Main

P2P Lending Archives

BTCJam: P2P Lending via Bitcoin

By Jim Bruene on November 6, 2013 5:13 PM | Comments

image I have not as yet jumped on the Bitcoin bandwagon. Unlike other digital financial inventions that seemed obviously useful when they first appeared (e.g., Internet banking, P2P lending, two-factor authentication, etc.), an open-source, math-based virtual currency created by an anonymous cryptographer seems a bit of a stretch.

But even the Fed (Chicago) complimented Bitcoin in a letter published today, saying:

"<Bitcoin> represents a remarkable conceptual and
technical achievement, which may well be used by existing financial institutions
(which could issue their own bitcoins) or even by governments themselves."

While remaining skeptical, I am at least coming to understand why it's needed. And startups are beginning to show up with businesses built on top of the currency, which helps explain just how important it could be.

Case in point: BTCJam, a global P2P lending outfit, with founders in Brazil and San Francisco, lends in Bitcoins. With participants in 85 countries, this is the first P2P lending platform that successfully crossed national borders.

The startup has already done 2,700 loans worth more than $1 million since its launch a year ago. In comparison, Prosper originated about 6,000 loans worth $28 million during its first year. Prosper's loan size in year 1 was more than 10x that of BTCjam (Prosper average = $4,800 in 2006).   

The company is currently in the process of raising about $1+ mil via Angel List.

__________________________________________

How it works
__________________________________________

Like most P2P lending platforms, borrowing requests are vetted by the platform. Once approved, they are displaying to the network so that prospective lenders can fund the request. Generally, lenders spread their risks by only backing a portion of each loan.

Since BTCjam is global, it cannot rely solely on traditional credit scores. Instead, it validates the borrower in a number of ways across various social and payment networks along with traditional credit checks, address verifications and income verification. The results are displayed within the loan listing (see screenshots below). 

Borrowers that have passed more verification steps and/or with more "social proof" (e.g., eBay seller ratings, PayPal verified status, Facebook friends, etc.) are more likely to be funded and at a lower interest rate.

___________________________________________

Results
___________________________________________

BTCJam has made 2,700 loans, of which 1,700 have been repaid, with 1,000 active. The company does not say how many have defaulted. Most of the borrowing is for small amounts over short time periods. The average loan amount is $400 to $600 with annual interest rate of about 45%. But most loans are very short duration with an average term of 35 days. The platform takes a 4% advance fee for loans less than 10 BTC (about $2,000) and 1% of higher amounts.

Many borrowers appear to be testing the waters and/or building their reputations through short loans quickly repaid at nominal rates. In addition, there are a number of borrowers using the platform to make Bitcoin currency bets.

Borrowers can choose to repay their debt in straight Bitcoins, but that entails a great deal of currency risk. To avoid that, borrowers can peg their loan to USD, GBP or other currencies. That way, fluctuating Bitcoin values are less of a concern if the funds are converted to local currency. Alternatively, borrowers can essentially short Bitcoins by keeping the funds in BTC and hoping the value against the USD drops.

The company has had loan participants from 85 countries.

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

Borrower listings at BTCjam (6 Nov 2013)
Note the borrower ratings/verification in far-right column

 image 

Borrower listing at BTCjam (6 Nov 2013)

image

-------------------------------
Notes:
1. We have published three reports in P2P lending (OBR 127 in 2006; 148/149 in 2007; and SR-5 in 2009). Our latest P2P lending market forecast is contained in the current Online Banking Report here (Jan 2013, subscription). We also covered equity and debt crowdfunding a few months ago (see Online Banking Report on Crowdfunding, subscription).
2. We are just finishing a report on Virtual Currencies. We'll announce it here by the end of the month.

Comments
Categories: P2P Lending, P2P Payments

Crowdfunding via Facebook: Puddle's P2P Platform Allows Friends to Pool Funds to Loan to Each Other

By Jim Bruene on June 3, 2013 4:37 PM | Comments

image When Prosper launched seven years ago, much of it's initial promise revolved around the notion that people would be more likely to repay loans made by their peers. To  create peer pressure, borrowers were encouraged to join loosely affiliated "groups" (see note 1). Over time, groups with good repayment performance would be rewarded with lower borrowing costs.

It was brilliant on paper, but early repayment behavior didn't follow the model. Had there been more runway (funding and/or regulatory tolerance), it might have worked. But the wicked combination of adverse selection (many initial borrowers were financially desperate and/or quasi-fraudulent, despite all the heart-warming stories posted) and the Great Recession pushed Prosper, and it's contemporary, Lending Club, into more standard unsecured lending procedures. And it seems to be working. The two are on track to do more than $2 billion this year, with revenues of $100 million or more (Note: 85% of current volume is from Lending Club, see latest numbers here).

Fast-forward five years: With the ubiquity of Facebook, it makes sense for newcomers to test the waters of the original Prosper/Lending Club hypothesis (note 2). That friends can lend to friends (F2F) at a far lower cost. And that a third-party platform is needed to facilitate lending relationships, which can become tense if borrowers fall behind or default on their obligations.

imagePuddle (formerly Puddle.io) is a new startup from Kiva CEO & Co-founder Matt Flannery and early Kiva developer Skylar Woodward along with Jean Claude Rodriguez. It uses Facebook bonds to create pools of money that friend groups can share amongst themselves. With suggested interest rates in the 4% range, it's a win-win, assuming the money is repaid. Borrowers save 10% or more from credit card rates and lenders get a return much higher than bank savings accounts.

___________________________________

How it Works
___________________________________

1. Register with the company using your Facebook credentials

2. Connect a PayPal account or debit card to the platform (Wells Fargo holds the money)

3. Start a new "puddle" by setting the rate from 0% to 20% (current average is 4.7%, see inset) and the maximum leverage rate (you can only borrow a multiple of what you put into the pool, the allowable range is 2:1 to 10:1 with the recommended rate of 8:1).  

