Everyone says that business startups are a huge driver for economic growth. So, when was the last time you received a solicitation for an unsecured loan to start a business (note 1, 2)? It may not be unheard of, but it's rare, especially since 2008.

So today's email from P2P loan pioneer, Prosper, really grabbed my attention (see screenshot below). Not only were they targeting a segment that's generally overlooked, they were doing it an effective way. The direct subject line, striking graphic, and concise copy, are guaranteed to get the message out.

My only concern is the reliance on the super low, 6.59% rate showcased (for AA borrowers, see highlighted section below). While it's not a teaser rate, it's also one that's not readily achievable for most people needing $25k to start a business. I'd rather see Prosper list the rate for a more typical borrower, or at least show a range of applicable rates.

Still, I give it an A-, because most borrowers savvy enough to start their own business understand that "....starting at" means something higher at the end of the process.

--------------

Prosper email to registered users (1 March 2012; 1 PM Pacific Time)
Note: Social media call to actions at bottom of message.

Landing page
Note: Interested borrowers are dumped on a generic signup/login page. It seems like there should be some tie-in here to the email call to action.

-------------------------
Notes:
1. Chase offered a great program in 2010 where business borrowers were given a lower rate for hiring new employees. However, it wasn't targeted to startups.
2. I'm not on their mail list, but I know Silicon Valley Bank aggressively pursues startup businesses for financing deals.  
3. We've covered P2P lending a number of times in our subscription service, Online Banking Report including updated U.S. forecasts in our Jan. 2012 report.

If you read much tech news, you've probably heard about Kickstarter, or at least their most famous project that helped a budding entrepreneur make watches from iPod Nanos (above).

Kickstarter is the best known (note 1) of the so-called crowdfunding sites where the Internet is invited to help fund new projects in return for recognition and/or a tangible good related to the project. Kickstarter focuses on the arts world, helping connect artists, designers, publishers, and performers with patrons around the world, who kick in as little as a $1 to help get a project off the ground. There are dozens of others focusing on other areas as well. 

I used Kickstarter this weekend to fund publication of a new comic book called Steamfunk (screenshot below). I came across it when searching for local Seattle-area projects.

My niece is a steampunk fan, so I thought it would be a nice surprise for her. I dropped $15 into its pledge drive, and assuming the artist Zilla Doty receives at least the $3,000 he was seeking (note 2), in April I'll have a signed copy of his inaugural edition to send to my niece (note 3).

Not only do I get a cool one-of-a-kind gift, I gain the satisfaction of helping a local artist get a project off the ground. Very gratifying.
_______________________________________________________________________

Bank Opportunity
_______________________________________________________________________

I bring this up, not because it's a slow news day, but because I think leveraging crowdfunding could be a good way for community banks or credit unions to distinguish themselves in the local market. It would not be an easy project, getting people to part with their money never is, but it has the potential to attract new small business clients while supporting your community.   

Here's how it would work (note 4):

1. Bank sends customers to a third-party crowdfunding site, which could be operated independently, or private-branded for the bank

2. Bank publicizes new community projects via its website, blog, Facebook page, and so on

3. OPTIONAL: Bank offers to match the crowd's funding with a credit line/loan (if needed and assuming reasonable credit risks) or other banking services

For extra credit: Integrate crowdfunding with peer-to-peer lending. 

------------------------

Kickstarter project page
Note: This is how it looks after you've made a pledge

----------------------------------

Notes:
1. According to Compete, Kickstarter had 750,000 unique U.S. visitors in Dec. 2011.
2. With 20 hours to go, the project has easily surpassed the $3,000 goal. 175 backers have pledged almost $5,000.
3. The pledge process is very smooth. Payment is made when you make the pledge and fulfilled through Amazon Payments. If the project fails to reach 100% funding by the end date, you get your money refunded. According to the company, 90% of the projects who make it past the 25%-funded mark end up with 100% funding. That's an amazing stat.
4. No, I don't have a clue what objections you might get from compliance, but I'll bet it will be an interesting conversation.
5. We haven't written specifically about crowdfunding at Online Banking Report, but we've covered P2P lending and small biz banking services.

As a semi-reformed eBay addict, anything with auction in the title still grabs my attention. And of the thousands of emails I get from banks every year, I believe this one from Ohio Valley Bank is the first ever for a vehicle auction. 

If you are selling off repos and REOs, you should let your customers get on a mail list announcing them. You could even turn it into a membership benefit, giving customers first crack at the deals and/or providing preferential financing.

Ohio Valley offers preapproved auction financing for its repo sales. A good move, although its landing page and online app could use a facelift (see second and third screenshots).

---------------------------

Ohio Valley Bank email announcing vehicle auction (link; received 29 Dec 2011; 6:35 AM Pacific)
Note: I am not a customer of the bank, but anyone can sign up for its emails.

Landing page for auction financing (link)

One-page online loan app (click to enlarge; link)

----------------------------------

Note: Ohio Valley Bank has a prominent link on its homepage to its holiday hours, a nice touch (see picture upper right).

I've written about Black Friday promotions at ING Direct (see note 1), Service Credit Union, and the growing Small Business Saturday event spearheaded by American Express (which even earned a tweet from  Obama).

This year I also noticed a trickle of activity on Cyber Monday as well. It's probably better than Black Friday for online/mobile campaigns. Better yet, use the approach of Visions FCU (screenshot 2 & 3) and use the entire weekend to maximize the impact. 

Cyber Monday promos:

• 50% off credit-monitoring products from Quizzle, the spinout from Quicken Loans (see email below)
• Visions Federal Credit Union offered a loan special from Black Friday through Cyber Monday (screenshot below). The CU reported $10 million in loans on Friday alone.
• Navy Federal Credit Union offered bonus rewards-points for purchases made online

-------------------------------------------

Cyber Monday email from Quizzle (link; Monday, 7 AM Pacific, 28 Nov 2011)

Visions Federal Credit Union Thanksgiving weekend loan special (28 Nov 2011)

Visions landing page (link)

Navy Federal Cyber Monday cashRewards promo (link)
Note: Given the date shown, this page is likely a carryover from 2010. But it's still available via "Cyber Monday" searches on Navy Federal's website.

Notes:
1. ING Direct was at it again with seven offers over the Thanksgiving weekend (Deposit Accounts has the full rundown). However, the specials did not extend into Cyber Monday.   
2. 1st Financial Federal Credit Union ($210 million, Wentzville, MO) and Heritage Community Credit Union ($200 million, Sacramento, CA) offered loan deals on Black Friday according to CreditUnionsOnline.com

As the country heads back to work and school, it's a great time to remind customers that you have killer rates for auto loans. So, First Tech Federal Credit Union's marketing email to members yesterday promoting a 2.99% rate was well timed. And I love how the message is direct and to the point.

While the email could use a little more visual punch (graphics/typography), First Tech nailed the timing, product, price, and headline. So it is 90% there even before reading the copy. However, that's where the effort falls a bit short. Here's why (numbers correspond to screenshot below):

Minor issues in copywriting:
1. The second sentence in the opening paragraph is awkward because the phrase "keep that new auto loan payment in check..." is hard to understand. If you pair "check" with "payment," it sounds like you are referring to a checking account, not a low-payment amount.

2. Be careful with how you talk about rate discounts. They way First Tech wrote it, ".25% rate discount" sounds like the loan rate is going to be chopped by a full 25% instead of 25 basis points. It would be better to put a zero in front of rate, e.g., "0.25%" and perhaps call it a "rate reduction" instead of discount to be perfectly clear. 

Weak "offer acceptance:"
3. It's too hard to find the loan application in order to take advantage of the great rate. Members are directed back to the First Tech homepage where they must search for an loan app. The CU should either take members directly to a specific landing page for this offer, or at least drop them on the auto loan page. It does help that one of the four rotating homepage banners is for auto loans, but it's third in the rotation and only stays in view for 15 seconds or so.

In addition, not everyone wants to research and/or apply online. A phone number, at least for more information, would be a welcome addition to the message.

Finally, there is no sense of urgency, e.g., "the rate is guaranteed through the weekend" or even "act now before rates increase."

Overall grade: B

-----------------------

First Tech Credit Union email to members promoting 2.99% auto loans (31 Aug. 2011; 9:28 AM Pacific)

This guest post was written by Peter Renton, (@SocialLoans), Editor & Publisher of peer-to-peer lending blog, Social Lending Network.

-------------------------------------

With the launch of Prosper in Feb. 2006, peer to peer (P2P) lending arrived in the United States with great fanfare. Borrowers no longer needed banks. Individual investors could be the banker and earn great returns.

But, there have been challenges along the way. In 2008, the SEC decided P2P lending should be regulated as a securities business and both Prosper and Lending Club, which launched in mid-2007, were shuttered for half a year as they retooled. Both companies also initially struggled with higher-than-expected default rates.

It is only now that P2P lending appears to be living up to that initial promise. Last month was the best ever as lending volumes broke the record for the seventh month in a row. The combined volume of Prosper and Lending Club amounted to $25.6 million in June compared with $12.2 million a year ago, a 110% gain. As you can see in the chart below, the growth curve has been getting steeper.

 
Source: Companies, July 2011
___________________________________________________________________________________________________

What is driving the growth?
_______________________________________________________________________

1. Credit card interest rates remain high
The most common type of loan by far, on both Lending Club and Prosper, is debt consolidation. People are trying to dig themselves out of credit card debt where rates can climb north of 30% if a payment is missed. In comparison, someone with good credit can get a 36-month P2P loan at 12% to pay off their credit cards in three years.

2. Home equity loans are very difficult to get
Before the real estate bust, banks pushed home-equity loans aggressively. No more. It now takes great credit and substantial equity to qualify. Last month Lending Club reported that 14% of its loans were used to fund home-improvement projects. Prosper said that number was 12%.

3. Investors can earn double-digit returns
It has been two-and-a-half years now since the Federal Reserve dropped its target-funds rate to zero. Fixed-income investors have been stuck with returns in the low single digits. Investors are looking for yield and some are considering alternative asset classes like P2P lending where returns are averaging around 10%, though it's yet to be seen if that return holds as the loans season.

Prosper CEO Chris Larsen attributes the high investor returns to the startup's five years of experience. He said, "Since re-launching our platform in July 2009, we've delivered returns of 10.4% and default rates of 5.3% and lenders are responding favorably." Their recent performance backs up these statements.

4. Institutional investors are taking notice
Lending Club says that currently about one-third of investor money comes from institutional investors. In May, Prosper took on a new institutional lender who has invested close to $2 million in just two months and has pledged a whopping $150 million in the future. Prosper expects the balance of individual to institutional investor to resemble more of a 50/50 split as the category continues to grow. Clearly some of the big-money players are starting to allocate assets to P2P loans.

5. The IRA option
For a couple years now, Lending Club has offered an IRA option they say has proven to be popular. "Investors planning retirement are less concerned with near-term liquidity and are more interested in consistent returns and the ability of an investment to generate cash flow," explained Scott Sanborn, CMO at Lending Club, "and we find existing investors who have been pleased with their returns who are opening larger IRA accounts to let their investment grow tax deferred." Prosper does not officially offer an IRA although it is possible to set up a self-directed IRA with Prosper.

(Rant alert: If you are tired of analyst/blogger whining over perceived personal service affronts, it would be best to hit delete now.)

I don't think there is an actual name for this, but I am car-dealer phobic. Seriously. On more than one occasion, I've driven all the way to the dealer. Parked my car. And then driven away as soon as I saw the sales guy (they have all been guys) ambling over. It's weird.

But I found eBay Motors about 10 years ago and have been overall very happy with the three vehicles I've bought there. So that would be the end of the story, if I wasn't married.

My otherwise wonderful wife greatly prefers vehicles with that new-car smell, not the ones that arrive needing an $1800 catalytic converter to pass the emissions test (my most recent eBay "deal"). And I can't really complain, because she's perfectly willing to drive the thing for a decade or more.  

Good online application UX
So she ordered a new car and put me in charge of paying for it (does that sound familiar to anyone?). Being an online-only shopper, I went to my favorite car loan specialist (note 1) and completed their online app. The app itself was flawless and took only a few minutes.

While I was disappointed that I wasn't approved in real-time, I received an email a few minutes later congratulating me on my loan approval. But there was a catch. In order to "to protect my privacy, (the bank) needed to verify some information." So would I please call. That was 2 weeks ago.

Terrible income verification UX
So I called the next day. What I found didn't totally surprise me. Despite being a customer of this financial institution (with an open credit line higher than the price of the car), and the fact that I've borrowed and paid back two car loans with them previously, and that I requested a 3-year loan which minimizes their collateral risk, and that I have good credit, the bank wanted to verify my income. And because I'm a business owner (not salaried), they needed 3 months of bank statements.

So I dug out the old statements, scanned them (note 2), and emailed them to the bank. There was no confirmation they were received, nor did the online loan-status indicator change (it simply said "approved"). I did that 12 days ago.

Then I waited for a week and heard nothing. So I called back and was told they hadn't looked at the docs yet, but that they would expedite them. That was six days ago.

The next day, I received an email from the bank asking me to call again. You know that's not good news. Here's how that call went:

• Bank: We cannot verify your income because it shows as "Internet transfers" on your bank statement.
  Me: But my business banking account is at the same bank as my personal one, so when I get paid, it's called a "transfer" because it is one.  
  Bank: Sorry, we only consider it income if the bank statement says "deposit."  
• Me: OK, I can understand that, how about I send you my 2010 tax return?
  Bank: Sorry, we don't accept tax returns for income verification.
• Me: OK, how about if I send you the last 3 months of my business bank statements, then you can see the transfers leaving that account and landing in my personal account. 
  Bank: Sorry, we can't accept biz-bank statements because we don't make commercial loans.
• Me: Can we move this application to an exception processing area for manager review?
  Bank: Sorry, we don't do that.
• Me: Is there any way you can think of that I could verify my income? 
  Bank: Do you have a spouse with W-2 income?
  Me: No
  Bank: Then unfortunately, I don't see any way that we can verify your income. Sorry.
• Me: Then what I hear you saying is that there is no way for me to get the loan you approved me for?
  Bank: Sorry, but that's the case.

With that we ended the conversation. Rather abruptly if I recall. (I will say, she was actually very nice throughout the whole call, so partial credit for that.)

After I'd cooled down a bit, I decided to call back and try my luck with another rep. Sure enough, after I explained the situation and offered to send the corresponding biz-bank statements to verify the transfers, he said, "That makes sense, let me check with my manager." Within a minute or two he came back on and said that my solution should work and to please send the business banking statements. Which I did, right away. And again no confirmation that they were received. That was 4 days ago.

After hearing nothing for two more days (this is supposedly being "expedited"), I called back and was told it was under review and there was nothing they could do to speed it up. That was 2 days ago. I haven't heard anything since.

The car dealer to the rescue
Because I had to pay for the car in full this week or forfeit the deposit, I gave up on my online bank and called the dealer. At their instruction, I completed their short online form, was approved by their indirect lender (thank you U.S. Bank!), and went in and signed the papers. Start-to-finish in just a few hours. There was no income verification. And I even got a better rate.

Lessons for Netbankers: Experiences like this is what gives online lending a bad name. This is the third time in a row I've had a really poor experience with an online loan app. I understand that my self-employment, even after 16 years, makes underwriting more difficult in these cautious times. But you need to have a process in place where denied applicants can request a quick review of their application, detailing the mitigating factors.

Simply leaving prospective customers hanging is not good business.   

----------------------------------------

Notes:
1. My policy is to not to disclose the name of the financial institution if it's about an issue or problem with my personal situation. But I will email you the name as long as you identify yourself and agree not to publicly post it (send to jim@netbanker.com).  
2. Unfortunately, I couldn't simply download estatements since my bank does not offer them, unless you give up your paper statement.
3. For more on online account opening, see Online Banking Report: Improving Online Account Opening ROI (published June 2009). 

A few weeks ago, I caught up with Chris Larsen, CEO & founder of Prosper. I've been a huge fan of his work for more than a decade. His ventures,
E-Loan and Prosper, have been pioneers in the lending space, both earning OBR Best of Web awards and Prosper also taking Best of Show in our first Finovate in Oct. 2007 (note 1).

But it's been a rocky few years for Prosper (see Netbanker archives), as it's been for most consumer lenders. The company even lost its lead in the U.S. P2P loan space to Lending Club, which is currently originating about three times as many loans.

But Prosper survived and appears to be back on a path to live up to its name. Some recent milestones:

• Its first private equity lender (updated 16 June, 2011, per comment below) is coming on board, pledging $150 million to fund loans on the Prosper platform. This is an important development and fulfills a goal that the company sought since its 2006 launch. It will also help Prosper keep up with Lending Club which has had major institutional investors for a while. Prosper hopes to keep a healthy mix of retail and institutional investment ("50/50 would be fine").
• $17.2 million in new venture funding from Draper Fisher Jurvetson and Crosslink Capital (announced 7 June, link)
• Achieving double-digit returns for investors, a far cry from the negative returns some lenders experienced in the "trial & error" era before (note 4) 
• Achieving large year-over-year loan growth, although the company is still running less than half the pace of the pre-SEC days (note 3)

Prosper loan growth

Source: Eric's Credit Community, 15 June 2011

Prosper's homepage is a model of Web 2.0 simplicity
Note: New lenders are offered an iPad for investing $20,000 or more (15 June 2011)

Both Prosper and Lending Club are averaging about 200,000 monthly unique visitors

Source: Compete, 19 May 2011

--------------------------------------------

Notes:
1. E-Loan was named OBR Best of the Web in July 1997 for launching the first online mortgage brokerage.    
2. Prosper was named OBR Best of the Web in March 2006 for launching the first P2P loan service in the United States, and the first anywhere to use competitive bidding to set rates, a model they recently abandoned.  
3. Before the SEC forced the company to restructure its business as a securities issuer in Oct 2008.
4. The average total return for the 2006 to 2008 loans (most of which are now off the books) was a negative 5.4%

This has to be the best notification of a price increase I've ever seen (see first screenshot).

