| By Jim Bruene on February 25, 2008 11:46 PM | Comments (5) |
This morning I was at the Parc55 Hotel in San Francisco to hear Prosper CEO Chris Larsen's "state of the union" address at his company's annual user meeting, Prosper Days. I've heard him speak four times in the past year, and I learn something important every time (see note 1).
The highlight today was an analysis he unveiled showing the performance of loans made to borrowers who've been endorsed by friends and family. About a year ago, Prosper added an important social networking feature that allows friends and family of potential borrowers to post endorsements. Even more important, Prosper shows whether the friend has put their money where their mouth is and made a bid on the loan (see screenshot below; note green number in upper right showing the amount of the bid made by the endorsing friend).
Analysis
The theory is that the social endorsement(s) will have two important benefits:
- Help lenders identify quality borrowers
- Provide borrowers with more incentive to repay the loan so as not to disappoint their endorsing friends
The first year's worth of data are in and the results are promising. The loans with higher social capital (i.e. endorsed by and bid on by friends) are performing significantly better so far:
- Loans with a single friend bidding on the loan are performing 35% better than similar loans without that endorsement
- Loans with multiple friends bidding are performing 50% better
Because Prosper makes its loan performance data public, investors will be able to track the value of these endorsements over time. If it turns out that endorsements do correlate with better long-term loan performance, loan rates will be bid down accordingly, and the borrower will capture the value of their social capital/reputation through lower loan rates. Already, the rates to these endorsed borrowers are running 10% lower.
Lenders can even search on these so-called "social elements." Prosper's advanced search includes 43 searchable fields, four in the social area (see screenshot below).
Note:
1. Prosper will be demo'ing their latest platform improvements at our upcoming FINOVATE Startup conference (previous coverage here).
2. For more information on Prosper and person-to-person lending, see our Online Banking Report, published in December.
Jim, I must say this addition to Prosper is nothing short of spectacularly brilliant. Wow. I am on the floor with amazement about what a great concept this is, and it appears to be well-executed as well. The fact that lenders can search for borrowers with multiple endorsements of the "money-where-your-mouth-is" variety is rather smart. I will shut up now because I'm all out of superlative adjectives.
Thanks for reporting this.
Morriss
@Morriss
Six superlatives in one paragraph!! You better slow down on the caffeine.
But I agree this is HUGE (at least you avoided ALL CAPS). It's hard to find the ROI in a lot of the social networking scene, at least in financial services. But 30% to 50% better loan performance for the lender and 10% lower rates for the borrower, is a huge win-win for social finance.
Dear Friend,
A group of researchers at University of Nevada, Las Vegas, are investigating effects of Weblogs on “Social Capital”. Therefore, they have designed an online survey. By participating in this survey you will help researches in “Management Information Systems” and “Sociology”. You must be at least 18 years old to participate in this survey. It will take 5 to 12 minutes of your time.
Your participation is greatly appreciated. You will find the survey at the following link. http://faculty.unlv.edu/rtorkzadeh/survey
This group has already done another study on Weblogs effects on “Social Interactions” and “Trust”. To obtain a copy of the previous study brief report of findings you can email Reza Vaezi at reza.vaezi@yahoo.com.
Win-win indeed. I particularly liked that the more "money where your mouth is bids" == the lower the default rate. Sometimes the world is so bright you have to wear shades.
Enjoyed meeting you are the conference.
Jim, I think the most groundbreaking aspect of this latest Prosper innovation is that there is now OFFICIALLY ROI attached to social capital by way of endorsements. I suppose eBay kinda had this, but this is now very direct in the financial world.