4. Invite Facebook friends to throw cash into the pool

5. Borrow from the pool (if that is your intent). Currently, loan sizes range from $300 to $3,000 with repayment on an installment schedule spread over a maximum of 12 months (current average outstanding is $320 across 50 borrowers). You can only borrow a max of 40% of the entire pool.

6. Puddle manages the repayment process, including assessing late fees (the late penalty is equal to the interest owed on the previous month's installment, i.e., you pay double interest if late)

7. As funds are repaid, they become available to other members of the pool to borrow.  

________________________________________________________

Analysis
________________________________________________________

Like Prosper/Lending Club in 2006/2007, the Puddle model sounds great in theory. But should friends be encouraged to lend to their friends online? I can see this ending badly, with unfortunate borrowers losing more than just the $1,000 they took out of the pool. With a public default to your (ex)friends, will a bad situation just get worse?

But given the founders experience at online microfinance leader Kiva, which has spread $440 million around the globe from nearly 1 million lenders, they fully understand the pitfalls. They also know that affordable credit can change lives.

Bottom line: I think it's a great experiment (and it is an experiment, the founders admit to not knowing how they will monetize or how regulators will react). But I'm not sure it scales without more financial controls (underwriting, collections, income verification) at which point it becomes nuch like Lending Club in 2007 (though not a bad outcome...given the P2P pioneer's recent $1.6 billion VC valuation).

I'd like to see financial institutions (or accredited investors) stepping in to backstop the loans (perhaps keeping the default confidential). For example, for a 4% to 5% annual fee, investors would agree to reimburse the pool for 80% to 90% of losses from any defaulting borrower. The fee would vary depending on the credit profile of borrowers in the pool. While borrowing costs would be significantly higher, down-on-their-luck borrowers would be less likely to lose their friends just when they needed them most. 

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

Puddle dashboard (active user)

Puddle dashboard


The Puddle dashboard through the eyes of a new user
Note: The great definition in box 1, "A puddle is like a small bank owned by you and your friends. You set the rules."

Puddle new user "get started" screen

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

Notes:
image1. For a review of circa-2006 Prosper "groups" see our March 2006 report on P2P lending (subscription).
2. Lending Club initially launched as a Facebook-only p2p lending service (our original 25 May 2007 post). The original Lending Club Facebook page is shown at right (click on inset). 
3. For the latest on crowdfunding, see our latest Online Banking Report on Crowdfunding (subscription).

Comments

Crowdfunding a Better Future: Pave

By Jim Bruene on February 28, 2013 11:38 PM | Comments (1)

image If you've ever worked in lending (or for a nonprofit), you know there's always far more need than funds that are available. That is unlikely to change at a macro level. But that doesn't mean we can't reach tens of millions more by deploying capital more widely and more efficiently (and at a profit). 

Enter crowdfunding, and the subset, P2P lending.

I've been a huge fan since it burst on the scene in 2006, authoring several reports (note 1) along with the only open letter in my life when the SEC squelched P2P in 2008/2009. I just could not believe that something with so much potential for good was curtailed while in its infancy.

But luckily, the tide is turning. Even though last year's Jobs Act is being held up (by guess who again), I'm encouraged that our government is seeing the light, although I wish Washington would embrace P2P like the Brits have.

And despite onerous disclosure requirements, Lending Club is on fire (with a $1.4 billion run rate in Feb) and proving to investors, and industry observers, that crowdfunding works. For the sake of the nascent industry, let's hope it doesn't stumble.

image We are working on a new report on the space (note 1), but in advance of that, take a look at Pave (see below), one of hundreds of newcomers. Maybe I'm a just a sucker for the drama, but it absolutely gives me chills to see web-based investment/lending platforms helping to move deserving folk forward. It's like a virtual credit union. 

At Pave, backers pledge money to prospects and form a team. In return, backers receive a portion of the prospects' future income. It's like angel investing, but focused on careers. Pave is just getting started, with eight funded teams, but the stories are compelling and the future is bright, just as it is for the whole industry. 

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

Pave brings mentors/benefactors together with talented individuals needing support (28 Feb 2013)

  image


Pave prospects

image


Pave backers


image


Pave teams

image

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

Notes:  
1. We have published three reports in this area (OBR 127 in 2006, 148/149 in 2007, and SR-5 in 2009). We are working on our fourth. It will focus more on equity and debt crowdfunding for small and mid-sized businesses. Our latest P2P lending market forecast is contained in the current Online Banking Report here (Jan 2013, subscription).

Comments (1)
Categories: Crowdfunding, P2P Lending

Crowdfunding (aka P2P Lending): The First Pure Internet-Induced Disruption in Financial Services

By Jim Bruene on January 10, 2013 5:46 PM | Comments (1)

image I am an unabashed fan of peer-to-peer (P2P) finance (see notes 1, 2). In theory, it makes so much sense to tap Internet efficiencies to match the buyers and sellers of money. On the other hand, there are good reasons to have highly regulated intermediaries, although that system is far from perfect as well.  So, I'm looking forward to the hybrids we'll be seeing in the next few decades.

Back to the present day. In the last 12 years of writing Online Banking Report, only two product launches have made me stop what I was doing and immediately start writing a new report:

  • PayPal's launch of P2P payments in 1999 (OBR 54)
  • Prosper's launch of P2P lending in 2006 (OBR 127; note 3)

And I believe P2P lending is way more disruptive than what PayPal has done. PayPal introduced a vastly improved front-end to bank checking accounts and credit cards. The company created an extremely valuable franchise (note 4), but the banking system is still intimately involved in most transactions. PayPal stole revenues from acquirers and held a few deposits, but for the most part, had little impact on card issuers.