ING Direct  (USA) famously does not charge OD/NSF fees on its checking account, Electric Orange. But that's a bit of a moot point since the bank doesn't offer paper checks, making it difficult to inadvertently go negative.

However, the bank does allow overdrawing by few hundred dollars if you so choose. And it charges interest on those "overdrafts" at a variable rate equal to 4% above prime, currently 7.25%. The bank reinforces the no-fee pricing in its standard low-balance alert (see second screenshot below).

But that low APR is heading upwards. Last night I received an email notification that effective May 15, the variable rate will be increasing to 8% above prime, or 11.25% today, a 55% increase. That's still relatively reasonable for unsecured credit.

But the bank's email doesn't focus on APR. After clearly disclosing the price increase, it lays out a comparison of what a $100 overdraft would cost the average U.S. consumer for one week, $31, vs. the $0.31 you'd owe ING Direct after 7 days. There are no other fees, transaction or annual, for the ING credit line (complete terms here).

Well played.

ING Direct email disclosing OD credit line APR increase (21 March 2011)

Overdraft notice (22 March 2011)
The bank reinforces its no-fee policy in its email OD alert.

Lending Club, which recently surpassed $12 million in monthly P2P loan volume (see below), does a great job concisely communicating important account info. The startup earned an "A" in our recent report on transaction alerts (note 1).

Below is another example of its exemplary email alerts. In just 30 words, the company reinforces my impressive rate of return and my account balance. Then it seamlessly goes for the sale, encouraging me to put my cash balance to work by making more loans.

The only improvement I'd suggest is making the call to action, "Browse available Notes," more prominent. First, it's not clear that it's a link. Second, what does that even mean? Ideally, it would be Lend Now, although I understand that terminology is not "SEC friendly," so Invest Now, should work.  

Bottom line: It's a win-win to provide encouragement every now and then about how customers might put their idle balances to work. Just don't overdue it.

Lending Club "Idle Cash Alert" (27 Sep. 2010)

Lending Club loan volume: Aug. 2009 through Sep. 2010

Note:
1. See previous post on OBR 181/182 published July 2010

If you've ever worked at a financial institution, you've no doubt heard the often-true horror stories from the loan department. You know the ones, where senator so-and-so's spouse or the CEO's brother were turned down for a car loan (see note 1).

The problem with automated loan systems is that there is no human doing a reality check on denied applications. Was it really a deadbeat applying or did someone just make a mistake on the application form? You can bet if a senator's spouse had applied for the loan in person the loan officer would have picked up some clues that maybe this app deserved some extra scrutiny.

But the flip side to human involvement is discrimination, whether intentional or not. A huge benefit to automated loan decisioning is the virtual elimination of certain biases from the process. Computer algorithms only evaluate the factors they've been told to look at. Nothing more. Nothing less. 

And because computer analysis has put more science into the underwriting process (notwithstanding the recent housing bubble), most people agree that it's generally been good for the bank and (most) consumers. But even the best system will generate a certain number of false negatives leading to the occasional embarrassing decline.

So it's worth considering installing a second-look system in your online process, providing wrongly denied applicants another chance at proving themselves worthy, before they end up embarrassing your CEO at their next family gathering.  

And why might I be thinking these thoughts? Yesterday, I went online to accept the direct mail offer from a major credit card issuer who's sent me more than 100 solicitations over the past decade (note 2). And I was flat-out rejected. Either I fell victim to a false negative or the issuer's underwriting is not in sync with their marketing.

The application process = great
The online acceptance process itself was flawless. I typed in my registration code, answered a few questions, and hit enter. It had taken about 3 minutes up to that point. Then wham! Twenty-four seconds later, the application was denied (note 3).

The rejection process = sucks 
And even though I could live without the card (note 4), it's frustrating and disappointing to be turned down flat with no recourse. Especially after being aggressively solicited for years.

And the company pretty much disowns you after the bad news. The website returns a two-sentence rejection thanking you for your interest, saying that they couldn't approve the request, and that they'll followup in writing in a couple weeks explaining their reasoning. And BTW, please don't apply again for at least 45 days. No apology. No email. No phone (or even email) to contact for more info. No referral to the credit bureaus or other resources. Just a simple, cold brush-off.

So I went back to the direct mail letter and called the number listed there. The bank rep said there was no way to look at the app I'd entered minutes earlier to see why it was denied. All he could do was take another new app, but he warned that the system wouldn't like seeing multiple apps and would likely reject it again.

Recommendations: You cannot avoid making credit denials, lots of them. And you can't avoid the occasional false negative. But you can, and should, create a way for online applicants to ask for a second look, and perhaps correct any errors that they might have made. And if you can't do that, at least be compassionate with the immediate messaging and try to offer some helpful resources.  

My three-step, face-saving, loan-denial process:

1. Thank the applicant and apologize for not meeting their needs. Say this both on the website and in a followup email.

2. Explain that although you're not perfect, there appears to be circumstances in the application that preclude you from offering credit at this time. Refer them to Credit Karma, Quizzle, or other credit resources to view their credit score and learn more.

3. Provide a second-chance option either through email or telephone for applicants with strong credit to ask for a human review. 

Optional: For customers you must turn down now, but who you think might be good future prospects for loans and/or other products, or who are already profitable existing customers, consider sending a consolation prize: $5 statement credit, a Starbucks card, two-for-one movie certificate, etc. 

Second-look apps would need a higher level of scrutiny to ensure against those trying to game the system. But there will likely be some gems uncovered in the process. 

--------------------------------------

Notes:
1. My favorite personal story of botched celebrity banking happened at First Interstate Bank of Washington where I worked in the late 1980s. Bill Gates, whose mom was on our board, supposedly used what was then our "state-of-the-art" telephone bill-payment service. Apparently, we didn't send off his mortgage payment and the late fee we ate was more revenue than the entire bill-pay program generated in a month. It happened a few months before I started working there, so I can't vouch 100% for its accuracy. But I can tell you it was a popular story within the bank with a "failed tech" angle and a juicy tidbit about the outlandish size of the mortgage on the Gates property.    
2. This is a rare situation where I'm not naming the company in a public blogpost because a credit denial is such an individual thing. It doesn't seem fair to single them out for one incident which is most likely not indicative of the normal experience there. However, I will disclose the name on an individual basis if you email me and promise not to post it publicly.  
3. I'm not sure what went wrong with the application. I have several decades of excellent credit, zero inquiries in the past 6 months, reasonable debt-to-income, and a decent level of household income. And I checked all three bureaus recently and everything was fine. However, the bureaus do have inconsistent, and partially incorrect, info about my employment history. But the application did not ask for employer name, so I don't see how that could have sunk it.  
4. I actually planned to use the card frequently; it had better terms than the one I was hoping to replace.

In 1988, as a new product manager at a long-since-merged-away bank, one of the first things I did was send a memo to my superiors pointing out that our overdraft fee of $8 was significantly less than our peers. And that we might want to consider raising ours to the industry standard $10. That little change added a million dollars to our bottom line and wasn't a half-bad start to my career there. 

So I've always understood how difficult it is to resist the temptation to raise OD fees. That said, there was no excuse for the debit-card excesses that led to the opt-in regulations taking effect this summer. No one should have to pay $39 extra for their morning coffee/donut fix.  

So as much as I detest price controls, I'll have to admit I've been looking forward to the industry efforts to turn debit overdrafts into a value-added service instead of the huge negative penalty they had become.

Ultimately, I see small overdrafts being priced more like mini-loans with a combination of withdrawal fees in the same range as foreign-ATM fees ($2 to $4 each) plus an interest rate or nominal daily fee based on the outstanding balance. Then, if I'm at the store and need $40 more for dinner groceries, I can decide to take the loan, pay the extra $5, and go about with my evening plans.

It's a win-win. I'm happy the bank/credit union gave extended me a little credit in a tight situation, and the bank makes some much-needed fee income, albeit in $3 increments, instead of $39. While the lower prices won't replace lost fee income dollar for dollar, and underwriting/credit issues must be addressed, customers will be happier and more loyal, employees will feel better about the value delivered, and in the long-term, things can get back to a more normal price/value relationship.

I'll be chronicling some of the most interesting implementations of value-added OD protection during the rest of the summer. I looked at Truliant Federal Credit Union a few weeks ago (here). Next up, Wells Fargo.

Three weeks ago I noticed that North Carolina-based Truliant Federal Credit Union had posted a highly visible opt-in overdraft pitch on its login page (see screenshot #5, below). I checked back today and found that the CU is still running a login page ad, albeit smaller (ss #2), and has also taken the message to its homepage (ss #1).

The new ads are more fear-based compared to the previous friend-of-the-customer approach (see note 1). In addition, the 180,000-member CU has moved to an online opt-in form (ss #4). Previously, customers could only ask for someone to contact them (ss #6).

Truliant has considerably simplified the landing-page message. In May, it offered a credit line option in addition to the simple $29-per-item system (ss #6). Apparently, that wasn't working as well as hoped. Now, members clicking on either the homepage or login-page promo receive a short, semi-urgent message (ss #3) that links to the online opt-in form.

Analysis: While I think the CU does an adequate job explaining the new opt-in options (see note 2 for suggested improvements), I'm disappointed it moved away from giving the credit line option equal billing. With an APR of 6.5% to 11.5% and no transaction/advance fees, it's a much more cost-effective option (note 3).   

1. Truliant FCU homepage visitors receive a large homepage pitch to opt-in for overdraft protection (10 June 2010)
Note: It must be a brand new banner since the underlying hyperlink, after the ads have cycled once, has a typo causing it to lead to an error page (9:25 AM PDT)

2. Overdraft protection message on login page (link, 10 June 2010)

3. Landing page (link, 10 June 2010)       4. Opt-in form (link,10 June 2010)
Click to enlarge                                           Click to enlarge

5. Previous login page had two ads for OD protection (20 May 2010)

6. Previous landing page included a line-of-credit option (link, 20 May 2010)
Note: In May there was no online opt-in form; interested members could only select a "contact me" button. The landing page now links to the form shown in #4 above.

Notes:
I hate singling out Truliant for this post. It has one of the best blogs in all of banking that does a great job educating and connecting with members. And because the CU has done a decent job with the overdraft opt-in process, I'd give it a B or B- grade. But my job is to look for potential improvements, so here goes.

1. Is making members afraid of using their Truliant debit card really a good way to endear them to the brand? Sure, the ads are likely to produce clickthroughs and they definitely don't cross over into the misleading category, but is there a little "crying wolf" here? Something to think about.

2. Other suggestions for improvement:

• The three choices on the online form are not as clear as they could be. The most popular choice, number 2, has both a YES and NO in it. That's the kind of wording that gives your members a headache. It would be far simpler if you just asked customers to tell you which types of transactions they want covered:
     A. Paper checks and automatic drafts (yes/no)
     B. Debit card transactions that don't require a PIN (yes/no)
• The landing page confuses the matter by using three different terms (debit without PIN, debit, and signature debit) without providing a detailed definition. At minimum, a link to a clear definition of the term should be included.
• The landing page says you have to "opt in again by August 15." That sounds like I need to do something now and something again later this summer.
• The "nightmare" scenario presented on the landing page, being denied at the grocery store POS when you have a hungry family to feed, is a good example of the downside of not electing to have debit-card OD protection. And even though the $29 charge is mentioned in the previous paragraph, members skimming the landing page may still not understand it will cost them $29 to avoid this embarrassment/hassle. I'd go overboard here and place an asterisk by this line and disclose the $29 fee again in fine print at the bottom.  

3. If the problem is that it's too hard to qualify for the credit line, the CU should consider a higher-APR and/or more-fee version for riskier members.

Syphr's RateMatch system was designed to help credit unions find new members and loan customers. Syphr generates revenue by charging financial institutions when prospective clients click on a link to contact the institution. According to Syphr, the RateMatch engine has processed more than 5,000 reports, with an average loan payment savings of $239 per month.

Syphr's newest innovation is MoreThanACreditReport.com, a credit reporting website with targeted loan information. It's designed to help consumers save by comparing their current loans to those offered by Syphr's affiliated banks and credit unions. Instead of offering just the credit report, the company provides money-saving loan deals. The site launched January 14, 2010 (press release here).

Although the site emphasizes a free credit report, MoreThanACreditReport charges users $14.95/month after a seven-day free trial (see screenshot below; highlighting has been added).

As part of that membership fee, the site's customers get access to other Syphr products including monthly credit monitoring, a credit report every six months, and Syphr's Payment Patrol system, which allows customers to receive notifications of better loan options as interest rates change.

How MoreThanACreditReport.com Works:

1. Consumers register at the MoreThanACreditReport.com site to get their credit report.

2. The site uses the consumer's Zip code to display average loan rates for the local area.

3. Next, using the consumer's credit card information, the site pulls an Experion credit report using a soft pull that does not show as an inquiry on the borrower's credit file.

4. Syphr's RateMatch technology analyzes the user's existing loans and searches for better deals available from affiliated financial institutions in their local area. RateMatch is powered by DataTrac, one of the largest interest rate databases in the United States.

5. The site shows the comparison to the consumer, highlighting where they can save money by refinancing or switching loans. In the example below, Eastern New York FCU is identified as a place that could save the user $60 per month.

If there are no participating financial institutions in the consumer's local area, they are given a RateTrac report, which compares the consumer's loans against the average payment plans offered by loan providers in the area. If the report shows that the consumer is paying more than the local average, the consumer can use the data to help negotiate lower rates.

6. If there are participating lenders available, the website allows consumers to contact the lenders directly simply by clicking on the "exchange it" button. Lenders automatically receive the customer's contact details and credit info.

7. Clicking on an offer on the MoreThanACreditReport site does not constitute a firm offer of credit. The bank or credit union follows up to arrange the actual loan. Because the loan information presented by the website is based on the consumer's credit report, it is likely to be representative of what the participating bank will offer.

My take: Saving money on loans is one of the key reasons people check their credit reports. Syphr says that more than 175,000 people check their credit reports online each month. As a lead-generation system for financial institutions, MoreThanACreditReport.com has the advantage of putting loan offers in front of consumers at the precise time they are thinking about a new loan. 

The MoreThanACreditReport.com site

RateMatch Offers Loan Savings

As an analyst who covers new developments in online and mobile finance, I will forever be grateful to Apple for opening up the mobile-phone platform, thereby unleashing a rush of innovations sure to rival the Internet circa 1995 to 2001 (note 1).

The latest financial app is from none other than Mercedes-Benz. The luxury-car maker has several iPhone apps available to its fans, but the latest, which appeared in the App Store last Tuesday, is specifically designed for its finance customers (iTunes link to app). It's the first captive finance company with its own app, at least in the U.S.

Other than the striking homepage image, the app is pretty pedestrian so far. It allows registered users (note 2) to make a car payment, calculate the pay-off amount, and find dealers and customer service numbers. In other words, it's a lot like the company's website ten years ago (note 3).

But that's OK, for now. Financial brands should take advantage of the free publicity of the iPhone App Store and  post something, even if it's just a window to their Web app (worked for Bank of America).

Along those lines, SunTrust (iTunes link) is the latest megabank to join the store (last week), leaving US Bank, Capital One, BB&T, and HSBC as the remaining top-10 U.S. retail banks without their own iPhone app. Who will be the last one in?

Mercedes-Benz Financial's homepage includes iPhone link (6 Oct 2009)

iPhone landing page (link)

Notes:
1. For more info on the market, see our Online Banking Report: Mobile Banking via iPhone (March 2009)
2. Users must set up a profile online at Mercedes-BenzFinancial.com  before accessing their accounts via iPhone.
3. But I'm kind of surprised MB didn't include a payments calculator, standard fare at most car sites.

This morning Lending Club emailed its existing lenders encouraging them to refer friends to become lenders on the peer-to-peer lending platform. The peer-to-peer lending pioneer says that is has added 11,000 new lenders this year, an impressive 1,600 monthly pace. Lending Club now has 20,000 registered lenders (note 1).

The pitch: Instead of paying referral fees, the $50 incentive is earmarked entirely for the new lender/investor. Basically they get a free trial of the service. The offer is available for only two weeks, otherwise Lending Club risks being flooded with new accounts that just want to get a hold of the $50.

Analysis: Typically, companies pay a fee to user who made a successful referral. Sometimes with an equal incentive to the new customer. While that may result in a slew of new accounts, converting them to long-term profitable participants can be difficult.

I believe the more-sophisticated investor/lender attracted to Lending Club will be MORE likely to make good referrals if they don't personally benefit from the referral (note 2). No matter how much users like Lending Club, if they are being paid to spam friends, it just doesn't feel right. While Lending Club may get fewer referrals this way, the ones they do get should convert better in the long run.

Lending Club is making it incredibly easy to spread the word. Existing customers can use an automated wizard to send messages to friends (see second screenshot) or prospects may simply enter the referring customer's member name to qualify for the $50. And there appears to be no fine print on the offer other than the Aug. 15 expiration date.

Lending Club email (sent 4 Aug 2009 at 6 AM Pacific)
Subject: Give your friends $50 to try Lending Club

Landing page
Includes tools for automating the process of reaching out to friends

Notes:
1. So far this year, $21 million in loans have been originated at Lending Club, approximately $1,000 per lender.
2. Lending Club does pay $25 to the referral source for new APPROVED borrowers. That's an affiliate marketing strategy and makes economic sense because it's only paid for approved loans. 

One benefit of running a financial services publication is that my own financial mistakes can be used for editorial material. My latest faux pas resulted in learning first-hand about U.S. Bank's self-service collection module integrated into online banking.  

The details: Apparently, last month I hit negative $300 in my business checking account during some intra-day moment. The daily closing balances never fell below a healthy balance, so I didn't realize an automatic "overdraft" transfer from our credit line had occurred (note 1). 

Since I assumed it was unused, I never looked at the credit line statement, and therefore neglected to pay it off or make the minimum payment. Then yesterday, when I went online to pay a bill, I noticed a new line item on my account ledger, Payment Assistance Options (see first screenshot below). I know that if my bank is offering to assist me with my payment, I'm in deep trouble.

