prosper handles loans of up to $25,000 (the average funded loan is $5,000), broken into smaller loans to distribute risk. Money for the loan is then supplied by Prosper lenders bidding for the most attractive interest rates. Prosper earns revenue by taking 1% of the loan amount in fees from the borrower up front, and charging a 0.5% yearly loan maintenance fee to lenders. Prosper currently has over $79 million in funded loans and more than 380,000 members. So far it appears a lot of those members are logging on to pay off credit card debt at a lower rate. Prosper’s backer, Benchmark, has also invested in another P2P lender, Zopa.
Who can borrow?
• Any adult US resident with credit score of 520 or higher can create a listing for a loan on Prosper. Borrowers can request unsecured loans from $1,000 to $25,000 at rates they select.
• • Who can lend?
• Any adult US resident can lend money to others on Prosper. Lenders offer money by bidding on borrower loans at rates they select.
• • Is it guaranteed?
• All of Prosper's loans are 3-year unsecured loans. You can protect yourself from defaults by bidding as little as $50 on each loan and spreading your risk.
• • Why is this safe?
• Ensuring that your data is private and secure is our highest priority. Our rigid privacy policy protects your personal information, and our secure servers make sure it's protected from theft.
• How much does it cost?
o We charge borrowers a 1-2% loan origination fee, and lenders are charged a 0.5-1% annual servicing fee, depending on the borrower's credit grade. B
o Borrower Fees
1-2% closing fee
If you are a borrower and your loan is funded, you will be charged a percentage of the amount borrowed or $25, whichever is greater, depending on your credit grade:
• AA - D: 1% closing fee
• E - HR: 2% closing fee
For example, if you are a borrower with a B credit grade and you take a loan for $5,000 to help pay for your wedding, you will be charged $50. The 1% is taken from your loan immediately, so in this example your loan is for $5,000 and you'd receive $4,950 in cash deposited into your bank account.
This means that if you're using Prosper to purchase something specific (like a wedding dress), make sure you ask for enough to cover the dress and the closing fee.
1% Non-electronic payment charge (optional)
Borrowers who elect to pay their loans through bank drafts, rather than the free electronic payment service through ACH, will have 1% of additional interest added to their loan's interest rate. This added interest will be paid to Prosper for processing bank draft payments, not to lenders.
o Lender Fees
o 0.5%-1% annual loan servicing fee
o The annual servicing fee is accrued daily, and is based on the current outstanding loan principal. This fee is accrued the same way that regular interest is accrued on the loan. The amount of the servicing fee depends on the borrower's credit grade:
AA - A: 0.5% annual loan servicing fee
B - HR: 1% annual loan servicing fee
o For example, on a $5,000 AA credit grade loan at 10% interest, the servicing fee would be $40.40 over its full 3 year length. Because the servicing fee is based on the daily principal balance (which is an amortized value), it will change on a monthly basis, and the servicing fee for a loan will vary based on the interest rate and the length of the loan (if the borrower happens to pay it back in less than 3 years).
o Collection agency recovery fee
o In the event that one of your loans becomes more than 1 month late, Prosper will assign a professional collection agency to attempt to collect the overdue amount. Each collection agency has its own fee structure, but will only collect a fee for their services if funds are recovered.
o Delinquency Fees
o $15 failed payment fee
o If your automatic monthly payment fails due to insufficient funds or because you closed your bank account and forgot to tell us, you'll be charged $15 on the first failed payment of each billing period. This fee may vary depending on your state lending limits. This fee is paid to Prosper, and covers the fees that Prosper's bank charges for failed payments.
o Late payment fee
o If your monthly payment is 15 days late, you'll be charged a late fee, which depends on your state lending limits. Late fees are passed on to lenders; Prosper does not profit from late fees.
o Note: Delinquency fees may vary based on regulations from the borrower's state of residence. View state lending limits for state-specific fees.
Statistics:
As of September 2007:
$85,000,000 in loans with 410,000 members = avg of $207 per member
News reviews of “Prosper”
• P2P lending site Prosper is doing well enough to swallow another $20 million in venture capital, the company is announcing today. The company has now raised $40 million in capital.
• The round was led by DAG Ventures and Meritech Capital Partners. Existing investors Accel Partners, Benchmark Capital, Fidelity Ventures and Omidyar Network also participated.
• Prosper allows members to request loans of up to $25,000 (the average funded loan is $5,000), and then other members offer to fund the loan at various interest rates. Prosper breaks the loan up into multiple pieces to distribute risk, and then funds from the lenders offering the most attractive interest rates.
• Prosper says they hav 330,000 users and have funded $70 million in loans. Zopa, a similar company, is headquartered in London.
• Prosper’s P2P Lending Spreads To Asia
o Peer to peer lending startup, Prosper , is expanding operations to Japan and other Asian countries as a shared partnership with Tokyo-based SBI Holdings, Inc. SBI will be helping prosper navigate Asia’s regulatory environment. SBI Group has a market capitalization in excess of $8 billion and consists of 65 consolidated subsidiaries and 12 affiliated companies, including 9 public companies.
o Prosper handles loans of up to $25,000 (the average funded loan is $5,000), broken into smaller loans to distribute risk. Money for the loan is then supplied by Prosper lenders bidding for the most attractive interest rates. Prosper earns revenue by taking 1% of the loan amount in fees from the borrower up front, and charging a 0.5% yearly loan maintenance fee to lenders. Prosper currently has over $79 million in funded loans and more than 380,000 members. So far it appears a lot of those members are logging on to pay off credit card debt at a lower rate. Prosper’s backer, Benchmark, has also invested in another P2P lender, Zopa.
o It’s ironic to see these peer to peer lending startups expanding at the same moment the collapse of the sub prime lending market sends waves through the mortgage market. Similarly, these startups will be sink or swim based on their ability to effectively manage risk.
o Prosper is managing risk by encouraging transparency, automatically deducting monthly loan payments, and tracking reputations. Borrowing groups are another risk management tool, both helping first time borrowers get some initial credibility (and lower rates) while encouraging the network to police itself by tying together their reputations.
o Prosper aims to go head to head against some of the biggest consumer loan companies in Japan (Aiful, AIC, CFJ etc). A good percentage of SBI revenue comes from direct commissions from these companies. How it plans to build a P2P loan channel without alienating it’s current loan business remains to be seen.
o something very disturbing. The fact that Benchmark Capital has invested in both Prosper and Zopa is troubling.
o Depending on how successful it is, maybe they'll also acquire Smava(Germany) and Boober(Netherlands)? Or, being that big, they might feel confident enough to start their own local services and simply compete.
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