That's competition.

However, Prosper, Zopa, Lending Club and the other P2P lending pioneers created virtual banks (taking in deposits and lending the money out) completely separate from existing financial institutions.

That's disruption.

And it's about to get way more interesting as the concept takes off in the business financing/investing arena via what's been called "crowdfunding" (note 5).

Bottom line: If you are a bank, learn to love crowdfunding and P2P. It's disruptive, yes, but you can harness it to both help those who don't qualify under your existing underwriting and increase your bottom line (note 6).

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

Notes:
Graphic: One of more than 50 books for sale at Amazon about Crowdfunding and  Kickstarter.
1. Unfortunately, I've backed only one loan so far, earning a nice return on my $100 loan in 2006.
2. We have published three reports in this area (OBR 127 in 2006, 148/149 in 2007, and SR-5 in 2009). We are working on our fourth. It will focus more on equity and debt crowdfunding for small and mid-sized businesses.
3. Zopa 2005 launch in the United Kingdom beat Prosper to market by almost a year.
4. eBay's market cap is $60 billion, of which a significant chunk is attributed to PayPal.
5. There are hundreds of companies entering this space. We are most familiar with two Finovate alums involved in debt-based crowdfunding (SoMoLend and Rebirth Financial). And we've written about equity-crowdfunder CircleUp, which was also featured in the NY Times along with SoMoLend this week.     
6. Our latest P2P lending market forecast is contained in the current Online Banking Report here (Jan 2013, subscription).

Comments (1)

New Online Banking Report Published: Online & Mobile Forecast Through 2022

By Jim Bruene on January 8, 2013 4:15 PM | Comments

imageOur latest research is now available: Online Banking Report 2013 to 2022 Forecast. The report includes our latest 10-year online banking, mobile banking and bill-pay forecast for the U.S. market. Online banking remains relatively flat, growing less than 5%, while mobile expanded by 40% last year (see note 1).

Based on recent mobile growth, we now project that in 2019, mobile account access will equal online account access in the United States (based on household penetration of each service).

The report also includes a revised 10-year forecast for U.S. peer-to-peer lending. After growing almost fifteen-fold in the past three years (2012 vs. 2009), we expect continued strong growth of nearly 30% compounded annually through 2022.

Finally, we took one last look at 2012 and documented the top-10 innovations or trends of the year (see below). We also updated our top-10 project priorities for 2013.

__________________________________________________________________

Top innovations & trends of 2012
__________________________________________________________

The report includes a summary of the top-10 innovations or trends during the past year (in alphabetic order):

  • Alt-biz lending disrupts commercial lending for the smaller business
  • Balance forecasting launched by Simple and Key Bank
  • Banking websites get “simple” makeovers
  • Digital (cloud) wallets find a value proposition, best-case routing
  • iPads appear at the POS and new accounts desk
  • Mobile deposit goes mainstream
  • P2P lending pops!
  • Pay As You Go auto insurance launched by MetroMile
  • Prepaid cards gain as “basic checking”
  • Virtual gift cards get a boost as Square launches 200,000 in a single day

__________________________________________________________________

New entrants to the OBR Hall of Fame
__________________________________________________________________

Each year we rank the top online/mobile innovations of all time (North America). A total of 48 achievements are listed from 50 companies:

  • 17 banks
  • 5 credit unions
  • 11 non-bank financial services companies
  • 17 fintech companies

The class of 2012 included two new entrants:

  • City Bank of Texas's mobile on/off switch for debit cards (powered by Malauzai)
  • Simple and Key Bank both launched real-time balance forecast tools 

__________________________________________________________________

About the report
__________________________________________________________________

Online & Mobile Banking Forecast (link)
The next 10 years: 2013 through 2022

Author: Jim Bruene, Editor & Founder

Published: 7 Jan 2013

Length: 32 pages, 26 tables, 12,000 words

Cost: No extra charge to OBR subscribers, US$495 for others here

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

Report excerpt:

Lending Club is the biggest fintech startup success of 2012 
The company originated nearly three-quarter billion dollars in new loans in 2012 and surpassed $1 billion in cumulative originations in November.

 image

Comments

Launching: Circleup Taps Your Inner Shark Tank

By Jim Bruene on April 19, 2012 5:17 PM | Comments

image If you dream of being Mark Cuban, Mr. Wonderful, or one of other Shark Tank investors (note 1), a wave of new angel-investing platforms are springing up all over the world.

TechStars, a NY-based incubator, said it had more than 30 applications from crowdfunding startups for its summer 2012 class.

In the United States, the recently enacted JOBS Act has spurred interest since it is expected to expand the market to several million more investors. But more importantly, the new legislation will lift the ridiculous "quiet period" rules that are supposed to keep companies from openly soliciting investors (note 2).

Once companies can openly look for investors (expected by early summer), private-placement investment platforms have a lot more to offer to companies seeking capital, namely a marketing opportunity.

Think about it. If you need $500,000 to launch a new line of organic granola bars sold nationwide, would it be better to get it from a couple local angels, or from 100 investor-fans kicking in $5,000 each? The latter approach gives you 100 evangelists in all corners of the country. And with only $5,000 invested, each investor has far less ability to meddle in your affairs.

In the past, the paperwork involved in booking $5k investments made it prohibitively expensive, even if you could find the investors under the old quiet period rules. But the new investment platforms promise to standardize the paperwork, reporting, and sales of small blocks of company shares.

image So, who are the leaders in the space? AngelList certainly, but it focuses on tech only. Of the newcomers, CircleUp which is launching this week, seems to have the most traction, at least measured by press mentions. Co-founder Ryan Caldbeck has recently been featured in the WSJ, NY Times, TechCrunch and the other tech blogs (note 4).