I followed the link to where a well laid-out module took me through my options to pay back the delinquent loan (see screenshots 2 and 3). I paid off the $300 plus an extra $39 for the late fee, $3 for the overdraft fee, and a $2.79 finance charge. That's $44.79 in penalty fees, pretty expensive for a 42-day $300 loan (note 1), but low cost for a blog entry.

Bottom line: The self-service collection module is a good addition to online banking and should save the bank costs in routine collection efforts where the user simply forgot to make a payment. Even though I hated the $39 late fee, I'm glad the delinquency didn't progress further until it landed on my credit report.

1. US Bank main account management page showing collection function (29 July 2009)

2. Landing page outlining collection options

3. Promise to pay page
Note: Can pay by Web, mail, express mail,

Note:
1. Yes, closer monitoring of our checking account transaction register would have identified the transfer. But like many business owners, I prefer to spend time in other areas of the business.

At our FinovateStartup conference two months ago, Prosper won a Best of Show award for the re-launch of its peer-to-peer lending platform. But apparently, the SEC didn't share our audience's enthusiasm over Prosper's plan to operate under State of California regulatory authority while its SEC filings were undergoing final scrutiny. So Prosper went offline again, waiting until today at 5:30 PM Pacific to reopen (note 1).

The company can now set aside the last nine months of regulatory servitude and pursue its vision: allowing loans to be originated online in an auction process. Sure, thousands of pages of Prosper documentation are now on file at the SEC, with thousands more on the way, and lenders (aka investors) must now meet various state-mandated "investor suitability" requirements (note 2). But fundamentally, it's the same peer-to-peer lending service the company introduced in 2006, albeit with hundreds of incremental improvements (note 3).

The latest version launched today includes a number of tweaks that include a higher minimum credit score (640), new risk ratings, and lower minimum bid amount ($25), but the only major changes are:

1. A secondary market is now available for lenders to sell their previously originated loans
2. A hard rate floor that establishes a minimum yield for loans. It varies by credit score and is determined by adding the current 3-year national CD rate to the expected loss rate of the loan. For example, a C-rated loan with a 6% loss rate now has a floor of approximately 8.3% (6% + 2.3%). The vast majority of loans would have been originated at rates above the floor anyway, so the impact should be small.
3. Because each individual state must now approve lending/investing at Prosper, only 14 are currently on board: California, Colorado, Delaware, Georgia, Illinois, Minnesota, Montana, Nevada, New York, South Carolina, South Dakota, Utah, Wisconsin, and Wyoming. More states will be added in the weeks and months ahead. Borrowing is permitted in all states except Iowa, Kansas, Maine and North Dakota.

On hold is the planned option to allow institutional lenders to post already-originated loans directly into the marketplace (Open Market), see previous post.

To support the grand re-opening, CEO Chris Larsen penned a blog post entitled: Prosper is Back! (We mean it this time) which features a humorous YouTube clip of him asking his dad to post a loan listing on Prosper (embedded below). It's good to see they've maintained a sense of humor. 

Prosper homepage minutes after its 5:30 PM Pacific relaunch (13 July 2009)

Notes:
1. The SEC approved the Prosper filings Friday afternoon, 10 July 2009.
2. Investor suitability requirements may involve one or more of the following: minimum net worth, minimum annual income, maximum investment as a percent of net worth.
3. For more on the P2P loan marketplace, see our Online Banking Report on Peer-to-Peer Lending (published Dec. 2007). 

Ah, it's nice to be among the funded (see note 1). Not only can Lending Club afford to push forward with the usual marketing programs such as Google AdSense and affiliate deals, it can support unique efforts such as UnCrunch America and support for self-directed IRAs.

The IRA option, launched today (press release), primarily appeals to serious investors, given the $250 annual maintenance fee (waived the first year) from sponsor EntrustCAMA. The EntrustCAMA IRA allows tax-deferred investments in a variety of assets including single-family homes, private equity, and so forth.

Interested parties can complete the IRA form directly on the Lending Club site. However, the form must be printed and mailed to EntrustCAMA (see landing page below)

Bottom line: While self-directed IRA investors have historically chased higher-yielding investments than the single-digit returns expected from P2P installment loans, in today's environment there should be more interest in the relatively low-risk consumer loan portfolios available through Lending Club. 

Lending Club self-directed IRA landing page (link, 25 March 2009)

Notes:
1. Last week, Lending Club announced a $12-million series-B round of funding.
2. Lending Club will be appearing at our April 28 FinovateStartup conference.

UnCrunch America, the peer-to-peer lending educational/marketing campaign spearheaded by Lending Club (note 1) got a big boost with the addition of Virgin Money USA.

Not only does Virgin brings its considerable brand recognition, it legitimizes the effort as a true cooperative project, and adds a huge new category to the site, home loans. Plus, they get a much bigger number to put on the top of the homepage (below): $74 million instead of $1 million.

Other financial services participants include: Credit Karma (note 1), On Deck Capital and Geezeo. The campaign has its official launch today, although the website has been active since December (previous post).

The timing of the UnCrunch launch is perfect, following President Obama's assertion last night that lending was the "lifeblood" of the economy. All active lenders, especially credit unions, should consider joining this effort or using similar themes in their marketing.

UnCrunch home page (25 Feb 2009)

Virgin Money UnCrunch landing page (link, 25 Feb 2009)

 Notes:
1. Lending Club and Credit Karma will be participating in our upcoming Finovate Startup conference April 28 (see full lineup here).
2. For more info on the market, see our Online Banking Report on P2P Lending.

Last month I wrote about Pertuity Direct's impending launch. It's been live for a few weeks, and I've had a chance to review it in detail. The model is so unique, we created an entire special report on the company. It is available to our Online Banking Report All-Access subscribers here. Others can purchase for $195 here. And if you just want the executive summary, read on.

Overview
Pertuity Direct is an amalgamation of two financial services plus a social lending community:

• Mutual fund: Retail investment assets are gathered via the National Retail Fund, an interval mutual fund created by Gemini Fund Services. The fund plans to invest primarily in consumer loans originated by Pertuity Direct (see note 1). At the outset, there are two mutual funds to choose from: one will invest only in loans to prime customers with credit scores of 720 or higher; the other will take on more risk and invest in loans to borrowers with 660 or higher scores. Minimum investment is $250 and current estimated fund expenses are 3.1%.
• Consumer loans: Three-year installment loans of $1,000 to $25,000 will be originated by Pertuity Direct under state licensure. The loans will be sold to The National Retail Fund who will hold them until they pay off. Pertuity Direct will be paid a 1% servicing fee from the fund. Borrowers also pay a 1% to 2% loan fee at funding. The company is currently licensed in 37 states.
• Social lending: The last, and least, piece of the product is a social lending forum, where mutual fund investors can purchase Pertuity Bucks to give to already-funded borrowers to help them repay their loans.

Analysis
Whether this should be called "peer-to-peer lending" is open for debate. Pertuity Direct makes all the loan decisions and sets the rates. Investors have no direct influence over which borrowers are funded. However, there is a social element because investors can donate to borrowers through the community area. The model probably most resembles a member-owned credit union or mutual savings bank.

From an investor's standpoint, it's a unique opportunity to capture banking interest margin without actually buying shares in a commercial bank. The mutual fund is more like a bond, so it should be less volatile than owning equity. Although current estimated management fees of just over 3% are a drag on earnings, the company hopes the percentage falls as the funds gain assets.

However, the mutual fund doesn't have the liquidity or upside of an equity investment. It's an interval fund, meaning they will allow some redemptions each quarter (note 2), but it's not publicly traded. There's also the matter of how they value the underlying assets of the fund. A proprietary model will value the consumer loan portfolio each day, but since the assets are not publicly traded, there is no way to really understand if that model is working until there is a performance history. 

Summary
Pertuity Direct does a credible job weaving these three disparate businesses together and its management team, with experience at PNC Bank and E*Trade, have great ideas on taking this business to the next level. But much remains to be done to educate the market and overcome the hesitancy of jittery investors. We will be following them closely (note 3). 

Screenshot: Pertuity Direct homepage (2 Feb. 2009)
The company posted a 3.5-minute YouTube video of founder Kim Muhota explaining the company's offering.

Notes:
1. While the intention is to invest in Pertuity Direct-initated loans, the funds can also invest in other vehicles.
2. The prospectus says that it will allow 5% to 25% of its funds to be redeemed each quarter.
3. CEO/founder Kim Muhota will be participating in our FinovateStartup 2009, so you'll be able to hear directly from him.
4. For more info on P2P lending, see our Online Banking Report on P2P Lending.

If you think your 2008 was stressful, imagine having to shut down for an extended and unknown period (it turned out to be 6 months) just 10 months after launch. Then spending hundreds of thousands of dollars on SEC paperwork that your major competitor avoided (temporarily it turns out), all the while watching that same competitor take your market share while you keep your mouth shut via SEC mandate.

That was Lending Club's year. But unlike so many horror stories of the past year, this one has a happy ending, at least so far. Not only did Lending Club reopen for business Oct. 14 at our Finovate conference (demo video here), within weeks they had already moved ahead of last year's origination pace (note 1).

As you can see in the table below, Dec. 2008 was substantially ahead of Dec. 2007 in all measures except average loan size and approval rate, which dropped a full 2 points:

• Number of applications increased by 78%
• Number of approved loans increased by 43%
• Dollars originated increased by 29%
• Average loan size approved declined by $1,000 (9.4%)
• Overall approval rate was 8.5% last month compared to just over 10% a year ago

Table: Lending Club loan origination results: Dec 2008 vs. Dec 2007

Source: Loan volume from Lending Club, site traffic from Compete, calculations by Online Banking Report, 8 Jan 2009

Here's the monthly origination chart (in US Dollars) courtesy of LendingClubStats.com who compiled the figures from data provided by Lending Club. 

Source: LendingClubStats.com, 8 Jan 2009

Also, site traffic is up 35% year over year according to Compete. 

Source: Compete, 9 Jan 2009

Notes:
1. The number/dollars of loans originated and applied for at Lending Club in Oct. 2008, Nov. 2008, and Dec. 2008 were all higher than the respective months in 2007. 

2. For more info on the market, see our Online Banking Report on P2P Lending.

Just when it looked like U.S. regulators were about to kill the market for P2P lending, a new entrant is about to launch. Apparently, with the full blessing of government watchdogs.

Pertuity Direct, originally scheduled to launch at our Oct 14 Finovate conference, is about to go live with a new approach to P2P lending. In an off-the-record discussion with founder Kim Muhota and marketing director Lisa Lough yesterday, I learned about their novel approach to make the service appeal to borrowers, investors, AND regulators. It could be the model for the industry going forward.

While I'll reserve judgement until I can actually use the service (it's still in private testing), I'm impressed with the company's thinking and encouraged that it appears to have successfully navigated the regulatory minefield and will make it off the ground in early 2009.

We'll cover it in more detail at launch.  

Note: For more info on the market, see our Online Banking Report on P2P Lending.

Start-up activity in the financial technology sector has slowed dramatically since Sept./October when a dozen online finance startups launched (see previous post), not a surprising development given economic conditions and the time of year. 

Still, a number of companies remain in the pipeline, and yesterday we saw the launch of an entrant into the battered P2P lending space. But ZimpleMoney is not entering into the newly SEC-regulated market occupied by Prosper, Lending Club, Loanio and other hopefuls. Instead, the Costa Mesa, CA-based startup is offering a platform with tools so that third parties can either build lending services on top of it, or use ZimpleMoney's processing capabilities to manage loans and financial transactions.

ZimpleMoney can also be used like Virgin Money USA or LoanBack to handle a single loan amongst friends and family, either for personal or business use. The introductory price for an individual loan is $39 plus $7.99/mo.  

The site, which opened Monday, still looks more like a beta operation. The registration system wasn't fully functional yesterday, and I ran into several broken links today. But minor annoyances aside, it's an interesting development that should help drive social finance forward.

Given Prosper's recent woes, we are not likely to see new Prosper-like P2P exchanges using the ZimpleMoney platform any time soon. But it could be a good way for nonprofits, foundations, or microfinance organizations to launch Web-based loan operations with a minimal amount of development time and expense. Banks, credit unions, and other financial services companies could also private-label the service for their clients.

In his announcement email Monday, CEO (aka ZEO) Steven Rabago said they'd had interest from several nonprofits, a realty company, an investment management company, a student lender, and a large regional bank. Rabago started his career as a commercial banker at Bank of America. He left in 1983 to start National Corporate Finance (now called Archarios). In 2001, he co-founded a location-based services company Telogis, where he remains as a board member.

ZimpleMoney homepage (9 Dec 2008)

Note: For more info on the market, see our Online Banking Report on P2P Lending.

It's 3 for 3 now. All major P2P U.S. peer-to-peer lenders have been shut down this year by the SEC (see note 1). First Lending Club in March, then Prosper Oct. 15, and finally Loanio this week (see note 1).

Here is the statement I received from Loanio founder Michael Solomon this afternoon:

In light of the recent cease-and-desist ruling issued to Prosper Marketplace by the Securities and Exchange Commission, Loanio voluntarily suspended its operations. We were not contacted by the SEC or any other government agency. The SEC ruling on Prosper, combined with the recent registration of Lending Club, removes all ambiguities as to the Commission's legal interpretation on the issue of whether P2P promissory notes, in all of their varieties, are considered securities under current law.

Regulators have concluded that loans created in these networks are, in fact, securities and must be registered as such. You can read the SEC's logic in its Prosper filing published this week (here).

I have mixed feelings. While I applaud regulators for taking the initiative to understand this new way of lending/investing, I find it a bit ironic that a $100-million self-regulating and relatively transparent marketplace receives heavy-handed treatment while multi-trillion dollar financial products grew relatively unchecked in recent years (see my prior editorial on the matter).

The good news is that Lending Club has proven that SEC registration need not be a death sentence. The startup successfully completed the registration process after six months, relaunching at our Finovate event Oct. 14. The company has funded $2.6 million in loans since reopening.

We are hopeful that Prosper, which has $40 million in venture funding, will be back in business in early first quarter. Angel-funded Loanio may need to raise money to finance the registration process.

Notes:
1. Last month (here), the Loanio founder predicted that at some point he'd also need to register with the SEC.

2. Fynanz and GreenNote, the P2P student loan lenders, appear to still be accepting lender funds.

It's a sign of the times. Instead of creating interest in auto loans by showing a sexy new convertible on a windy seaside road, Chase offers to help customers stay in their same vehicle with a lower monthly payment (see today's homepage below).

Interestingly, the $44 number in the headline is the actual average savings to Chase auto loan refinance customers in August (see note 1 for how Chase calculated the savings). That makes the whole ad much more believable than the usual what-if scenario.

Instead of burying that key fact in the fine print on the bottom of the landing page (second screenshot), Chase should make it the main headline of the landing page. The bank could go "social" with it by adding testimonials, a blog or forum, calculators (how about one for the iPhone?), a Facebook page, sweepstakes and even a scrolling activity ticker showing actual refinance savings as they happen, much like the Progressive auto insurance quotes (see note 2).

It's not going to help Detroit much, but it's smart marketing for the pre-holiday period. A $44 lower monthly payment translates into $500 in annual savings, enough to put a little something extra under the tree this year.

Chase Bank homepage (13 Nov 2008)

Landing page pop-up (13 Nov 2008)

Notes:

1. Derivation of the $44 savings:

Monthly savings figure is for illustration purposes only. $44.43 is the average monthly amount saved by customers who lowered their rate by refinancing their auto loans with Chase during the period from 7/25/08 to 8/21/08 on which we have the information to determine savings. These customers started with an average balance of $17,500, with an average remaining term of 49 months at an average Annual Percentage Rate (APR) of 10.50% and refinanced on average for 53 months at an average new APR of 7.31%.

2. An activity ticker is one of our top-rated projects for next year as published last week in our Online Banking Report 2009 Planning Guide.

Industry blog, P2P-banking.com recently compiled a list of peer-to-peer  loan volumes from around the world. The chart is reprinted by permission below.

These numbers are cumulative, all-time volumes since inception. More than half is from Virgin Money USA which has helped individuals put $370 million in loans together since it began as Circle Lending in 2001.

Because these companies don't all use the same model, I've revised the tables somewhat, excluding: 

• Facilitators: My definition of peer-to-peer lending excludes Virgin Money and Loanback because they do not serve as matchmakers (note 1). They do play a crucial role in putting a legal framework in place for friends-and-family loans and often end up servicing the loans as well. They are more like PayPal where Prosper/Lending Club are like eBay.
• Microfinance markets: I would exclude Kiva as well. It's an awesome platform that allows U.S. citizens to loan money to third-world merchants at zero interest. A powerful tool for philanthropy, yes, but not really peer-to-peer. The same goes for MyC4 and Microplace.

So excluding the above companies, total worldwide originations are $262 million, with two-thirds of that from Prosper.

Here are the market shares of the 8 true P2P lenders that have originated more than $1 million since launch:

Source: P2P-Banking.com, 28 Oct 2008

Note:
1. This does not mean I dislike Virgin Money's business model, just that its loan volume is not comparable to the others on the list.

2. For more info on the P2P lending market, see our Online Banking Report on Person-to-Person Lending

A new financial market will open Monday where businesses as small as $1.5 million in annual sales can borrow against their receivables with prices set in an auction market.

New Orleans-based The Receivables Exchange opens for trades on Monday (17 Nov) after an 18-month development cycle.

Businesses register with the exchange, a process that entails uploading financial statements and completing an application. The Receivables Exchange conducts due diligence on the potential participant to ensure that it is legitimate.

Businesses must meet the following criteria:

• Minimum of $1.5 million in annual sales
• At least 2 years of operating history
• Registered to do business in the United States

Upon approval, the business can list specific invoices for financing, with a minimum total value of $10,000. Then accredited investors (SEC definition here) bid to provide short-term financing until the receivables are collected. Sellers are encouraged to upload PDF copies of invoices, proof of delivery, and so on to get the best rates. However, many documentation requirements are optional.