I've been using the beta version for a week, and am impressed. Circleup is focused on consumer products, and three companies are currently featured within the site, raising $100,000 to $500,000 each. I'm itching to drop the minimum investment ($3,333) into one of them just for fun. However, my wife wonders if that will be the same "fun" we had the last time I thought I could pick stocks (note 5). So, I'm still just an observer for now, but a very interested one.

How it works
Circleup is a lot like a simplified version of P2P lending. Companies seeking capital post their investor deck, introductory video, and any other info they deem important to their story. An online forum allows investors to ask questions that the companies can answer publicly (though this was little used during private beta).  

Investing is as simple as clicking on a button, agreeing to the terms, and pledging the funds. Once the minimum investment round is reached, the money is taken from investor bank accounts.

Relevance to Netbankers
If it's allowed to flourish without being crushed by the SEC when the inevitable scams appear, crowdfunding could eventually provide stiff competition in small business lending. Probably not in its current form, where the investments are speculative, ill-liquid equity bets. 

But fast-forward a few years and imagine a marriage of crowdfunding with P2P lending, and with the liquidity issue fixed through secondary markets. Small- and mid-sized businesses could use a crowdfunding platform as one safe source to get a mix of equity, debt, and receivables financing.

Banks should also consider getting involved in crowdfunding by partnering with the platforms to provide debt and other banking services to the small business participants. Banks could even start, or at least invest in, crowdfunding initiatives of their own.   

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

Company info page
Note: Fictitious listing; note investment button in middle-right.

Circleup company info page

Investing page
Note: For $25,000 (the max allowed), I get 134,000 shares, or 0.51% of the company.
Actual company seeking capital through Circleup, name masked due to the soon-to-be-ending prohibitions against soliciting investors. 

image

Notes:
1. Shark Tank is the U.S. version of Dragon Den. It's my favorite show on television, though I don't like how founders are sometimes ridiculed by the celebrity investors, whose egos struggle to fit on the same soundstage.
2. Though Shark Tank, watched by millions on prime-time network TV, demonstrates it's not a well-enforced rule.  
3. Ryan Caldbeck's 10-minute discussion of the JOBS Act is worth watching if you want a quick overview of its impact. TechCrunch covers the launch 18 April 2012 here.
4. Our policy at The Finovate Group is to NOT invest in fintech companies.
5. For more ideas on innovating in the small-biz banking market, see lengthy report on the subject, written 2 years ago.

Comments

Out of the Inbox: Prosper Markets to Small Businesses

By Jim Bruene on March 1, 2012 7:47 PM | Comments

image 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.

Prosper email to business startups

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.

Prosper landing page

-------------------------
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.

Comments

U.S. Peer-to-Peer Lending Hits Record High for Seventh Month in a Row

By Jim Bruene on July 20, 2011 1:07 PM | Comments

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.

image 
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.

Comments

Prosper is Back in the Game, Lands First Private Equity Lender

By Jim Bruene on June 15, 2011 7:01 PM | Comments (1)

imageA 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

image

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)

Prosper's homepage is a model of Web 2.0 simplicity

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

image

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%

Comments (1)

Out of the Inbox: Lending Club’s “Idle Cash Alert”

By Jim Bruene on October 12, 2010 6:24 PM | Comments

image 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)

image

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

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

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

Comments

Peer-to-Peer Marketplaces Join Forces to Influence Lawmakers with the "Coalition for New Credit Models"

By Jim Bruene on October 22, 2009 9:20 PM | Comments (1)

image Caught up in the regulatory crackdown in all things financial, new models that would transparently originate consumer and small business loans between individuals, the so-called P2P marketplaces, have struggled mightily to satisfy SEC requirements (my feelings about that). In fact, all three peer-to-peer U.S. lenders had to shut down for extended periods in 2008/2009 to reengineer their marketplaces. See our previous coverage here (note 1).

Earlier this year, Lending Club spearheaded a largely marketing-oriented campaign called UnCrunch America, which brought together several companies including Credit Karma, Virgin Money, Geezeo and On Deck Capital to publicize alternative lending. You can see our previous coverage, but that program appears shuttered with the URL redirecting to Lending Club.

This week, a new multi-company effort called, Coalition for New Credit Models, officially launched (press release). This group is spearheaded by rival loan marketplace Prosper, whose founder Chris Larsen has spent considerable time lobbying federal and state legislators during the past year.

The coalition's stated goals are largely political, hoping to influence legislators to reverse the SEC ruling that classified P2P loans as security offerings as well as adopt new programs to help support new methods for consumers and businesses to access capital.

Chris Larsen's quote in the press release compares the need for financial innovation to that needed to solve energy problems:

This country has been in an energy crisis for years, and we are now in a financial crisis. America's economic future depends on new and alternative credit models being embraced in the same way green technologies are being nurtured by policy leaders to help solve the energy crisis.

It's a worthy effort, and we hope their voices will be heard on Capital Hill. With traditional bank financing still a pipe dream for many small businesses, this is an ideal time to test new methods of getting capital to entrepreneurs who can productively put it to use. 

About the coalition members
We are proud that five of the seven (Credit Karma, Loanio, Prosper, The Receivables Exchange, and SecondMarket) have appeared on stage at FinovateStartup and three of those (Prosper, Credit Karma, and Loanio) have also presented at Finovate in NYC (note 2).

Here they are in alphabetic order:

  • Credit Karma: The San Francisco-based Finovate alum (video) launched in 2008, displays free credit scores and credit report info in an ad-supported business model. 
  • Loanio: This Nanuet, NY-based peer-to-peer lender launched at Finovate 2008 in October 2008 (video). However, it suspended business activities a few weeks later to register its securities with the SEC. It has yet to reopen.
  • ProFounder: The Palo Alto, CA-based startup provides a platform where entrepreneurs raise seed funding from their social network and affiliates.
  • Progreso Financiero: The Mountain View, CA-based firm provides loans to underbanked Hispanic families using a proprietary credit score enabling it to make loans to families without FICO scores. 
  • ProsperThe San Francisco-based startup, which presented at the inaugural Finovate in 2007 (video), has facilitated $180 million in p2p loans since launching Feb. 2006.
  • The Receivables Exchange: The New Orleans-based startup showed its account receivable marketplace at FinovateStartup this past April (video).  
  • SecondMarket: The NYC startup and FinovateStartup alum (video) is the largest centralized marketplace for illiquid assets such as auction-rate securities, bankruptcy claims, CDOs, private-company stock, whole loans, and more.

Notes:
1. For more on peer-to-peer lending, see our Online Banking Report: Peer-to-Peer Lending (Dec. 2007)
2. Uncrunch America members Lending Club and On Deck Capital are also Finovate alums.

Comments (1)

Lending Club Offers New Lenders $50 to Get Started on its Peer-to-Peer Platform

By Jim Bruene on August 4, 2009 12:12 PM | Comments

image 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

image

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

image

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. 

Comments

Prosper Back in Peer-to-Peer Lending Game with Full Approval of SEC

By Jim Bruene on July 13, 2009 6:48 PM | Comments (1)

image 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)

image

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). 

Comments (1)

Peer-to-Peer Lender Prosper Reopens Today at FinovateStartup

By Jim Bruene on April 28, 2009 5:39 AM | Comments (1)

image There's good news in peer-to-peer lending today as Prosper reopened for business. The announcement was timed around its appearance at FinovateStartup today.

The company is adding a loan-resale component called Open Market (see diagram below). Open Market loans are initiated by other financial institutions, then resold on the Prosper platform. Open Market loans must have been originated by Prosper-vetted financial institutions, and be current and have had at least three on-time payments.

We'll look deeper at the new Prosper in coming weeks; for more coverage now, check out articles today at The Wall Street Journal, CNET and the San Francisco Chronicle

How Open Market lending works

image

Comments (1)
Categories: Finovate, P2P Lending, Prosper

Lending Club Teams with EntrustCAMA to Offer Self-Directed IRA Option for P2P Lending

By Jim Bruene on March 25, 2009 6:56 PM | Comments

image 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)

image

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.

Comments

Cology's TuitionU.com Acquires Student Loan P2P Lender GreenNote

By Jim Bruene on March 3, 2009 4:23 PM | Comments

image TutionU.com's acquisition of Finovate Startup alum, GreenNote, was announced today (press release). The social student lender debuted at our conference last year (video here).

TuitionU.com is a student loan portal operated by Cology Inc. According to Compete, the traffic to TuitionU.com has been running from 1,000 to 2,000 visitors per month during the past year. GreenNote has recently been averaging 6,000 to 8,000 monthly unique visitors (see chart below). 

image

 
TuitionU.com homepage reflects GreenNote acquisition (3 March 2009)

image

Comments

Virgin Money Joins UnCrunch America

By Jim Bruene on February 25, 2009 12:11 PM | Comments

image 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)

image


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

image

 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.

Comments

Pertuity Direct Launches Financial Mashup: Consumer Loans + Mutual Funds + Social Finance

By Jim Bruene on February 15, 2009 12:43 PM | Comments (1)

clip_image002Last 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.

image

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.

Comments (1)

Lending Club Launches UNCRUNCH AMERICA, a Microsite Advocating Social Lending

By Jim Bruene on January 19, 2009 6:25 PM | Comments

image During the Christmas holidays, Lending Club and its partners launched a clever new microsite, UNCRUNCH AMERICA at <uncrunch.org>. The site promotes peer-to-peer lending as a way to help increase the availability of credit in the United States (see screenshots below).

Joining the effort are four others:

The site explains the concept behind peer-to-peer lending and funnels visitors to Lending Club or On Deck Capital to borrow. Lending Club was promoting the site on its homepage (see third screenshot), but it's no longer mentioned. And none of the other partners mentions it on their sites.   

The site consists of just two pages, the homepage and a Learn More page listing the partners. The homepage uses Flash to deliver five different messages. The red action buttons lead to a special landing page to Lending Club (see third screenshot).

According to American Banker, Lending Club hired Tobin Smith, the chairman of ChangeWave Research, to create the campaign.

Analysis
Overall, I like the UNCRUNCH idea. It's timely. It has a catchy name. And it resonates with consumers. But companies must be very careful using consumer advocacy as a marketing strategy. While most consumers understand the need for the sponsor to make a buck, they can see right through anything that appears overly self-serving.

In financial services, credit unions have a distinct advantage here. As member-owned cooperatives, their consumer advocacy messages are believable. Shareholder-owned banks have less credibility, but can still pull it off if they back up their words with a record of action.

I think that's why ING Direct's We the Savers campaign works (see previous post here). For its entire eight years in the United States, the bank has consistently promoted savings and thrift. So few question its motivations behind the We the Savers petition drive, though clearly it supports the bank's for-profit savings program.

On the other hand, UNCRUNCH AMERICA was a bit misleading when it first launched (see first screenshot below from Jan 7). But with the recent improvement in disclosing the site's purpose and primary sponsors, I think it's acceptable now (see second screenshot below from Jan. 19).

Here are the main improvements:    

  • It wasn't clear that the primary sponsors were lenders. But the new site includes Personal Loans and Small Business Loans sections that clearly disclose the Lending Club and On Deck Capital involvement. There is also new fine print at the bottom of the page that further identifies the sponsors.
  • The original copy made it sound like a completely altruistic effort with its main pitch, Invest in America. That section has been completely removed and the site no longer solicits investors/lenders. It's clear now that the site is designed to generate loan leads. The main button on the homepage was changed from Invest in America to I Need a Loan.