Sellers select the terms they are willing to accept and the bidder that beats those terms by the widest margin wins the credit. If no bidder meets the minimum terms, the auction ends without a trade.

Co-founders: Justin A. Brownhill and Nicolas R. Perkin

VC backers: Prism VentureWorks LLC and Fidelity Ventures

Analysis
In an era of tight credit, it's a welcome addition to the financing tools available for small and mid-sized businesses. Larger businesses typically have more options through commercial paper and other capital markets.

The startup expects banks to be valuable sources of referrals. Although, at this point, there are no referral fees or revenue-sharing options.

So far, The Receivables Exchange has signed up sellers with a total of $2 billion in annual sales. And there's been a lot of interest. Founder Nicolas Perkin says his company has been approached by 20 $1+ billion companies.

But what about the other side of the trade, the lender/investor? The company says it has access to $8 billion deployable capital. Of course, that doesn't mean that the capital will be easily enticed into actual deals.

Starting Monday, we'll see what the buy side thinks. Are they willing to risk their capital in the unproven market? If The Receivables Exchange can drive out fraud and deliver on its promises, we think the answer will be yes.

The Receivables Exchange homepage (11 Nov 2008)

In the early commercial Web era (1995 to 1998), five financial startups inspired me in terms of their innovative products and services: 

• E-Loan for mortgage
• E*Trade for stock brokerage
• Netbank for deposit-taking
• NextCard for credit cards
• LendingTree for lead generation

These were my go to companies for ideas and inspiration when covering the space in the mid-to-late 1990s. In those days, traditional financial institutions were just getting started and were not as far along in features and functionality. 

Sadly, two of the five have failed, NextCard in 2002 (here) and NetBank in 2007 (here). And the other three are struggling through the credit crisis.

The latest downer: This week, E-Loan, owned by Banco Popular, announced its exit from the online mortgage origination business. Reading the headlines, I first thought they'd thrown in the towel altogether. But it turns out they are discontinuing only direct mortgage originations. The company will continue to use its popular website (see traffic below) to attract potential borrowers who are handed off to other lenders, something it already does today for student, auto, personal and business loans, along with credit cards. This is a potentially lucrative fee-based business with zero credit risk.

It's a cautionary tale of how critical, and difficult, the execution piece is. These were industry darlings, always in the news and at the top of the search results. Yet, in financial services especially, you have to temper innovation with prudent underwriting and business practices. All three were brought down by credit-related problems. 

E-Loan traffic has stabilized at around 250,000 uniques per month:

I was packing up my hotel room after five great days in NYC putting on Finovate, when I got a call from a reporter who asked me if I'd "heard the news." Since we'd been talking P2P lending earlier in the week, I figured his question was related to that. But I couldn't imagine what news could compete with the launch of Loanio, the closing of Zopa (US), the delayed launch of Pertuity Direct, and the grand reopening of Lending Club. That was already a full year's worth of major developments packed into a two-week period. 

So I about fell off the bed when he told me Prosper had closed off new lending until the completion of its SEC registration process, entering the same regulatory twilight zone from which Lending Club had just emerged the previous day. And this was only 14 hours after Chris Larsen had been quoted in an upbeat Prosper company blog entry about the role of his company during the credit crunch (note 1):

"At a time when every sector in the economy seems to be under pressure and shrinking, the growth Prosper has experienced is very respectable."

Impact on Loanio
Because I'd just spent an hour with Loanio founder Michael Solomon the day before at our Finovate conference, I immediately wondered if he might be facing the same registration hurdle. But I reached him a few minutes ago via email and he's thinking this probably benefits his new marketplace since lenders are frozen out of Prosper. He also doesn't expect to enter into a similar registration process in the foreseeable future.

Here's his full statement:

"...from the perspective of (Prosper) going silent, it is actually great for us as I think we will quickly gain lots of lenders and hopefully we can wow them into sticking around. From a regulatory standpoint, we believe that at some point we will seek to introduce a secondary market platform, but we will focus the greater part of the next 12 months on building our platform and seeking out a national bank partner to cover the rest of the U.S. Our plans for a secondary market are too far ahead for me to contemplate at this time."

Thoughts
Regulators certainly have a right to require transparency in the marketplace and protection for consumers. But Prosper, with an open API of its transactions, balances and even repayment behavior, and which uses a completely market-driven, open-bidding process to set rates and select loans to fund, is about as open a business as you ever will see, especially in financial services.

For the sake of the nascent industry, I hope the registration is put on a fast track and Prosper is back in the game faster than the six months Lending Club waited. At this point, an alternative credit supply, albeit only $100+ million per year right now (note 2), sourced directly from willing individual investors and not from capital-constrained financial institutions, seems like something we should encourage.

Ultimately, Lending Club and now Prosper should benefit from improved liquidity that the secondary market allows. Since Prosper is not allowed to comment on the move, we can only speculate on what happened. But the timing of all this seems a bitter irony. Wasn't a breakdown in the secondary markets a big part of what put us in such a bind now? 

According to its blog, Prosper will continue to make loans "through alternative sources (of funds)" (note 3). So perhaps the impact to the Prosper marketplace will be small. Especially if they are back in full swing by year-end or early 2009.

Notice on Prosper's website announcing quiet period (isn't that an oxymoron?) 16 Oct. 2008

Notes:
1. See today's NY Times article for more info on this week's developments. Don't miss the picture of Lending Club CEO Renaud Laplanche standing outside the Finovate 2008 demo hall.

2. For more info on the market, see our Online Banking Report on Person-to-Person Lending. 

3. Presumably, to keep the loans flowing, Prosper can tap its own funds as well as those of institutional investors or other professional investors. We'll know soon, thanks to its open API.

Article updated at 2 PM Pacific with quote from one of Zopa's partner CUs, Affinity Plus. 

Zopa's U.S. social deposit/lending site will be shuttered, just 10 months after its launch (see previous coverage here). The site, which delivered loan applications and CD customers to six credit union partners, apparently was closed by Zopa. At this point the exact reason is unclear (see update below). Zopa blamed the U.S. credit situation and said it wanted to concentrate its efforts in other markets. 

Here's part of the statement from CEO Doug Dolton that appeared on the Zopa forum earlier today (also here's the official blog entry at Zopa UK):

The facts are: Due to the extremely difficult consumer credit circumstances in the US, we made the decision to focus our ongoing efforts in the UK, Italy and Japan. We have six credit union partners in the US, and we have been working with them to modify our business model to offer our customers the best possible offerings, given the poor credit conditions in the US.

We're certainly facing unprecedented economic times worldwide right now, but I am pleased to report that our UK and Italian operations are doing better than ever, and I look forward to continuing to develop those marketplaces. I apologise for any confusion regarding our circumstances.

As of this morning, the Zopa US homepage is unchanged, but you can no longer sign up as a new member and all the Learn More links redirect to USA Federal Credit Union. 

Implications
It's surprising that the company would throw in the towel on the significant investment it made here. However, if Zopa's CU lending partners had curtailed, or stopped, making loans through the site, something noticed last week by the Prosper Lending Review blog, the whole strategy would no longer be viable (see update below).

But this has nothing to do with what Prosper, Loanio (which launched last week) and hopefully Lending Club (expected be accepting new lenders shortly) are doing with person-to-person lending. Zopa US, unlike Zopa UK, was NOT a P2P lending site, it was a lead-generation site for six credit unions. When those CUs stopped needing loan-leads due to the credit crunch, it took the legs out from under the U.S. division. Even continuing to just take deposits made no sense, since each depositor was required to assist a borrower by gifting a portion of the deposit interest.

We wouldn't be surprised to see Zopa back in United States in the future as a true P2P lending site, copying the model of its U.K. and Italian divisions. The social aspect of its offering certainly resonated with consumers and industry players as well. The company was one of four Best of Show winners in our April Finovate Startup conference, an award by majority vote from the audience (video here).

For more information, see our Online Banking Report on Person-to-Person Lending. And those attending our Finovate next week will see two companies demo P2P lending. 

Update: 2 PM PDT, 9 Oct 2008

As one of the credit unions who were partnered with Zopa, I would like to clarify that we have no credit availability issues and have changed none of our lending practices. This decision was made by Zopa.

-- Sarah Mason, SVP, Affinity Plus Credit Union

Add one more company to the list of recent launches: Loanio went live today after a lengthy "coming soon" process (previous coverage here). The thousands of people on its email list received a message this morning announcing the launch (see below). 

Founder Michael Solomon demo'd the product back in April at our Finovate Startup event (video here). Today's live version looks similar to the April build. The key differentiating features of Loanio's product are:

• Ability for anyone to borrow, if they have a creditworthy co-borrower
• Optional enhanced pre-verification process (costs $35 for single borrower, $45 for co-borrower apps) allows borrows to boost their credibility by submitting the following documentation in advance of posting their listing:
  - Photo ID
  - Income documentation
  - Bank account statement
  - Employment documentation
  - Postal address documentation
• Longer loan terms -- up to 5 years compared to P2P lending standard of 36 months
• Borrowers have the option of accepting partial funding of their loan request as long as it's at least 35% funded

Several other tidbits from the FAQs:

• Experian provides the credit info on borrowers
• Lenders pay a 1% service fee on all outstanding loans
• Buyers pay an origination fee as follows, equal to the greater of $95 or:
  -- Loans with one borrower: 2% for A and B credit grades, 3% for all others
  -- Loans with co-borrower: 3% for A, B and 4% for all others
• Borrowers may seek loans of $1,000 to $25,000
• Lenders must put in at least $100 to participate with a minimum bid amount of $50

The first borrower listing appeared on the site within the last hour or so, a C-grade credit seeking $2800 for debt consolidation (see screenshot below, note 1).

Screenshot of Loanio home page with first loan listing (1 Oct 2008)

State coverage limited
At launch, Loanio has gathered licenses to lend in only 22 states (see note 2). However, 10 of those have interest rate caps of 12% or less, so lending will be limited to the highly credit worthy, and one (Minnesota) caps the loan amount at $2550.  Here are the 12 states which Loanio primarily competes in today:

State	Max Interest Rate
Alabama	30%
Georgia	30%
Mississippi	30%
New Mexico	30%
North Carolina	30%
Indiana	21%
West Virginia	18%
Wisconsin	18%
Alaska	16%
Nebraska	16%
New Jersey	16%
New York	16%

These are the 10 states that allow borrowing from Loanio but cap the rate so that only those with excellent credit are likely to receive funding:

State	Max Interest Rate
Tennessee	12.25%
Hawaii	12%
Louisiana	12%
South Carolina	12%
Virginia	12%
Connecticut	12%
Arkansas	11.25%
Delaware	11.25%
Kentucky	10.25%
Pennsylvania	6%
Washington D.C.	6%

As you can see, there is no lending in major population centers of California, Texas, Florida, Illinois, Ohio, Massachusetts and for the most part in Pennsylvania with a 6% rate cap. But there are ways to change that and Loanio can at least get started in 10 states while it fine tunes its business and develops methods for lending in all 50 states. Prosper and Lending Club both originate loans nationally through Webbank before passing them to the individual lenders. This allows nearly full geographic coverage, while usually bypassing state-mandated maximum loan rates.

Loanio joins Prosper, Lending Club, GlobeFunder, Fynanz, GreenNote and Virgin Money in the U.S. P2P lending space (currently, only Prosper, Fynanz, and now Loanio, operate true P2P exchanges). The others are either closed to individual lenders temporarily (Lending Club, GlobeFunder) or require borrowers to find their own funds from friends and family (GreenNote, Virgin Money). For a complete look at the market, see our Online Banking Report on Person-to-Person Lending.

Email: Loanio now open (received 10:39 AM Pacific time 1 Oct 2008)

Note:
1. Unfortunately, this loan is unlikely to be funded due to the max interest rate of 6%, likely because she is a Pennsylvania or Washington DC resident where the rates are capped at 6% (see table).
2. Just about anyone 18 or older can be a lender regardless of where they live. Only South Dakota and Pennsylvania residents are currently ineligible to lend through Loanio.

It's not often that bank collection techniques make the business press, and when they do, it's usually not a good story. But last week's WSJ article by personal finance writer Jane Kim featured a relatively positive spin on how banks are working harder to collect revolving credit debt.

She cited two examples of Web-based self-service applications trying to turn early collection efforts into a non-confrontational, positive experience including:

• WaMu's self-service website, <wamucanhelp.com>
• The Virtual Collection Agent powered by Online Resources that is being rolled out by three of the top-10 card issuers. The system was first shown to the public at last year's Finovate conference (video here)

You can only look at the WaMu collection site if you have a WaMu credit card (screenshot below), but in perusing domain-ownership records, it appears to be hosted by Online Resources, so it likely resembles the screenshot below, a generic mockup from the Online Resources website.

Note the settlement offer listed at the bottom of the page. This offer can be produced dynamically based on input from the user as they use the self-service site.

What's innovative?
While it won't work for everyone, collecting past-due debts is one of the trickier areas of bank operations. Financial institutions have to be careful not to be too aggressive early on so they don't appear heavy-handed and end up driving away an otherwise profitable customer, not to mention that customer's friends and family.

That's why a gentle email/text reminder with a link to a self-service support area makes so much sense. Not only can you speed repayments from delinquent borrowers, but also garner valuable goodwill by offering a positive experience via a collaborative online tool. Given the current environment, Web-based collection efforts could maintain precious account relationships.

Virtual collection agent from online resources (19 Sep 2008) 

 
WaMu's Web-based collection website <wamucanhelp.com> requires a WaMu card number for login  (19 Sept 2008)

Now that we are well past the mid-point of 2008, it's a good time to look at where we are with one of the most talked-about online financial subjects of the decade: person-to-person or social lending.

Currently, two U.S. companies are actively originating unsecured, multi-purpose P2P loans (note 1): 

• Prosper: Through July, the leader in the market is running 10% ahead of its 2007 loan-origination pace. The company has funded $55 million and is on pace to do just under $100 million for the year. Website traffic is up 15% compared to a year ago (see graph below) and through July there have been 13% more loan listings (see previous coverage here, Finovate 2007 Best of Show video here; monthly volume reports here).
• Zopa: The company, which isn't technically person-to-person (the loans are originated by six credit union partners) but definitely has a social aspect to its loan program, has not revealed any numbers, but they list 475 loans on the "browse all borrowers page." Assuming average loan size of $8000 to $9000, they are doing less than $1 million per month. Zopa is using Google AdWords to pitch "instant approval" with a credit score of 640+ (see screenshot below), an aggressive marketing move, especially combined with the 8.49% APR touted on the landing page (see screenshot below; previous coverage here; FinovateStartup 2008 Best of Show video here).

In addition, three more P2P lenders appear very close to launching or relaunching:

• Lending Club: The company, launched in May 2007, has been essentially closed to new business since March as they retooled loans into securities for regulatory reasons. However, the company is scheduled to present at our Oct. 14 Finovate conference, implying that they will be out of their quiet period by then (previous coverage here; Finovate 2007 video here).
• Loanio: The startup appears to be very close to launching based on an a Sept. 3rd email sent to its house list announcing the launch "in just a few weeks" and adding in parenthesis (yes, we mean it this time!). The company will likely be the first to offer a co-borrower loan application (previous coverage here; Finovate Startup video here).
• Pertuity Direct: The newest competitor in the space is Pertuity Direct which we wrote about last week. Its website claims a Sept. 15 launch, and we look forward to seeing their first public demo at Finovate on Oct. 14.  

Finally, several companies are looking to launch P2P services in 2008 or 2009, including Globefunder, Community Lend (Canada) and one we just heard about today, Swap-A-Debt.

Forecast revision
Last December we published our second detailed Online Banking Report on Person-to-Person Lending. In that report, we predicted just under $200 million in originations this year. However, due to the inactive period at  Lending Club, the delay in Loanio's launch, and the more conservative approach by Prosper lenders, we are lowering the 2008 forecast by 25%, with an expected total of $135 to $150 million for the year as follows:

• Prosper ($95 to $105 million)
• Lending Club ($25 to $30 million)
• Zopa ($5 to $10 million)
• Loanio ($1 to $5 million)
• Pertuity Direct ($1 to $5 million)

P2P lending traffic from Compete (July 2007 through July 2008)

Zopa AdWords ad on "loanio" search
(4 Sep 2008, 1 PM PDT from Seattle IP address)

Landing page (4 Sep 2008, link here)

Notes:
1. Specialists are involved in the student loan piece (GreenNote and Fynanz) along with Virgin Money and Loanback which help with person-to-person loan documentation and servicing. 

2. Top-right graphic from April 2008 ABC News segment on Lending Club and person-to-person lending.

"> Last September, we wrote about the launch of Washington D.C.-based Pertuity Direct. At the time, the startup was showing some interesting social-personal finance tools such as Dare to Compare, which allowed users to compare their financial situation to their peers and national norms (see "before" screenshot below). It looked like another online PFM play.

But it turns out the company's true business model is person-to-person lending (aka social or P2P lending) where it will compete with Prosper, Lending Club, Loanio, and others (see note 1). Its URL redirects to a non-functional placeholder page (below) that includes only an email signup (note 2).

Here's the company description of its strategy:

Pertuity Direct is bringing the next generation of social lending to the Web - integrating simplicity, liquidity and automatic diversification into the social lending model.

The founder is Kim Muhota, an ex-banker out of PNC Bank. Pertuity Direct, which is currently closed to the general public, will demo its new product at our October Finovate conference.

Current: Pertuity Direct placeholder page with email signup
(26 Aug 2008)

Before: Pertuity Direct website before redirect put in place
(see note 1, 26 Aug 2008)

Notes:
1. For more on the P2P lending space, see our Online Banking Report on Person-to-Person Lending.

2. You can see the previous website content by following a deeper link available from Google.

Lending Club filed an amended S1 statement, a positive sign that it is moving through the registration process in a timely fashion.