I'm relieved that UNCRUNCH.org has stepped up its transparency. At this point in the financial mess, we need lenders and other financial entities to be totally upfront with the public so as not to invite even more regulation than what is already coming. Given its six-month hiatus in 2008 while it revamped to comply with new SEC requirements, Lending Club should understand that better than most.    

Other financial institutions should consider similar cooperative efforts in their local areas. The public could use some positive messages from the banking sector. 

1. UNCRUNCH AMERICA homepage before improvements (7 Jan. 2009)

image

2. Homepage after transparency improvements (19 Jan. 2009)

image

 

3. Lending Club homepage featured UNCRUNCH button (7 Jan. 2009)
but it has since been removed

image

Note:

1. For more info, see our Online Banking Report on Peer-to-Peer Lending

Comments

Lending Club Regains Momentum, Posts 40% Gain in P2P Loan Originations Compared to Dec. 2007

By Jim Bruene on January 9, 2009 7:12 AM | Comments

image 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

  Dec
2008
Dec
2007

Change

% Change
Number of loans originated 238 167 + 71 43%
Dollars originated $2.28 mil $1.77 mil + $0.5 mil 29%
Number of loan applications 2,798 1,575 + 1,223 78%
Approval rate 8.5% 10.6% (2.1%) (20%)
Dollar value of all applications $24.2 mil $14.4 mil + $9.8 mil 68%
Average loan size approved $9,600 $10,600 ($1,000) (9.4%)
Average loan size declined $8,600 $9,000 ($400) (0.4%)
Site traffic (unique visitors) 78,000 58,000 20,000 35%

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. 

 image

Source: LendingClubStats.com, 8 Jan 2009

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

image

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.

Comments

New Peer-to-Peer Lender Pertuity Direct Nears Launch

By Jim Bruene on January 8, 2009 1:28 PM | Comments

image 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.

Comments

Open Letter to SEC: Leave Peer-to-Peer Lending Alone

By Jim Bruene on December 17, 2008 3:44 PM | Comments (9)

Dear Mr. Cox:

image I don't have to tell you that the Madoff mess has dominated the Wall Street Journal headlines for the past few days. You probably saw Jane Kim's recap today tallying the $25 billion in known losses so far in a wide-reaching, long-running fraud perpetrated by a firm overseen by your agency.

It's not that I blame you for the Madoff fraud. The cops can't catch every crook. But now that you have your hands full with this matter, I have an idea as to how you can free up some staff resources to sort out the mess Mr. Madoff left.

You've probably been too busy to read Netbanker (see note 1), but if you had, you'd know that I haven't been very happy with the way the U.S. peer-to-peer lending industry has been treated by the SEC this year. Thanks to your agency's efforts, the three major providers have all been shut down for extended periods and several others have been dissuaded from opening at all.

Currently, just a single company, Lending Club, remains in operation, but they were crippled much of the year by a dark period as they spent hundreds of thousands of dollars meeting SEC registration requirements. Thankfully you approved their registration statement and they are now open for business, albeit weighed down by massive ongoing reporting requirements. 

As recently as last year, we had as many as a dozen companies in various stages of launching companies in this space. The goal is to connect people with excess funds to those in need of money with a fair rate of interest established via open bidding in a transparent market. What more can you ask for? 

And even before the SEC became involved, it's not like these companies were skating by with no regulation. They spent considerable time and money obtaining lending licenses in individual states and/or working with existing regulated financial institutions to originate loans. In addition, the startups all had to comply with a myriad of federal consumer protection statutes. In fact, you could say they were already operating as highly regulated companies.

The biggest of the group, Prosper, even made all its data available to the world including the good, the bad, and the very, very ugly. They could very well be considered the first open source financial institution in the world. Their unique transparency gave us all a ringside seat to watch the ebb and flow of a new market gaining traction. 

No, Mr. Cox, it has not been a smooth ride for Prosper. More than 20% of the loans made the first year have already gone bad, and ultimately the losses may end up above 30%. But with an average interest rate of 17% on the 70% of the balances ultimately repaid, most lenders will get most, if not all, their principal back from their speculative bets. That's a better return than blue chip stocks over the same period. And I'm sure the investors in Madoff Securities would be happy with to have 98% of their principal returned.

But even before the SEC got involved in P2P lending, things were improving for lenders. The open market fostered quick learning as lenders learned from both from their own mistakes and those of others in the community.

And the exchange operators were learning even faster. Prosper now makes much more borrower info available and began verifying certain applicant statements. As a result, returns appear to be improving. Although, against the backdrop of a severe recession, it's hard to make good comparisons.

Had these companies been left alone, journalists would be writing stories about how P2P companies were stepping into the lending void left by the turmoil in the banking sector. And how wise the U.S. regulators were in letting this new area thrive amidst the collapse of HIGHLY REGULATED financial companies around the world.

But instead, the SEC decided it needed to keep closer tabs on the tiny $100 million annual volume originated in these markets (that's just a single day's worth of fraud by Mr. Madoff). Your agency came to the surprising conclusion that loans, made between individuals in a regulated peer-to-peer market, are securities and needed SEC oversight. And based on recent events, what exactly does that even mean? Besides requiring a flood of documents uploaded to your servers, are you really going to assign an agent to watch over these $3,500 loans. I don't know what your 2009 staffing plans are, but I'm guessing everyone will still be pretty busy.  

The decision to classify these loans as securities will ultimately cost Prosper as much as $10 million, a potentially fatal blow. Prosper has been shut down as it goes through the SEC-registration process. The SEC ruling has already cost the company at least $2 million in cash: $700,000 just to create the documentation for your agency to review, $1 million to pay-off state securities regulators, and an undisclosed amount to settle with your agency. And the company must still settle or fight the class-action suit, where lenders, who knew perfectly well the risks they were taking (Hello... they were lending to strangers on the Internet!), will try to win back their loan losses by asserting that Prosper was selling unregistered securities.

Furthermore, you are driving innovation and competitors out of the market. The original pioneer in the industry, Zopa, withdrew from the U.S. market, despite a thriving business in the United Kingdom because of the threat of SEC registration. End result: There is just a single U.S. P2P loan exchange operating today. Had you stayed out of it, we'd have at least five, probably more. 

I have this to say to the SEC:

  • Rethink your oversight model: We've seen hundreds of billions lost by SEC-regulated companies this year. You weren't even able to sniff out a $50-billion Ponzi scheme in your own backyard. Maybe you don't have enough resources. I buy that. Even mammoth funds with virtually unlimited resources were duped by Madoff. So let me ask the obvious question. If you are short on staff, why are you wasting them on controlling the $100-million P2P market where every bid, loan, and repayment are open to scrutiny by the community. 
  • Embrace openness: Instead of stomping on a new, open and self-regulating market, maybe you could learn from it. As Don Tapscott proposed in his BAI Retail Delivery keynote last month, let's open source financial holdings. If Madoff had made his trading data public, his customers could have monitored the flow themselves, and figured out about $49.9 billion dollars ago that he was fabricating his results. 

Bottom line: Leave the P2P lenders alone. Their open approach reflects an order of magnitude far better than the broken regulatory model employed on Wall St.

Regards,

Jim Bruene, Editor & Founder
Online Banking Report & Netbanker.com

<whew!...stepping off soapbox>

Note:
1. In the spirit of openness, Prosper, Lending Club, Zopa, Loanio, Pertuity Direct and other P2P startups are customers of ours, buying research reports and admission to our events. But the total gross revenues from the sector amounted to less than 2% of our total revenues. We do not invest in any companies we cover, nor do they pay us for consulting, or influence our editorial coverage in any material way. 

Comments (9)

ZimpleMoney Launches Peer-to-Peer Loan Platform to Power Social Finance

By Jim Bruene on December 9, 2008 7:24 PM | Comments

image 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)

image

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

Comments

Prosper Pays $1 million to States to Settle Securities Complaint; Nightmare Not Over Yet

By Jim Bruene on December 1, 2008 7:52 PM | Comments

image No one said it would be easy trying to disrupt a multi-trillion dollar industry. Prosper's latest blow is the cool $1 million it spent to settle what could have been a legal black hole, individual states suing it for securities law violations. Here's today's press release from the NASAA announcing the settlement.

With state securities regulators off its back, Prosper now has two of its three problems settled. Last week it announced a settlement with the SEC (here). Terms were not disclosed.

But there is one major hurdle remaining: potential claims from lenders wanting their money back. Attorney Broox Peterson commented on Prosper's potential legal liability yesterday (here):

Sale of a security that has not been registered under Section 5 of the Securities Act of 1933 gives rise to a private right of action under Section 12(a)1 of that Act.  The remedy that can be enforced with this private right of action is rescission of the sale of the unregistered security.  In practical terms this means that investors in unregistered Prosper notes that were ultimately uncollectible can get their money back.

If a significant portion of the lenders, who hold an estimated $30+ million in bad debt, successfully sue Prosper for a refund on the grounds they were sold an unregistered security, it could be very expensive for the company. At least one class action suit has been filed against Prosper (The Rosen Law Firm suit filed Nov. 26 ).  

Comment: Ultimately, I think the U.S. peer-to-peer lending industry will recover from these legal setbacks. However, the regulatory situation has put a damper on innovation, reduced competition (see note 1), and caused a significant reduction in credit available to consumers via P2P exchanges (see note 2).

Court cases aside, the bigger issue is whether P2P loan losses can be kept to a level that provides a reasonable rate of return for lenders. The jury is still out on that (see note 3).

Notes:
1. Zopa has now admitted that the reason it did not open a fully peer-to-peer loan market in the U.S. was because it expected this regulatory treatment (post here).

We always took the view that the SEC would likely view our platform, as operated in the UK and Italy, as requiring registration with them. That's the key reason why we didn't launch our UK model in the US...

2. P2P lender Lending Club, which reopened Oct. 14, is fully SEC compliant and open for business. Prosper and Loanio remain shuttered until the SEC filing process is completed sometime in 2009.

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

Comments
Categories: P2P Lending, Prosper

Loanio Shuts Down (updated with statement from Loanio)

By Jim Bruene on November 26, 2008 12:35 PM | Comments (2)

image 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.

image

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.

Comments (2)

Peer-to-Peer Lending Volumes Worldwide

By Jim Bruene on November 12, 2008 6:09 PM | Comments (4)

image 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:

Company US$ (mil) WW Share
Prosper (US) $178 68%
Zopa (UK) $39 15%
Lending Club (US) $20 8%
Money Auction (Korea) $7.8 3%
Smava (Germany) $5.8 2%
Zopa (Italy) $4.3 2%
Boober (Netherlands) $3.1 1%
Other $4.5 2%
Total $262 100%

 

image

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

Comments (4)

P2P Lender Prosper Closes Marketplace to Lenders; Loanio Unaffected for Now

By Jim Bruene on October 16, 2008 7:06 PM | Comments (5)

image 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

Prosper quite period announcement 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.

Comments (5)

Finovate 2008 Lending Club

By Jim Bruene on October 14, 2008 10:52 AM | Comments

image Next is Lending Club. CEO Renaud Laplanche will do the demo.

Lending Club was the second person-to-person lender in the United States, launching on Facebook in May 2007 and on the Web in September. It's been operating on a limited basis since March as it sought SEC registration for its loans. The company presented at the first Finovate last year. 