As we noted here after reading the original S1, Lending Club has indeed added a secondary marketing piece to its business plan. Holders of its notes (aka individual lenders), will be able to sell their Lending Club loans through a market run by an undisclosed third party.

Here's the pertinent section from pp. 50-51 of the August 1 S1 (note: the name of the partnering broker-dealer is not disclosed; hence, the blank space below):

Trading System
Lender members may not transfer their Notes except through the resale trading system operated by           , a registered broker-dealer. This trading system is an Internet-based trading system on which Lending Club lender members who establish a brokerage relationship with the registered broker-dealer operating the trading system may offer their Notes for sale. In this section, we refer to lender members who have established such brokerage relationships as “subscribers.”

Subscribers may post orders to sell their Notes on the trading system at prices established by the subscriber. Other subscribers will have the opportunity to view these prices, along with historical information from the original loan posting for the member loan corresponding to the Note, an updated credit score range of the borrower member and the payment history for the Note.

I skimmed the updated S1 and didn't see anything else particularly noteworthy. Another blogger, Doughroller.net, noted that the company is adding more credit factors to its loan-pricing model. You can see the new formulas in the S1 filing (pp. 36-38).

I had a great conversation today with the founders of FirstAgain, a startup online lender from the same folks that brought us PeopleFirst Finance ten years ago.

People First invented "blank check" auto lending, earning it  one of the first OBR Best of the Web winners (1998 article reprinted here). The company was purchased by Capital One in 2001.

FirstAgain made its first loan in late 2006 and officially launched its unsecured AnythingLoan in July 2007. But the company is just gearing up to start lending in higher volumes after a $30 million venture investment from Arsenal Capital Partners in January. Merrill Lynch provides the warehouse line.

Founders Gary Miller and Dave Zeller outlined their vision of simplifying online lending for customers that pose minimal repayment risk, the FICO 740+ crowd. Having watched them create a new segment in auto lending a decade ago, I expect they will succeed. The company has already originated more than $100 million in unsecured loans.

What's Innovative?
We've added FirstAgain to our watch list and will report back on its innovations in more detail. But here are two small things that demonstrate its creative approach:

1. The little green tree icon on the homepage (see above) highlights the company policy to plant one tree for every loan originated. While that isn't exactly an earth-shattering benefit, it helps differentiate the company from fly-by-night website operators who'd never think about giving something back to the world.

2. This is the best featurette I've seen in a while: "real" online signatures. Users "sign" their loan docs by moving their mouse to draw their signature online.  The company also offers a typing option, so users type their name on the keyboard and it's rendered on-screen with a standard script font.

I imagine FirstAgain is not the first to do this, but I've never seen it before. While this new doodad isn't quite enough to warrant another Best of the Web, it's still pretty cool, at least if you are an Internet banking geek.

According to the Wall Street Journal, scooter sales in the U.S. are up 25% compared to last year (article here). While still relatively rare in U.S. cities, I have a feeling that 10 years from now, after a steady diet of $5/gal gas, American cities will look more like their European counterparts, with scooters zipping about everywhere.

For banks or credit unions, this might be the ideal time to jump on the scooter bandwagon by helping customers buy the energy-efficient vehicles. It would be a great way to grab a little PR boost during the slow summer-news cycle, and with some models selling for $4,000 or more, you could boost vehicle loan outstandings by a measurable amount.

A brief Google search located two financial institutions pushing scooter loans, both appropriately with "green" in their name: South Burlington, VT-based Green Mountain Credit Union and a Wisconsin-based credit union (who's name we removed at their request in Aug. 2010 because the offer is no longer available and they still get inquiries from this post). 

Evergreen is promoting a special one-day, 3.99% scooter loan on its homepage (see screenshot below and note 1). The Saturday morning event, conducted in partnership with a local scooter dealer, included test rides, free hot dogs, and prize drawings. The CU also gave away a scooter earlier this month as part of its 50th anniversary special.

Benefits/Opportunities

• Incremental loan originations: If you are a good relationship lender, the $4,000 scooter loan today could lead to many $25,000 car loans in the future. 
• Search-engine marketing: Currently, there are no direct ads running on the keywords "scooter loans," although you will compete with several advertisers displaying against the generic "loan" in the search term. There are also few organic results for the term, so there's a good chance an SEO-optimized landing page would rate highly in Google results.
• Leverage branch parking: One of the problems with urban scooter use is lack of available parking. Branches with parking could turn over one or more spaces for customers with scooters, creating good will, as well as the occasional picture on the 5 PM news.
• Public relations: Anything that saves gas makes for a good story this summer and beyond. It can also be pitched as a "green banking" story, although it's not a pure environmental win. The gas savings are easy to see, but scooter emissions can be significantly higher than those of the automobiles they replace.
• Starter loan/credit: If you can convince your underwriting staff to accept applicants with limited or no credit history, the scooter loan could be a great way for young adults to build a credit file and improve their credit score (thanks, Andrea, for the idea)
• Customer acquisition: Scooter loans could be a great way to introduce younger consumers to your financial institution.
• Trendy icon: At least for urban customers, the scooter, especially the classic Vespa look, makes for an attractive graphical image, conjuring up memories of trips to Italy, or at least movies shot there on location. Your scooter program could make for good website content, eye-catching outdoor feel (great bus ad!), and or a nice flourish for other media efforts.
• Strike a deal with Scooter Financial: The number one result at Google for "scooter loans" is Scooter Financial, which does exactly what you'd expect, make loans to buy scooters. Given their name and Google pagerank, they could be an ideal company to partner with.

Cons and potential problems

• It's an asset easily hidden from the repossession agent, so it's harder to use the repo-threat to enforce outstanding debt. 
• The accidental death rate for scooter owners is about 65% higher than that for cars; so you might want to be careful how much you push it as an "automobile alternative." But the news isn't all bad: Scooter owners are much less likely to perish than motorcycle owners. 
• Most gas-powered scooters release significantly more pollutants than most automobiles.
• The smaller loan sizes may lead to little, if any, profits.
• Not a big market overall.
  

(21 May 2008)

Credit Union homepage promotes Saturday "scooter loan" special (21 May 2008)

Armed with a new national lending capability (note 1), new slogan, "Let's bank on each other," and a window of opportunity to gain ground on the competition (note 2), person-to-person lending pioneer Prosper is preparing new marketing initiatives which include television and radio advertising. Prosper said in its blog Monday that the ads will begin test runs this week. 

The two television spots feature short vignettes of real lenders and borrowers (see screenshot below). Prosper has also posted brief "behind-the-scenes" videos of the borrower and lender meeting while giving gushing testimonials about the service.

There is also a series of seven 30-second radio spots:

• Meet the lender/borrower spots featuring same pairs as the TV ads (2 ads)
• A young student borrowing from Prosper
• A small business person borrowing from Prosper
• A youngish woman borrowing from Prosper for debt consolidation
• A man borrowing from Prosper for home improvement
• A man borrowing from Prosper for a car loan

Preview the ads here (note 3).

Analysis
It will be interesting to see how the advertising is received. From a branding perspective, I think the ads are extremely effective, doing a good job communicating the benefits to both borrowers and lenders. And Prosper positions itself as a smart bank alternative without getting overly negative (e.g., Lending Tree's $100-million "When banks compete" campaign in the late 1990s) or going so over the top (think WaMu) that you can't recall who made the ad (see previous coverage here). 

One thing I'm sure of: Prosper did a great job showcasing the ads on their website, including the very Web 2.0 touch of posting "behind-the-scenes" videos of the TV commercials. 

Notes:

1. Prosper recently changed its process so all loans are originated by Utah industrial bank, WebBank, then resold to the winning Prosper bidders. The TV ad above even carries the fine print that, "Prosper lenders are loan purchasers."

2. Prosper's primary competitor, LendingClub, is currently operating at limited capacity as it seeks additional licensing/authority from regulatory bodies (coverage here). It, too, uses WebBank to originate all loans made through its platform. The latest entrant, Loanio, debuted its services at our April 29 Finovate Startup conference, but is still a few weeks away from a launch. A number of other P2P startups are in various stages of development with launches expected within the next 12 to 18 months. 

3. For more information on the P2P lending market, see our Online Banking Report: Person-to-person Lending 2.0 

Community Lend reached out to bloggers last week to get the launch buzz started (note 1). The site appears ready to go, all it needs is a loan/borrow signup form in place the email notification box in the center of the homepage (below).

From the look of it, the startup has a good design team. It's direct and to the point in the main section while staying fresh with blog posts, selected news stories, and press releases displayed in widget-like boxes along the bottom of the screen (below the fold on my laptop). But I'll reserve judgement until I see the actual lending and borrowing screens when they become available.

The most interesting part of the pre-release info was the list of official advisors to the startup which included Virgin Money (US) CEO Asheesh Advani as well as the Phil Hopper, CEO of Australian P2P lender, iGrin. It will be interesting to see if those relationships turn into future Canadian partnerships.

For more information on P2P lending, see our recent Online Banking Report (#148/149) and catch Prosper and Loanio on stage at our FinovateStartup April 29 in San Francisco.

__________________________________________________

*Technically, IOU Central was first in the Canadian market. However, a few weeks after launch it was forced to shut down as it works to satisfy regulators (coverage here). Therefore, the honor looks like it will go to CommunityLend.

CommunityLend pre-launch homepage (17 April 2008)

 
Note:

1. Blogger outreach is the modern day equivalent to the press conference. Dave Colman's emails to bloggers resulted in five blog posts that same day, and that's without any news other than its UNOPENED site had been remodeled. Think back to the last time you revamped your website, did you get five press mentions?  

Last week's post on P2P lending traffic prompted several comments on how worthless website traffic is as a metric, especially when the two major players make their loan-production numbers public. With that in mind, I present the Q1 total loan production for Lending Club and Prosper.

While Prosper still had twice the overall loan volume of Lending Club in Q1 ($21 vs. $10 million), Lending Club is closing the gap in the prime/near-prime market (FICO 640+) originating two-thirds the volume of Prosper in March ($4 vs. $6 million). But if you take into account Lending Club's more stringent debt-to-income requirements (max 30%), the newcomer actually surpassed Prosper in these lower-risk loans ($4.1 vs. $3.7 million in March).  

While the two-horse race is an interesting sidelight, the more important statistic is industry growth. In Q1, Prosper and Lending Club combined for more than $30 million in originations, up $10.7 million (55%) compared to about $20 million in Q1 2007. Only $3.4 million of the Q1 total (17%) was subprime, compared to $7.0 million (36%) a year ago.

Loan originations doubled in the prime/near prime (Prosper grades AA to C and all of Lending Club) ending the quarter at just under $27 million.

Why so much attention to a tiny sliver of the $2.5 trillion U.S. consumer loan market? It's new. It's different. It's social. And it's an experiment in online finance we get to watch in real time thanks to the transparency of the lenders. For more info on the market, see our recent Online Banking Report on P2P lending.

Q1 2008 Loan Volume: Prosper vs. Lending Club
in $ millions (U.S. only)

Source: Online Banking Report compilation of company data, 2 April 2008
*Loans made to Prosper grade AA through C borrowers (FICO 640+)
**Loans made to Prosper grade AA through C borrowers with debt-to-income (DTI) less than 30% 
***Lending Club only makes loans primarily to the "prime/low DTI" segment (FICO 640+, DTI <30%)

Note:
1. These prime/near prime/subprime distinctions can help financial institutions compare their prices to the marketplace rates.

Talk about turning the tables. Now individuals are lending to businesses. Has the credit crunch gotten to that level?

Small business lending, or the lack thereof, was highlighted in today's Wall Street Journal in a column by Jane Kim that ran on the front page of the Personal Journal section, Where Either a Borrower or Lender Can Be: Small-Business Owners Turn to Online Networks for Funds as Banks Tighten Credit (here).

The article includes three examples of small business owners, frustrated with the stinginess of bank lending departments, that turned to person-to-person exchanges for loans. Apparently, all three had excellent credit since Mr. Walsh was able to borrow $22,500 at 10.25% and Mr. Kelley $18,500 at 10.97%, both from Prosper. And Mr. Kalempa received $15,000 from LendingClub for 9.6%. You don't get funded for loans of that size unless your credit is good and your story even better.

Small business owners may not have time to shop for credit, but they do network. And given how unique positive borrowing experience are, these P2P success stories will be told and re-told dozens of times. The credit-crunch induced conservatism of the banking community, especially towards growing businesses, could be an HUGE opportunity for the new P2P marketplaces.

It could be the crossing-the-chasm market niche that the loan exchanges need in order to gain traction and profitability as they position themselves for the mainstream consumer marketplace. The credit markets are huge and complicated and it's impossible to predict how this plays out. But if I worked in small business banking product management, I'd circulate this story to senior management and start working on my response to the P2P lending threat. 

In what it hopes is a temporary set-back, Canada's IOU Central has stopped taking new loan applications or accepting bids on existing ones. The company was launched two weeks ago (coverage here). Evidently, a bit more work needs to be done before the site is fully blessed by the Canadian government.

This might explain why IOU Central seemingly came out of nowhere to become the first Canadian P2P lender. We'll let you know what we hear from the founders. Thanks to Wiseclerk, via Prosper Lending Review, for the tip.

IOU Central homepage (29 Feb 2008)

Explanation of suspension (29 Feb 2008, 4 PM Pacific)

Two years ago, computerized personal financial management was a two-horse race: Intuit's Quicken vs. Microsoft Money. Both full-featured. Both relatively easy to use. But both were packaged software apps, clearly not the future of consumer computing.

Fast forward to 2008: We now have two dozen startups, several banks, and other financial stalwarts, offering online personal finance of every size and shape (see Online Banking Report 142/143 and 131/132).

The latest entrant: Quicken Loans, which launched an open beta of Quizzle, an online budget and personal finance portal that features home values, mortgage advice, and free credit reports/scores from Experian (see note 1).

Quizzle also calculates what it calls your Quizzle score based on your credit score, home value, savings, debt, and household income/expenses (see second screenshot, below). Debt payments are imported from credit report data, but users can edit the information or add other items to improve the results.

Quizzle also provides home-value estimates calculated from public records, but in my case, it's no Zillow, and listed a home value that was significantly wrong (see note 1).  But it's simple to edit the number with your own estimate. Quicken Loans should consider tapping Zillow's API to provide a second opinion.

The sign-up process
Signup is simple with users providing name, address, birth date, email address, income, and home-purchase date. Email address is verified with a message that must be confirmed. Then identity is verified online using data pulled from the Experian credit bureau.

This is the same procedure used by every online credit-report provider with one huge exception. Quicken Loans DOES NOT REQUIRE A SOCIAL SECURITY NUMBER, a huge usability and privacy gain. The company is allowing credit-report access based on a name/address/birth date match. That's a welcome improvement for the user.

Analysis
There are a few rough edges in the tool. The home-equity portion is not well explained. In my example, my home value was shown to be about $50,000 more than the loan balance. However, in the equity portion of the tool, it showed that my home equity to be zero. Evidently, the site uses an 80% LTV criteria to calculate the amount of home equity available to lend against. While that's a perfectly reasonable assumption in today's credit environment, it should be spelled out in detail.

But overall, it's a great tool. The really free credit report and score alone are enough of a payback to gain consumer usage. The rest of the Quizzle score is less useful, but still interesting. And seeing it all in one place is fantastic. It will be interesting to see how Quicken Loans pulls me back to the site in the future.

Quizzle is off to a great start, and I look forward to seeing more companies, including banks, credit unions, and card issuers, integrate credit scores/reports into their online offerings (see note 2).

Overall scores:
    Look and feel (user interface) ==> A
    Credit information ==> A+
    Other tools ==> B
 

Quizzle home (18 Feb. 2008, prior to entering a ZIP code)

Overview pages showing the makeup of the overall Quizzle score
(upper right)

Note:

1. Quizzle uses a 900-point scale for credit scores, padding 50 points to everyone's score compared to Fair Isaac's FICO that tops out at 850. This makes you feel a little better about your score. No doubt, credit score inflation will continue, with someone using a 1,000-point scale in the near future. 

2. WaMu has provided free credit scores to credit card customers for several years.

We were surprised to learn today that someone beat Community Lend to market, becoming Canada's first person-to-person lending exchange (previous coverage here). The Montreal-based startup, IOU Central, says they've been working on the company for a year.

The company merged with an established Danish person-to-person lender FairRates <fairrates.dk>, whose co-founders, Robert Bialek and Arkadiusz Hajduk, are now on the IOU Central team.

Much like its U.S. counterparts, Prosper and LendingClub, IOU Central facilitates installment loans of up to $25,000 CDN, with terms of up to 3 years.

The company's homepage includes a YouTube video of its President, Phil Marleau, giving an 80-second overview of the company. Even more important, they have a testimonial from a former TD Bank EVP to the right of the video (see screenshot below).

The company issued a news release today (here) that was picked up by several blogs (here and here). For more info on the market for P2P loan, and what financial institutions should do about it, see our recent Online Banking Report (here).

Three new P2P lenders are known to be preparing to go to market in 2008:

• GlobeFunder: Opened for loan applications earlier this month, but is still not accepting individual lenders at this point. I tried testing the loan application, but it would not accept requests from Washington state.
  
• Fynanz is the latest P2P lender to surface. According to the Prosper Lending Review blog, the company is gearing up to enter the U.S. market specializing in student loans, a space that Virgin Money USA has said it will enter later this year. Fynanz founder is Chirag Chaman, although he is not listed on the company's website.
  
• Loanio: Has been saying "coming in January" for the past several months.
  

In addition, I know of three others in formation and I'm sure there are dozens of others circulating business plans. With 100+ million potential customers in the United States, there is probably room for dozens to co-exist, although only a few will ever become household names.

For a complete analysis of the market see our most recent Online Banking Report (here).  

As noted in our recent research report on the P2P lending market (here), the exchanges need to boost revenues to remain viable. Even with scale, a 1% borrower fee and 1% servicing fee just don't provide enough revenue with the relatively small loan sizes currently being funded.

For example, using Prosper's previous pricing on a typical $7,000 loan, about $130 would be earned in the first year, then another $50 for the remaining two years of the loan (see note 1), for a maximum of $230 in lifetime revenues per loan.

So until loan sizes increase dramatically as secured notes become more common, Prosper has raised its prices for the core portion of its loan demand, the alt-prime and subprime portion. The company left its superprime, class AA price alone because it competes with banks and credit unions for this type of borrower.  

As you can see from the table below, most loan-origination fees increased by 1 point, although C and D loans were increased 2 points. Looking at the company's mix of business during the first half of 2007, the new pricing would have doubled its loan-origination revenue from about $500,000 to just over $1 million. The weighted average fee under the prior pricing was 1.2%, compared to 2.4% under the new formula.

Here's the new price plan effective Jan 4, 2008, as announced in the Prosper blog (here):

Type   New Price   Previous  Change  Avg Loan*  Avg Loan Fee* 
Prime  
  AA           1%               1%             none             $9,000            $90
  A             2%               1%            +1 point         $10,300         $210
Near Prime
  B             2%                1%           +1 point         $9,800          $200
  C             3%                1%           +2 points       $8,400           $250
  D             3%                1%           +2 points       $6,500           $195
Sub-prime
  E             3%                2%            +1 point        $4,500          $135
  HR           3%                2%            +1 point        $3,000           $90

Weighted
  Average*** 2.4%          1.2%

*Average loan size during the first half of 2007 per company
**Loan-origination fee deducted from proceeds of loan; there is no fee if the loan does not get funded
***Using the loan mix from the first half of 2007

Note:
1. It depends how the servicing fee is calculated. At Prosper, it's calculated on the outstanding loan balance which for a $7,000 loan averages approximately $6,000 in year 1, $3,750 in year 2 and $1,250 in year 3.

In researching our latest report on P2P lending, we visited the websites of Zopa's six credit union partners to see how they were promoting, and explaining, the relatively complicated new product. Overall, they gave Zopa surprising prominence. Five of the six mention it on their homepages, with three of those running large banners, usually in rotation with other offers (see list below as observed on Dec. 6). USA Federal Credit Union is the lone holdout, with no mention of Zopa on its website so far.

Analysis
I understand why the credit unions are featuring their Zopa relationship. It's new, it's different, it's exciting and the helping-others message fits right in with the holiday spirit. However, for the most part, the program is woefully under-explained when clicking through the banners. I have to believe the most common member reaction to seeing the Zopa product info is, "Huh?"

It must lead to some interesting conversations on the phone and in the branch. Some of which may result in sales, so it's not all bad. But I don't think the ultimate purpose of partnering with Zopa is to confuse members to the extent that they call. There are easier ways to do that.

Examples
First Tech CU has two images on its homepage, both emphasizing Zopa's core message of helping. And the educational aspect is helpful (see screenshot below).

Addison Avenue CU takes a light-hearted approach on its homepage ad, saying:

Introducing Zopa (And no, it isn't a new energy drink)

And Addison Avenue does the best job explaining the service, although I still think it raises more questions than it answers.  

For much of the past four or five weeks I've been researching and testing person-to-person lending sites. I've become a lender and have gone through the borrowing process at all three major U.S. P2P lending exchanges: Prosper, Zopa, and Lending Club. Plus I set up friends and family with loans at Virgin Money USA and LoanBack.

It was all part of the research process for the latest Online Banking Report entitled, Person-to-Person Lending 2.0: Disruptive service or market niche? That report is now available at our main website (here).*  

I had originally intended on publishing it in early December. But as I was trying to wrap things up, Zopa launched its new U.S unit. So I stopped the presses and added an analysis of its unique model. Then as I was finishing that, Lending Club made a significant change last week, becoming a national lender instead of state-sanctioned one. That too is now in the report. 

Here's a summary of the major fourth quarter activity in the person-to-person lending sector:

• Oct. 2: Prosper overhauled a number of its lending tools, which were announced at our FINOVATE conference Oct. 2 (video here) 
• Oct. 6: Virgin Money (formerly CircleLending) launched its revamped friends-and-family service with a splashy debut in Boston with Virgin founder Richard Branson leading the parade (coverage here)
• Dec. 3: Zopa launched its U.S. version, an entirely new way of looking at the P2P space (coverage here)
• Dec. 13: Lending Club went national in a unique partnership with WebBank

________________________________________________

*Subscribers may download the report free of charge.
Others may purchase it as an individual report.

Just two days after its semi-public beta, Zopa US opened for business late yesterday. The announcement was in the Zopa US blog (here) and emailed to its house list this morning. See Sunday's NetBanker post (here) for our initial impression of the service.

Below is a screenshot from Day 1, forever memorializing Zopa employee Scott, as the first (and so far, only) Zopa borrower. And since all Zopa lenders are required to help at least one borrower, Scott's payments on his $1,000 9.9% loan have been covered for the first year by the company's first 13 CD depositors.

Zopa US opened a private beta Saturday morning, emailing selected customers that had previously signed onto its mailing list. Both of our listed email addresses received invites.

We'll look closer at the new service in our upcoming Online Banking Report on P2P lending, but what stands out is the business model: part P2P lender, part deposit-taking financial institutions, part charitable organization, part broker, and part lead-generation site. I'm not positive you can be all of those things at once, but it will be fascinating to see if Zopa and its partner credit unions can pull it off.

How it works
To understand how the Zopa US system works, you must first realize that all loans and all deposits are held at the six partner credit unions (see list below). So in that way, Zopa is a pure lead-generation play.

Zopa "investors" put their money in fixed-rate, 1-year certificates of deposits held by a credit union partner. Borrowers take out 5-year fixed-rate personal loans, again from a credit union partner. This part is pure depository financial institution, with Zopa as a broker. 

Finally, the P2P/social finance aspect comes into play with the requirement that all depositors must choose to "help" at least one borrower by reducing the borrower's loan payment. The depositor has the choice of accepting the highest rate of interest, currently 5.1%, and making a token donation, or sharply reducing the APY on the Zopa CD in order to provide more financial assistance to Zopa borrowers. Depositors select who they want to help from the listed loans. An obvious scenario would be a grandparent investing a substantial sum into low-interest Zopa CDs, so that a child/grandchild could take out a 5-year loan to help with a down payment on a house. But depositors may also help a stranger whose story they find appealing. 

Our preliminary take
Zopa has removed much of the uncertainty from the P2P lending process. But by eliminating the risk, they've also reduced available returns. Marketing Director Wade Lagrone, with whom I spoke Saturday afternoon (as Zopa engineers hammered away on the final tests), believes that U.S. investors overwhelmingly prefer low-risk, fixed-income investments and will prefer this P2P model.

I'm not convinced yet. It seems like a somewhat convoluted path to buy a simple CD. First, you must set your deposit rate, choose one or more borrowers to help, and finally join one of the six credit unions. The website makes the process relatively straightforward, but it's not the same as simply dropping a few grand into an online bank. 

On the other hand, the ability to donate all or part of your deposit's interest-yield could appeal to certain investors, especially the well-heeled looking to help family members obtain below-market-rate loans for defined purposes (home purchase, education, business expansion, etc). And eliminating lender risk removes the huge chore of keeping lenders happy and informed about their book of loans. 

Another potential problem is lack of transparency for borrowers. To obtain a Zopa loan, prospective borrowers fill out a nonbinding "loan quote." Not until after this application is made, and a credit inquiry logged, do borrowers find out if they will receive the lowest rate of 8.75% or the highest of 16.99%. And borrowers have no idea whether they will receive "help" from investors to lower their payment, and effectively reduce the APR of the loan.

Screenshot: Zopa CD setup (1 Dec 2007)
Zopa investors (aka lenders) select the rate of return for their 1-year CD and then choose a borrower to help by offsetting a portion of their Zopa loan payment.

 
Appendix: Credit Union Partners
The six U.S. credit union partners of Zopa US:

• Addison Avenue Federal Credit Union
• Affinity Plus Federal Credit Union
• FirstTech Credit Union
• FORUM Credit Union
• Provident Credit Union
• USA Federal Credit Union

Less that two years after the first P2P launched in the U.S., it looks like we'll soon have at least five companies chasing this new market, six if you include Virgin Money.

The most well known is Zopa, the person-to-person lending pioneer which opened in the UK in 2005 and now has nearly 200,000 members. Its long-awaited U.S. launch is scheduled for next week. I'll be speaking with marketing director Wade Lagrone tomorrow, but Jane Kim broke the news in today's Wall Street Journal (here). The market forecast in the article, predicting as much as $9 billion in P2P originations by 2017, is from our upcoming Online Banking Report on P2P lending (note 1). 

Zopa is working with six credit unions, including FORUM Credit Union, to match lenders with borrowers. And unlike other P2P lenders, Zopa's is guaranteeing the lender's principal. That will reduce potential returns, but make participation more like buying a CD from a bank. So, it will be interesting to see how the company differentiates its offering from traditional bank/credit union fare. We'll have more when the site opens to the public next week.

We also hear that GlobeFunder and Loanio are about to launch, possibly yet this year. Loanio has not revealed its strategy, but GlobeFunder is positioning itself as a microlender in the same vein as the Nobel prize-winning approach of Grameen Bank. For more info, read the GlobeFunder blog.  

All three will be included in our upcoming Online Banking Report (note 1). We'll also look at Prosper, Lending Club, LoanBack, and Virgin Money (formerly Circle Lending).

Note:

1. Online Banking Report subscribers will have access to the report as soon as it is published on Dec. 8. Nonsubscribers can put their name on the announcement list here and receive a prepublication discount code to save 10%. Please mention "P2P report" in the subject line.

Jeff Bezos may have grabbed the cover of Newsweek for the latest high-tech gadget, the Amazon Kindle, but that's old hat for him. The bigger news in online banking circles is Richard Branson gracing the cover of the December/January issue of Fortune Small Business (click on the inset to read the magazine online). His smiling mug is shown tossing hundred-dollar bills out of a teller cage. 

The reason: Virgin Money USA (previously Circle Lending) is one of six new products/services the magazine included in its annual "The Next Little Thing for 2008" series. To be part of the article, the innovation must be coming from a "small business," although I'm not sure Virgin qualifies as small anymore.

The 1.5 page story discusses the Business Builder "friends and family" loans that Virgin will administer for a one-time cost of $199 to $299 plus $9 per payment. The company says it plans to offer a business loan product later in 2008 or 2009 that will match outside money to the original friends and family loan, provided it's been paid on time. 

Could 2008 be the year of person-to-person lending? Given Branson's track record, there's a good chance the relatively unknown service will take off next year.   

Note:

1. According to my recollection. 

Finally, we have someone using a blog to have a little fun (note 1). Carolina Postal Credit Union's blog, I Love My Hoopty, is using humor and user-generated content to drum up car loan business. Through its website and blog, the CU asks users to write about and post pictures of their first cars, and the more rickety the better. I wasn't familiar with the term, but apparently in this context "hoopty" means an old rickety car. 

The hoopty theme is also used on the CU's homepage to promote vehicle loans (see second screenshot below). 

Analysis
Since I'm twice the age of the target market here, it doesn't matter that the blog's content doesn't resonate with me. I LOVE the creativity and I'll bet the younger, Colbert-Report-watching crowd thinks it's pretty cool that a bank/credit union would do something this irreverent. 

Unfortunately, the follow-through doesn't look nearly as good as the creative. I first noticed this blog a few months ago, and until last week, it hadn't been updated since July. It doesn't really make sense to have a blog that's only updated a few times per year. If the CU doesn't have the resources to add something at least once per month, it should pull the blog down and incorporate the content into its main website.

Also, I question the prominence of the campaign on the CPCU homepage. Is that really the main message you want displayed to your members for several months? Even if does fit the overall brand strategy, the CU should change the banner ad's hyperlink. Currently, it goes to the hoopty blog (after a short detour to acknowledge that they are leaving the CU's website), which is not an effective landing page. The CU should first take users to a dedicated lending page that explains loan options and prices and invites members to apply.

Carolina Postal Credit Union blog (20 Nov 2007) 

CPCU homepage (20 Nov 2007) 

Note:

1. UMB used a similar approach in its My Ugly Room contest a year ago. 

Ever since Virgin bought CircleLending for $50 million earlier this year (previous coverage here), I've been looking forward to its launch. We hoped they might launch at our FINOVATE conference two weeks ago, but we lost out to the Mortgage Banker's Association's 94th Annual Conference in Boston, where Sir Richard Branson delivered the opening keynote a few hours ago. 

According to today's NY Times, Sir Richard himself will hand out red "dollars" today in Boston's Copley Square while mere mortals will be doing the same in Manhattan. 

We now have answers to several questions about the new venture:

1. Will Circle Lending's product, person-to-person loan administration and servicing, live on?
   Answer: Yes, in fact it looks identical, but with much more marketing pizzazz.
2. Will the Circle Lending product be extended into a person-to-person loan marketplace like Prosper and LendingClub?
   Answer: Not yet, but I still expect that to happen.
3. Will Virgin Money use person-to-person lending as an entry point for a full line of financial services?
   Answer: Not yet, but there has to be more coming.  
4. Will Virgin Money bring the hip U.K. direct-banking vibe to the United States?
   Answer: Yes, the website is very progressive by U.S. banking standards (see screenshot below). I haven't seen any other media efforts yet. However, the current homepage design is marred by an annoying Flash display that is a real turnoff even on a broadband connection. Once you get off the homepage, the rest of the website is excellent.

According to today's Boston Globe, the company currently employs 30 in Waltham, Mass., a headcount that will double the over the next year as it introduces more services. The only new service disclosed so far is student loans, an obvious fit with the friends and family real estate, business, and personal loans offered today. We'll be following Virgin Money USA closely and will include an in-depth analysis in an upcoming Online Banking Report on person-to-person lending (2006 report is here).

Virgin Money USA homepage (15 Oct 2007)

 Goodbye page at CircleLending.com (15 Oct 2007)

One of the great promises of the Internet is a better shopping experience. While most retail products have indeed become easier to shop for—think automobiles or vintage postcards—the financial services experience is still a mixed bag.

It's certainly much easier to compare savings rates online, a capability that has fueled growth at ING Direct and others. But loans are still much harder to shop for. The lead-generation sites, such as BankRate, GetSmart, LendingTree and Interest.com, have made it easier to contact multiple lenders, but in most cases, the customers still has to select a single lender, complete an application, and hope that there are no nasty surprises at closing in the form of extra fees or higher rates.

However, Mortgagebot is about to change all that and hopefully usher in a new era of transparency in mortgage pricing, with the launch of Mortgage Marvel, making its debut at our FINOVATE conference tomorrow.

How it works
Mortgage Marvel is a destination site where mortgage shoppers can search and find actual rate and fee information for participating lenders, usually at a nearby bank or credit union. And there is no personal info required, just the loan amount, property value, and zipcode. If the shopper finds what they want, a simple click on the APPLY button sends them directly to the lender's application to lock in the rate and fees listed (see screenshot below).

The key to making the marketplace work is having a wide variety of participating lenders with recognizable brand names at the local level. Normally, that's extremely difficult. But Mortgagebot, with more than 700 bank and credit union clients on its mortgage platform, can plug its existing client base into the exchange with ZERO systems integration (note 1). Currently, there are 250 lenders on the system.

And Mortgagebot clients have little to lose by placing themselves into the exchange which for the most part, only charges fees when mortgages are originated through the marketplace.

Right now, all mortgage lenders are displayed equally in order of lowest APR. But in the future, the company may offer preferred placement for additional fees.

Summary
For the first time, U.S. consumers can easily shop and compare the total price for mortgages from competing lenders. And thanks to the Internet, they can complete an application in less time than it takes to drive to the nearest loan office.

Note:

1. Currently, only Mortgagebot mortgage-platform customers are allowed to participate in the network.

Much of what we cover at NetBanker falls under the traditional "marketing 4 Ps": product, place, price and package. But, there are also hundreds of important things going on behind the scenes that can make or break a company's Web presence. We are lucky to feature two important tools at our upcoming FINOVATE conference Oct. 2 in NYC.

Online Account Opening from Andera
During the past two years, few areas have received more attention within banks and credit unions than the tricky business of online account opening. It's an absolutely critical element of turning a profit online but also an area rife with risk, error, and the potential for turning away potential new business. We are pleased to have Andera on stage, a company we are seeing more and more of as we drill down through the offerings of major credit unions. The company is a major force in online account opening with more than 125 clients including: Alliant Credit Union, Associated Banc-Corp, General Mills FCU, American First FCU, Toyota Federal Credit Union, First Mid-Illinois Bank & Trust, Energy First Credit Union, CSCEFCU, Service Credit Union, and Bank Rhode Island. Its recent alliance with Yodlee (press release here) opens up even more opportunities. We look forward to seeing its account-opening process in action at FINOVATE.

Web-based Collections from Online Resources
I first met Online Resources in 1992, when its national sales rep visited Seattle to show us their cool smartphone-based banking service. I was new in my R&D assignment looking at alternative delivery methods for US Bancorp, and I really thought there would be a market for this hybrid call center/online banking solution. Of course, that was before the Web burst on the scene three years later. Luckily, Online Resources didn't have all its eggs in the telephony-based basket and adapted quickly to become a leader in Internet banking and electronic payments. The company is a two-time OBR Best of the Web winner, in 2003 once for its novel MoneyHQ premium online banking service and via acquisition of InCurrent which, in 1998, took home one of our first awards for its futuristic online credit card management service. 

At FINOVATE, Online Resources will be showing its Virtual Collection Agent. I have not yet seen it in action, but from the briefing it sounds like a smart way to improve actual collection yields while maintaining the customer relationship during a very tricky time. 

As we enter the final week of summer, we will begin showcasing the companies that will be DEMOing new products and services at our inaugural conference FINOVATE 2007. See here for the complete lineup.

Person-to-person lending
P2P lending has grabbed headlines around the world since it launched in the the United Kingdom in March 2005 by Zopa. We are pleased to have on the FINOVATE agenda the two leading U.S. providers: Prosper, the brain-child of E-Loan founder Chris Larsen, and Lending Club, which launched its exchange on the Facebook platform just three months ago.

Both companies received significant cash infusions this summer and we're looking forward to seeing what enhancements the lenders will showcase at FINOVATE 2007.

Lending Club received a significant $10.3 million first round last week (blog entry here). Since the company's launch of Facebook three months ago today, it has closed 134 loans averaging approximately $5,600 for a total of $750,000 in originations.   

In June, Prosper, the winner of an OBR Best of the Web award last year (note 1), secured a $20 million third round bringing total funding to $40 million (previous post here). The company now has more than 380,000 members and has funded nearly 14,000 loans totally $80 million. Since inception, Prosper has posted more than 168,000 loan listings from more than 75,000 borrowers.  

Mortgage lending
Here's a bit of trivia for Monday afternoon (or Tuesday morning if you read NetBanker via email): What was the first profitable banking website? And no, this is not a trick question with the answer being "none" or "no one knows" (see note 1).

The answer: Bank of America in 1994, or at least that's what an exec told the audience at the first conference on Internet banking held in the summer of 1995. Practically before anyone outside of academia or Silicon Valley had heard of the Web, BofA was using it to produce mortgage leads in the lucrative California market. I can clearly remember the woman who ran BofA's website saying, "mortgage leads are already more than covering the bank's costs (of its website)." Of course, that was in the days when a website cost less than a couple billboards.   

We've been writing about online mortgage lending since that first 1995 conference. One of our favorite lending platforms, winner of the second mortgage-related OBR Best of the Web award in 2001, is MortgageBot. The company was also named to last year's INC 500 list of the nation's fastest growing private companies producing a 560% revenue increase during the YE 2002 through YE 2005 period. 

At FINOVATE 2007, MortgageBot will take the stage to show a radical new approach to mortgage shopping that its been testing for some time now. We can't release the details yet, but we were luck enough to get a sneak peek on Friday and were very impressed!

Note:

1. Our sister publication, Online Banking Report (OBR), typically names 6 or 7 companies as "Best of the Web" during the course of each year. It is earned by launching a product or service that significantly "raises the bar" in online delivery of retail banking and lending products.

I think I understand Zopa's delayed U.S. launch a bit better now. Apparently, the company is looking to expand not just in the U.S. but in Asia as well (along with the previously announced Italian licensee).

Here's a quote from a recent blog entry

"...we have had over 100 different teams in over 40 countries get in touch with with us, looking to launch a version of Zopa locally. These have ranged in distance from France to New Zealand, and included countries as diverse as Brazil, Mexico, Canada, India, Japan, Korea, Taiwan, Australia, South Africa, Ghana, Turkey, Spain, Germany, The Netherlands, Poland, Slovakia, Lithuania and Romania."

We've seen that interest at Online Banking Report as well. Our Feb. 2006 report on Prosper and P2P lending was our best selling issue of all time. We're planning an update later this year, hopefully with an analysis of Zopa's U.S. version, which the company still says is coming this year.  

In many ways, hybrid vehicles are the perfect antidote for guilt about our 21st century high-consumption lifestyle. Buy a Prius, and instantly feel better coasting around the city on self-generated battery power. Yet you still get to motor about in a relatively large, well-appointed and air-conditioned steel box (note 1).  

That's why politicians have jumped on this bandwagon in droves. And why it makes a great marketing statement to support energy-saving and/or low-emission alternatives with loan discounts. Not only does it position you as caring about the larger environment, there is a very real environmental education benefit to the efforts.

The most recent example—Star One Credit Union <starone.org>, a $3 billion (assets), 71,000 member CU based in Sunnyvale, California—has a link on its homepage to its hybrid offer. Customers financing a new or used hybrid vehicle save 0.25% on their loan rate. On a $20,000 5-year loan, $139 is saved, enough to fill the tank three, maybe four times. The offer is spelled out here (screenshot below).  

Other financial institutions offering hybrid car loans:

• UCB Bank (Miami, FL): no payments for 3 months offer here
• Deedham Savings (Deedham, MA): offer here
• Sound Credit Union (Tacoma, WA): 0.50% discount offer here
• Tech CU (San Jose, CA): 0.25% discount offer here
• Vancity (Vancouver, BC, Canada): Prime rate for low-emission vehicles here
  

Note:

(1) I'm not trying to be cynical here. As a former engineer, I think hybrid technology is fantastic. Using waste energy to fuel the car is both elegant and efficient, and I look forward to driving one soon.

Looking for an eye-catching grand prize for your fall sweepstakes? You can't beat the new Smart fortwo car hitting to hit our shores in six months. According to today's Wall Street Journal (here), more than 20,000 (make that 20,001) have already plopped down $99 for a "reservation" for the Smart fortwo (here).

Not only is this a sexy sweeps prize, it has green appeal as a less resource-intensive vehicle compared to larger gas cars. While hybrids will still be more fuel efficient for in-city driving, the $12,000 base price makes it much more affordable that the $20,000+ Prius.

With the perfect storm of higher gas prices, the rebirth of environmental awareness, and America's obsession with cars, the Smart micro is almost guaranteed to be a hit, at least in urban markets. Anyone who's been in Europe in the last 10 years knows how popular these cars already are.

Financial Institution Opportunities
There's hundreds of ways to use a coveted, and potentially rationed, consumer product in your marketing efforts. For example:

• At $10,000 less than the Mini Cooper, this is the cost-conscious choice for a sweeps grand prize
• Use the car to reinforce your smart banking choices such as paperless banking, auto bill pay, and so forth
• Smart loans that include a preapproved auto loan along with a reservation for the car
• Use the car's "CO 2 champion status" (see inset) to reinforce your green banking efforts
• Paint the car with your brand and provide smart rides around town...include a form on your website for requesting a ride; for extra credit offer text message reservations
• Work with Smart USA dealers in your area to offer joint promotions

And you already know we have a weakness for the car; so as an added benefit, any banking promotion involving it has a great chance of making it to the pages of Netbanker. Just give me a heads-up here. 

Just as the dust was clearing from the latest social lending launch, Lending Club, which opened on Facebook exactly one week ago (coverage here), we received word of another P2P lending exchange Loanio. The founder is revealing little about the new company at this point, but you can see from its logo and tagline, People Lending to People, what market it has its eyes on. 

Loanio's one-page website allows you to enter your email address for future notifications. We'll be covering all six North American P2P lenders (see note) in an upcoming update to last year's Online Banking Report on the market for P2P loans. (Hint: we will publish a longer-term forecast which will show more robust opportunities past the 2006-2011 period we looked at in our last report.)  

Note:

Right now the North American market consists of five pure P2P lenders:

• Prosper (US, launched Feb. 2006)
• Zopa (UK, but coming to the US in 2007)
• Lending Club (US, launched 25 May, 2007)
• Community Lend (Canada, not launched)
• Loanio (US, not launched)

Plus, P2P loan servicer:

• CircleLending (now owned by Virgin USA, launched 2001)

Just as we are putting the finishing touches on our latest Online Banking Report, which looks at the intersection of personal finance and social networks, a new person-to-person lender launches. And how do they plan to gain traction? Through tight integration with Facebook, the second-largest social network. So we are holding the presses, and adding this important new development to our upcoming report.

We'll have much more on it later, but if you are curious now, login to Facebook and check out Lending Club (the easiest way is to login via the link at the top of the Lending Club homepage). Or read Colin Henderson's great analysis here.  

Last year, Facebook developers created a proof-of-concept personal finance app, originally called Facebank, then changed to MoochSpot (see previous coverage here). That effort was designed to show how third parties could leverage the Facebook API to create new services. It didn't take long for someone to take the bait. Within a few weeks, BillMonk created an interface to Facebook to support their expensing tracking service, now owned by Obopay. Buxfer also supports login via Facebook's username/password (post here), but does not link into the social network as yet.

But Lending Club is the first to leverage the Facebook interface to support actual financial transactions, in this case lending/borrowing. The company is modeled after Prosper. Lending Club timed its launch to coincide with the Facebook developer's meeting and launch of Facebook Platform.

We'll be testing it during the next few days and will report back on whether its a challenge to mainstream lending, or merely blog fodder. Given the rising power of social networks, my guess is the former. 

LendingClub homepage from outside Facebook

LendingClub homepage from inside Facebook

Twelve years ago I spoke at the very first for-profit conference on online banking. It was held in San Francisco and put on by IQPC. One of the handful of bankers taking the stage was the marketing director from a small Massachusetts-based bank, Salem Five Savings Bank. 

In 1995, Salem Five was one of the first 100 banks in the world to launch a website and continued to pioneer website functions during the last century, even launching a dedicated direct bank <directbanking.com> which has now been rolled back into the parent.

One early innovation was a mortgage lead generation tool consisting of an interactive $100-off closing costs coupon. It was still in use several years later when we named it an Online Banking Report Best of the Web winner in 1997 (see circa 1997 screenshot above, and the Online Banking Report article archived here).

It was "interactive" because in order to print it, the customer was required to first enter  their name and phone number into the on-screen coupon. It was a great promotional idea, especially for 1995. And I still remember receiving a phone call the Saturday morning after I tested the coupon from the cheery Boston-based loan agent, wondering if I was moving to their area and interested in a mortgage. To this day, one of the best follow-ups I've experienced to an online lead.

Mobile Banking Launch
In April, Salem Five took another pioneering step, becoming one of the first community banks pushing mobile banking (here). However, its mShift-powered service is a WAP solution, not likely to be widely adopted in its current form. Last week another mShift client, Cardinal Bank, launched a similar mobile offering (here). 

The bank is making sure its customers know about it with a page-dominating banner in heavy rotation on its homepage. Note: Salem Five uses both "wireless" and "mobile" to describe the service.

Salem Five homepage (8 May 2007)

Salem Five mobile banking landing page

For more information on mobile banking see our full report at our sister publication, Online Banking Report (here).

It's quite likely that energy consumption and environmental issues will grow in importance over the remainder of this decade and well into the next one. Financial institutions can play a positive role in promoting environmental causes both by their actions, such as Vancity's pledge to be carbon neutral by 2010, and by offering products that reduce paper consumption, such as eStatements and electronic payments (note 1). 

Seattle's Verity Credit Union <veritycu.com> demonstrates another approach: offering an environmentally friendly premium for home equity applicants. The free compact fluorescent light bulbs are relatively low-cost but have a lasting value to the customer. Finally, the credit union wraps it all up neatly with a tie-in to the upcoming Earth Day (see homepage screenshot below and note 2).

Notes:

1. Because saving paper also saves the bank money, be just a bit careful that you don't come off as overly self-serving when promoting estatement options. Passing on some of the savings to the end-user and/or donating a portion of the savings to a good cause, could ease any criticism you might get.

2. The Earth Day promotion was one of five promotions offered in the main ad box, accessed via a Seattle IP address at 4 PM April 20, 2007.   

I never understood the fight against Wal-Mart's limited-purpose banking charter. I say let it "enjoy" all the benefits of being a bank: CRA statements, regulatory audits, compliance committees, and endless questions about trigger terms and the alphabet soup of regulations. Maybe a banking charter would have distracted it from going ahead and providing pretty much the same thing, but as a non-regulated retail partner instead of a bank.   

Take Kroger for example. They are entering the financial services arena through their retail grocery stores with a menu of financial products outsourced from other companies (link here; also see note 1 and screenshot below).

According to a story Monday in the Lexington (KY) Herald-Leader (here), the grocer began quietly rolling out the services to its 2400 stores in February. Most of the  services are sourced through various Royal Bank of Scotland units.

Other than deposits, it's a full-service offering including:

• Credit card issued by RBS National Bank (a unit of Royal Bank)
• Mortgages through a joint venture with CCO Mortgage (a unit of Royal Bank)
• Home equity loans through Charter Bank (a unit of Royal Bank)
• Gift cards issued by Charter Bank
• Pet insurance through PetFirst Healthcare
• Identity theft services through Trilegiant's PrivacyGuard

Analysis
Kroger's product offering seems reasonable and no doubt will have good visibility in the company's stores. But few of these items are impulse buys and much of the success will hinge on whether the Royal Bank phone sales agents can close the deals. The item that has the best chance of earning its keep: pet insurance, a surprisingly popular search term (see Online Banking Report, #95) and one that can be cross-sold effectively with other pet items. 

Will Kroger Personal Finance be be a success? With low fixed costs, it might turn a nice profit, but probably not nearly as much as the rent that bank clients pay for in-store branches (a core Wal-Mart strategy). But will it impact the industry? Highly unlikely.

I'm sure Wal-Mart will be following this rollout closely. If they find it's working at Kroger, you can bet they'll be doing the same thing within a few years, and probably at much lower prices. So, if you think you've dodged the Wal-Mart Bank bullet, think again. 

Note:

1. The homepage of Kroger's personal finance site <krogerpersonalfinance.com>, is dominated by a pitch for its MasterCard rewards card. The only link so far to the broader offering is the "new products" link hidden on the right leading to the following page <krogerpersonalfinance.com/Max/KPFhome.htm>.

Since publishing the first third-party research on so-called person-to-person, or social, lending, last year (link to report here), we've heard from entrepreneurs around the globe looking to replicate the model in their country. Most are still operating in stealth mode, but one has recently lifted the veil just a bit, with a placeholder website and email announcement list (see screenshot below). It's called CommunityLend, <communitylend.com> and it's targeting the Canadian market.

There's not much detail on CommunityLend site, but the startup already has 50+ Google links, many stemming from a brief mention in a March 9 Finextra article (here). The Founder and President is Michel Garrity, previously VP Marketing & Sales at ePost. Others on the team, at least in advisory roles, are ex-Bank of Montreal exec and BankWatch blogger Colin Henderson and John Philip Green (profile here), currently Director of Engineering at Affinity Labs and Co-Founder of of Savvica and Rapleaf.  Development efforts are spearheaded by a Toronto-based Ruby on Rails shop, Unspace.

It looks like an innovative group and it will be interesting to see how they approach the social lending market. We'll keep you posted as the company moves towards its fall 2007 launch goal.   

Contact: info@communitylend.com

The nascent market of online social or person-to-person (P2P) lending turned two as its pioneer, UK-based Zopa, celebrated its second birthday today. In addition to slapping a this enormous "2" button on its homepage (see screenshot below), the company marked the occasion with an open house at its headquarters, an online lunch-time webcast, and an online giveaway of ten iPod shuffles (see the text of the email message sent to Zopa lenders and borrowers here).

The Latest Numbers out of Zopa

According to Easier Finance (thanks to PaymentsNews for the link):

• Zopa has 135,000 members
• Zopa lenders have received on average 6.75% before-tax annual return after fees and defaults
• Zopa borrowers have obtained loans at rates as low as 4.2% APR
• The current default rate is only 20 basis points, 0.2%

Zopa continues to create a considerable buzz in the UK. The company's homepage links to 42 articles from a diverse range of publications, most recently The Sunday Times and The Daily Mirror. And my favorite, an awesome piece from the UK's public-service Channel 4, that is unlike anything I've ever seen on U.S. news (click the play button below). 

The YouTube replay of the 4-minute feature was posted to Zopa's blog March 1 along with TV clips from CNBC and Fresno, CA news. The Channel 4 piece covers the topic of "social lending" in general and primarily covers Zopa, but near the end, another UK alternative lender is interviewed, Fair Finance <fairfinance.co.uk> is interviewed. We'll look at Fair Finance in a separate post.

At its first annual user meeting, which kicked off today in San Francisco, Prosper unveiled a number of changes to its person-to-person lending exchange. The most interesting is that the site is no longer taking loan listings from all comers. They have eliminated the New Credit (NC) category and now require a minimum FICO score of 520 to participate (see email announcement below).

Neither change will affect loan-origination volume in a measurable way, since few of those loans were funded by investors. However, it does eliminate one of the feel-good aspects of the site, the ability for anyone to use it to start, or re-start, their credit history.

Price increase
But Prosper is first and foremost a for-profit business, so the policy change is not surprising. In the same vein, the company announced a price increase for riskier credits, doubling the loan-origination fee to 2% on high-risk (E & HR) loans, and doubling the annual servicing fee to 1% of the outstanding balance on on all but A and AA loans. Late payment fees also tripled from $5 to $15 each month. Finally, Group Leader rewards have increased up to four-fold, which will have the effect of raising rates for many borrowers.

Lender enhancements
Prosper also added several enhancements to assist lenders in evaluation loans, including:

• 100% identity-theft protection providing full refunds for fraudulent loan applications
• ROI estimator, a tool that uses historical Prosper data to project return on investment
• Public borrower Q&A: Like eBay, lenders can now ask borrowers specific questions, and the borrower can opt to answer the question with a public response to be displayed within the loan listing
• Additional credit report data: Six new fields are now available to lenders, making 12 credit bureau-sourced data points for each loan listing (see screenshot below). This is a huge change from a year ago, when only the letter grade was available to make lending decisions (Prosper's full explanation of credit data available is here). 

Borrower enhancements
Although attracting lenders is the key to the company's survival, Prosper added a new feature to help borrowers make their loan listing more believable, member endorsements. Now, any Prosper member, including the Group Leader, can add an endorsement or testimonial to a loan listing (see Group Leader endorsement below; the full loan listing is reprinted in the Notes section).

Borrowers can also show a list of "Prosper friends" to further enhance their credibility. The friends' network shows in the upper-right info box (see inset).

Notes:

• For a more detailed look at Prosper and person-to-person lending, refer to Online Banking Report #127.
• Previous NetBanker coverage is here.
• Full loan listing shows endorsement (at right, click to enlarge).
• Feb. 12 email announces the changes (see Lender section above, click on image to enlarge). 
   

In a blog post today, person-to-person lender Zopa told its U.K. lenders that, due to a seasonal "lack of creditworthy borrowers," it would take a bit longer to lend out their money this month. However, the company predicted a seasonal upturn in January as more good borrowers looked for funds. The company reminded lenders that they still earn 4.25% on idle funds held by Zopa.

Many financial institutions sell or auction repossessed vehicles to the public. However, not many use this by-product of installment lending as a prospecting tool on their homepage.

We came across this novel approach at Houston Federal Credit Union <houstonfcu.org> while putting together a presentation titled "Extreme Website Makeovers" for an upcoming American Bankers Associate conference. The first place we looked for inspiration was the client list of Trabian, a talented new website designer concentrating on the credit union market (grab a feed to their outstanding blog, OpenSourceCU here). 

Trabian's client, HFCU, includes a link to its vehicle auctions on the right-side of its homepage (see screenshot below). Clicking on the box takes users to the main auction page where any registered user may bid on the vehicle (in this case, just a single motorcycle was up for auction).   

Analysis
Everyone loves a good deal, and unlike retailers who can drop a loss-leader on their homepage to generate excitement, financial institutions have far fewer options. Vehicle auctions provide an interesting way to encourage members to check back periodically to see if they could get a smoking hot deal on a used sedan, truck, or bass boat.

It's also a good prospecting tool. Nonmembers are allowed to register on the site and bid. This provides the credit union an immediate opportunity to make a sales pitch such as the "Wish your auto loan was at HFCU instead?" in the center of the page.

The email address supplied by the bidder also enables the CU to market to the nonmember in future emails. Finally, anyone who buys the auctioned vehicle is a great candidate for an HFCU loan, which are positioned in the upper-right of the auction page (see screenshot below).

Making it even better
We love the idea, and it works well even in its relatively simple form. It would be even better with a few additions:

1. It would drive even more traffic with an email and RSS feed option for receiving information on new auction items and for monitoring bids.
2. The credit union would generate more interest by including a variety of vehicles (even if they bought a few at auction to seed the site). Today's sole entry was a 2005 Suzuki motorcycle with a buy-it-now price of $6300.
3. The auction format and tools are relatively crude by today's standards. For example, it wasn't obvious who the other bidders were, how long it had been up for auction, or what the next bid needed to be. There are numerous auction services that could provide a more eBay-like experience.
4. It would be helpful to integrate the auction more closely with the loan center so users could easily calculate monthly payments, insurance costs, etc.

In a blog post today, person-to-person lending pioneer Zopa announced several usability improvements in its upcoming release, a new My Zopa screen and Quick Lend area.

But what caught our eye was Zopa's upcoming option to guarantee the return of principal for its lenders. There's no free lunch, of course, so an insurance premium must be paid when lenders choose this option. Even though that will cause returns to fall to a more "normal" rate, it could be a psychological boost that brings in more funds. At minimum, it will generate press coverage.

The new guarantee is still awaiting U.K. regulatory approval. We'll look at it in more detail when it becomes available. 

BAI's Retail Delivery Conference continues to offer an excellent array of speakers on almost every delivery topic, from the "branch experience" to "optimizing multi-channel delivery." But one area that's barely covered is loan originations. 

Only one session, out of 36 total, dealt with lending issues this year. And it was a last-minute replacement, not even in the program guide, substituting for NetBank and UPS's Banking on Brown, scrubbed after the announcement last week that the effort was being shuttered (see our coverage here).

Cornerstone Advisor's Steve Williams presented Consumer Lending: It's Not Just a Transaction Anymore. Although lightly attended, due to its placement at the closing moments of the show, he discussed a number of great ideas for improving loan originations, both online and in other channels. We'll look at some of them in more detail in coming weeks.

The presentation is available via email from swilliams@crnrstone.com. 

Nine-month old Prosper announced its results to date (press release here):

$20 million in loans originated
4,000 loans booked ($5,000 average)
100,000 registered users

It's a good start for the person-to-person lender, running about 25% to 30% ahead of our projections made when the company launched (see Online Banking Report #127).

However, they are a long way away from profitability, booking just $200,000 in loan fees during the first nine months, plus less than $50,000 in servicing fees and some pocket change in late fees, which are shared with lenders.

The company may need to consider hosting advertisements to prop up the bottom line. With high CPMs in the loan and personal finance market, Prosper could potentially make more on advertising than it does on the loan originations.   

Person-to-person lender, Prosper, announced its first annual user meeting next February in San Francisco. Registration is a refundable $25 and includes an all-day session with dinner on Monday, Feb. 12, and a half-day on Tuesday, Feb. 13.

The agenda has not been published. Online signup is here.

The October newsletter (see End Notes for screenshot) also announced the arrival of the group ratings, an important milestone for the nine-month-old service. Group ratings promise to help lenders locate borrowers with better-than-expected likelihood of repayment. If it works, Prosper could become a major force in consumer lending. If it doesn't, the company will have to find another way to beat the loan default odds. 

For more information:

• For prior coverage of Prosper and its U.K. rival Zopa, look here.
• For detailed analysis of the market, see Online Banking Report #127 published in March

End Notes (click on the link below to see Prosper's Oct. newsletters)

Banner advertising at About.com's banking blog <bank.about.com>

Landing page for direct navigation to <bankofamerica.com/nofeemortgage>

Landing page from bank's Google ad on "bank of america mortgage no fee"

Here's something we hadn't expected, payday loans from a major bank delivered through its online banking program. Minneapolis, MN-based U.S. Bank, not known for its pioneering work in online banking, quietly added payday lending to its platform recently.*

How it works
Users are alerted to the feature through a green link at the top of their checking-account transaction detail (see below).

Clicking on the link returns the well-designed "advance" pop-up screen where users can elect to take an advance from their next paycheck or from one of their pre-existing credit accounts (see below).

After selecting payday advance, users choose the amount and then follow the instructions to complete the loan. Funds are moved in real-time with no credit check. Since we don't have a direct-deposit paycheck, we didn't expect to qualify for an advance. However, we did receive a token "advance limit" of $80 (see "Available Credit" in lower-right box below).

Pricing & Disclosures
The advances are priced at 10% of the advanced amount, with a $20 minimum advance. Advances are automatically deducted from the checking account in one month if not already repaid. The APR if the amount is outstanding for the full month is 120%. Only one advance can be outstanding at a time.

In our example below, we chose a $20 advance and were required to repay $22.

The program is well-disclosed with a lengthy FAQ and Disclosure Statement (click on the continuation link at the bottom to see these documents).

Analysis
Putting an advance button at the top of checking-account transaction data is a great idea. However, at least in our case, the bank's implementation was questionable. Although we maintain as low a balance as possible in this checking account, we often run $10,000 or more through it. Also, we have an open credit limit of $20,000 on a U.S. Bank credit card linked to this account. Offering us an $80 advance limit is ridiculous.

Also, we're not sure that online payday lending is strategically very smart. Why charge 120% APR on small advances of one-month duration, risking customer and press backlash, when you could instead upsell an overdraft line of credit with a reasonable APR? 

The bank would stand to make much more on a reasonably priced overdraft line of credit, which could be delivered nearly as seamlessly. For example, a $2,000 outstanding balance on an 18% line of credit would provide $200 or more of annual profit vs. about $40 for a pair of $200 advances. And the customer will likely be more satisfied with the credit line. 

Although the bank demonstrates in its disclosures (see notes below) that its program is less expensive than an NSF fee or a typical payday loan, the 120% APR will likely create a bit of a furor with consumer advocates lambasting the bank in the press. It appears to have escaped notice so far.   

U.S. Bank deserves a pat on the back for its innovation, but without more consumer-friendly pricing, the payday-advance program may backfire on them.

*We have several accounts at U.S. Bank and noticed it this week for the first time.

End Notes (click on the following link for more information):

Program Disclosures

Program FAQs

Flipping through a pile of American Bankers on the plane last night, I came across a page one story on The Money Store <themoneystore.com>. If you've been in the business at least ten years, you probably remember the sub-prime lender that created a household name for itself with heavy TV and print advertising featuring baseball great Jim Palmer and others. But shortly after First Union (now Wachovia) paid $2.1 billion for it in 1998, its sub-prime portfolio tanked and the bank shut it down in 2000.

Why First Union/Wachovia didn't use the famous Money Store brand for other lending pursuits is a mystery, but I'd wager that after blowing a couple billion dollars on the acquisition, senior management, and shareholders, didn't want to hear that name ever again. 

Fast forward five years. MLD Mortgage, a NJ-based lender founded by former Money Store Vice Chairman Mortan Dear convinced Wachovia to sell him the Money Store brand name. The brand was then repositioned as an online loan exchange along the lines of LendingTree, brokering mortgages for 50 lenders including Washington Mutual, NetBank, and Flagstar Bank. 

Analysis
The use of the Money Tree name is good, although they absolutely must secure the <moneytree.com> domain name. The online loan-exchange business model is sound, and its lending partners offer good credibility. However, the company's website execution is deplorable.

The busy home page doesn't even mention the product it sells (see screenshot below). We could write an entire report on what's wrong with the site, but we'll review just one small section here to give you an idea of the problems.   

At first glance, the "three simple steps" graphic in the upper-left looks promising, although the type should be bolder for readability (see inset).

As users struggle to understand what the company offers, many will start here due to its location, color, and shape. Unfortunately, most users will become even more confused after reading it due to three significant usability errors:

Mistake #1: Scaring off potential customers. The goal of a financial website is to make users confident in transacting there. Money Tree does the opposite. The very first thing users see is step 1, "Provide your personal information." In today's paranoid times, that's a huge red flag from a relatively unknown website. Before you cause even a smidge of user-apprehension about the application process, you must make visitors want your product. Try starting with a benefit statement such as "lower your mortgage payment" or similar.

Mistake #2: Amateur copywriting with no benefit statements. Always use a professional copywriter, even for bullet points. The Money Store is obviously cutting corners here. For instance, the first line above says "price your loan today." That makes almost no sense to a consumer. It's industry jargon. It should be a benefit statement, like "lower your mortgage rate today" or something similar that can be easily grasped. My fifth-grader could have come up with a better opening line.

Mistake #3: Steps that lead to the wrong product. For the life of me, I can't figure out what the company was thinking with its third step. Here's a synopsis of the three: 
1. Provide personal info.
2. Select product
3. Get your credit score
Huh? Are they selling credit scores or saying you need to go somewhere else, find your credit report and then finish the process? Either way, they are going to lose just about anyone that's gotten this far.

Instead, the steps should lead to a recognizable benefit such as:
1. Tell us what you want
2. Compare all the great prices we'll provide
3. Choose the deal that saves you the most money
4. Enjoy your extra cash!!

The Money Store homepage (Oct. 9)

After a slow start, with no new entries during its first week, the student loan blog from Wells Fargo is off and running. Since its Sep. 5 launch, the site has averaged about two posts per week, each running 300 to 400 words, a good length. (See inset for jump page to the bank's two blogs, <blogs.wellsfargo.com>)

Furthermore, the writing is surprisingly good, with little corporate-speak, a trap that's so easy to fall into when every word has to be approved by a team of attorneys and compliance officers. Interestingly, the one off-topic post, written by the freelancing college-student mom, Caroline Hansen, was pulled from the site a day or two after it was posted. Either her step-daughter, or more likely, Wells Fargo management didn't like the story about her new tattoo.

The site is obviously aimed at parents, with warnings about credit card abuse and an instructive post about transferring money online to pay for a $573 book tab (ouch!).

While the bank does a good job of not blatantly pitching its products, it seems that most links within the posts lead to a wellsfargo.com page. The blog would have more credibility, and readership, if it linked to more outside resources.

When it comes to generating incremental fee income, it's difficult to find new ideas. One you may not have considered is automobile title insurance.

Although we've purchased two used cars on eBay, we'd never heard of title insurance for autos until we read about it in the Wall Street Journal today. For a one-time fee of $50 to $60, consumers can buy insurance that protects them against fraudulent titles, including instances where a salvaged auto has had its title wiped clean by registering the vehicle in a state with more liberal salvage rules.

According to First American Corporation, which markets a $49.95 policy in a joint venture with Experian Automotive, 20% of salvaged autos end up with clean titles. The product is called TitleGuard Vehicle Title Insurance and is sold through a stand-alone website <autotitleguard.com> and through resellers such as Credit Union Direct Lending and Escrow.com.

Financial institution opportunities
There are two ways financial institutions could use title insurance:

1. Education: In your auto-loans area, explain the ways that car titles can be manipulated with links to outside informational sources.
2. Resell title insurance: Title insurance is most needed when purchasing vehicles from unknown private parties. Even if you don't finance such transactions, you could earn commissions on customers referred to third parties for title insurance.
3. Bundle title insurance with loans: If you offer financing for private transactions, you could bundle title insurance with your loan to help differentiate your product and help justify premium pricing. The title insurance could be mandatory or optional and either way could be priced as a fee-based add-on or included in the regular loan-origination fee.

According to OpenSourceCU, a blog operated by website designer Trabian, person-to-person lender Zopa is actively soliciting credit unions to partner with the U.S. version of its service scheduled to open later this year (see NB Sep 7). One idea floated by Zopa's Wade Lagrone to attendees of the Taps Lending Symposium put on by Forum Solutions, was requiring Zopa borrowers to join a credit union in order to participate.

It's not as far-fetched as it sounds. In our analysis of peer-to-peer lending published in March (see Online Banking Report #127), we identified a number of ways financial institutions could benefit by referring customers to competitive loan marketplaces. It helps you serve the "long tail" of borrowing, those specific situations that your underwriting cannot accommodate, but where you still want to satisfy the customer to retain their other banking business.   

Zopa <zopa.com> continues to work towards a 2006 launch of the U.S. version of its person-to-person lending exchange. The company is trying to spur a bit of word-of-mouth in advance of its launch by buying a case of beer for anyone sponsoring a Zopa barbecue this summer.

The company website also contains a newsletter-like posting <www.zopa.com/ZopaWeb/ promo/newsletter/ us/issue1/> with info on the U.S. division (click on inset for closeup).

Beside promoting the free beer offer, the newsletter profiles Bruce Brenkus, VP Credit and Risk at Zopa U.S., an excellent choice of subject matter since credit management is the biggest concern for prospective Zopa lenders.

LendingTree owns MSN’s homepage again <msn.com>, locking up the main page sponsorship today (9am Pacific Time) with a refi pitch in the upper-right corner and an ad for home equity loans in the Money area (see inset).

In an approach popularized by car dealers, both ads emphasize monthly payment amount rather than rate. This theme is carried through on the landing page which has no mention of rate. In fact, you could complete the entire loan application without ever seeing the rate.

The only rate link is the relatively faint reverse-type line in the upper-right corner. Clicking on it delivers a small, quarter-page popup with disclosures for all 41 promotional offers currently in use by LendingTree — 6,800-words in all across 24 screens (download lendingtree_disclosures.doc).

Interestingly, both offers lead to the same landing page. While it would probably be more effective to craft different pages for each loan type, LendingTree may prefer a common landing page to more easily compare results from its different promotional ads.

Tired of competing with 1.9% dealer financing? Fight back with online car buying services. Many financial institutions, especially credit unions, have offered car-buying services online. With 67% of new car buyers researching online last year according to JD Powers, there's ample opportunity to get in front of car buyers BEFORE they arrive at the dealership. However, for the most part, major banks have stayed away from this area, in part so as not to annoy their dealer-financed customers.

That may change as one big player, Capital One, enters the business, albeit with fewer channel-conflict issues. The credit card giant is already a big player in online auto finance and generated 1.5 million auto loan applications across its 44 million customer base last year alone. It recently launched its new DriveOne <driveone.com> service in several markets (click on inset for closeup).

DriveOne is a slick car-quote service that rivals anything we've seen online. The design is state-of-the-art, easy to navigate, and, with no advertisements, it's much faster than others. The site, powered by Zag <zag.com>, features branded data from Kelly Blue Book <kbb.com>. Furthermore, it's closely tied to the lender, with a slide-bar payment calculator built in to the main user interface (see right-side of screenshot left).

DriveOne will connect buyers to dealers who must agree to sell vehicles at a fixed price no higher than Kelley New Car Blue Book Value. However, dealers are still free to negotiate add-ons, such as security systems or additional warranties. In addition to the fixed prices, buyers receive a $250 (new cars) or $400 (used car) rebate direct from DriveOne, no matter how they finance the purchase. Dealers indirectly fund this rebate with the fee paid to Zag whenever they sell a car through the program.

Powered by Zag
The DriveOne platform comes from Zag, a car-buying service launched early last year by Scott Painter, the founder of CarsDirect.com and BuildToOrder.com. The company used seed money from Elon Musk, founder of X.com/PayPal. One of Zag's investors is Capital One, which led the third round in Dec. 2005.

In Nov. 2005, the company acquired Autoland, the leading auto-buying service bureau for credit unions, with 300 clients serving a total of 8 million members, primarily on the West Coast. Total annual vehicle sales are more than $270 million. The company says it will have approximately 50 of the 300 credit unions using the DriveOne platform by year-end.

Last month, Zag acquired Automotive Invitational Services that serves 6 million members across a dozen AAA clubs. Zag says it will be offering DriveOne in seven states by the end of this month and will be working with 3,000 dealers by year-end.

--JB

Although our readers won't find much new information in today's Wall Street Journal article, Online Banking Strives for the Human Touch, it's significant for two reasons:

• Another example of a leading personal finance writer looking for "the next big thing" in online banking (see also NetBanker June 28); expect a wave of these stories through year-end
• The article included a full-text screenshot of a banking chat session with SunTrust. You might circulate this among your reps so they understand that what they write in a chat session potentially becomes part of the "public record" (by the way, the SunTrust rep, and/or the marketing guru who scripted the canned responses, deserve a raise for their sales technique).

If you make it to the end, you'll find a couple interesting online lending factoids:

• Bank of America claims an 8-fold increase in online-mortgage sales in Q1 2006 compared to the year earlier quarter, with live-chat part of the reason; it also said home-equity loan volume doubled
• Citbank says 90% of its live-chat users complete a home-equity application, presumably at its <myhomeequity.com> site mentioned earlier in the story (see screenshot above); the bank also said it expects to originate $2 billion in home equity loans online in 2006, double that in 2005

--JB