What's new
Lending Club is back online as of today. The company received approval of its registration documents with the SEC. They are the only P2P lender to have a trading platform, i.e., a secondary market enabling lenders to resell loans they've made through the Lending Club platform. The platform is powered by Foliofn.

They have been experiencing a 2% default rate and have been approving 14% of applications received.

Lending Club showed tools that allow lenders to select a desired portfolio of loans based on various risk criteria.

Comments
Categories: Lending Club, P2P Lending

Just-Launched P2P Lender Loanio Joins Finovate Conference Demo Lineup

By Jim Bruene on October 9, 2008 5:37 PM | Comments (1)

imageAs noted here last week, Loanio launched its much anticipated peer-to-peer lending exchange Oct. 1.
And we are lucky that founder Michael Solomon has agreed to take the stage this Tuesday at Finovate to show everyone the results of his nearly two-year development effort.

imageThe reason for the last-minute addition is that another P2P lender planning to launch at Finovate, Pertuity Direct, has delayed its grand opening to ensure that regulators are comfortable with its business. Given recent worldwide events, that's understandable. We look forward to seeing its demo at Finovate 2009.

There are still a few seats remaining at the nearly sold-out event (registration is here). The complete lineup is listed here.

Comments (1)

Loanio Launches New Person-to-Person Lending Service

By Jim Bruene on October 1, 2008 12:57 PM | Comments (3)

image 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)

Loanio homepage on launch day (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)

Loanio email to house list announcing launch (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.

Comments (3)

Person-to-Person (P2P) Lending Update

By Jim Bruene on September 4, 2008 2:38 PM | Comments (1)

image 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:

  • imageLending 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)

image


Zopa AdWords ad on "loanio" search

(4 Sep 2008, 1 PM PDT from Seattle IP address)

Google results from "loanio" search 4 Sep 2008


Landing page
(4 Sep 2008, link here)

Zopa landing page from Google ad 4 Sep 2008

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.

Comments (1)

Pertuity Direct to Launch Person-to-Person (P2P) Lending Service

By Jim Bruene on August 27, 2008 5:14 PM | Comments

">Link to website 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)

Pertuity Direct temporary homepage 26 Aug 2008


Before: Pertuity Direct website before redirect put in place

(see note 1, 26 Aug 2008)

Previous Pertuity Direct homepage

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.

Comments

Lending Club Adds Secondary Market to Updated S1

By Jim Bruene on August 14, 2008 6:32 PM | Comments

image 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).

Comments

Lending Club Files S-1, Prepares to Get Back into the P2P Game

By Jim Bruene on June 22, 2008 10:52 AM | Comments

image No one said it was easy being a startup, especially a "Web 2.0 lender" in the middle of major credit turmoil. Lending Club, which had to shut down the retail lending portion of its service in April, is preparing to put the second P back into its P2P loan service (see note 1).

A big part of that process is filing with the SEC so the company can sell retail securities backed by its loans. For lenders, it won't be much of a change. The securities will be backed by the individual loans, just as if it were a standard loan. And at least initially, the securities cannot be resold. However, in the filing, Lending Club says it is planning on creating a secondary market for the securities through its platform. 

Lending Club posted an update on its website announcing the filing.

Lending Club discloses $500,000 monthly burn rate
Luckily for the company's followers, and competitors, the S-1 filed Friday (20 June) sheds light on what would usually be known only to its investors and creditors, the privately held company's inner finances. The company disclosed that during the fiscal year ending March 31, 2008, it experienced:

  • negative cash flow of $6 million
  • total net loss of $7 million on revenues of $450,000; the revenue total includes $200,000 in interest on deposit balances   

Lending Club itself is a significant lender on the platform
Another interesting disclosure: More than half the loans originated through the Lending Club platform have been funded by the company and its creditors/investors, even before it had to stop taking new retail loan commitments April 7.  That's an interesting dynamic for a so-called person-to-person lender. Because Lending Club sets the market clearing rates, its funding did not compete directly with the retail lenders, i.e., Lending Club stepped in to help fund deals that retail lenders had not fully funded. However, had the company not put so much money into the system, borrower rates could have floated higher, potentially increasing lender yields (note 2).

As of June 10, 2008, only $6.4 million of the loans made through the platform have been to "retail lenders." Later in the S1, Lending Club discloses that it has funded $7 million of the $15 million loaned through the platform as of March 31, and then $1.6 million of the $3 million loaned after March 31. That leaves Lending Club holding $8.6 million of the $18 million loaned through the platform.

The lending was financed primarily through loans from Silicon Valley Bank ($3 mil), Gold Hill Venture Lending ($5 mil). Also, through March 31, company insiders and investors had lent about $0.5 million.  

Other stats from the S-1
Other numbers (as of 31 March, 2008, unless indicated otherwise):

  • $1.8 million spent on marketing, of which $270,000 was advertising
  • $1.8 million spent on engineering
  • 23 full-time employees
  • Average loan amount per borrower is $9,100
  • Number of loans = 1,669 worth $15.2 million (through 10 June 2008)
  • 150,000 website visitors in March
  • Average amount lent per loan per lender = $75
  • 50% of loan volume has been through LendingMatch that automates the process
  • $8.9 million had been outstanding for more than 45 days and had been subject to at least one billing cycle; of that amount, 98.3% was current, 0.88% was 15- 30 days late and 0.87% was more than 30 days delinquent. No loans had gone into default which is 120+ days delinquent
  • On p. 48 is a detailed table of home ownership. job tenure, annual gross income and debt-to-income ratio by Lending Club credit grade

Loan purpose:

  • 50% refinancing high-interest credit card debt
  • 35% financing one-time events such as weddings, home improvements or medical
  • 15% small business financing

Notes:
1. For more info on person-to-person lending see our Online Banking Report #148/149

2. I say POTENTIALLY increased yields. That would depend on whether the borrowers accepted loans at higher rates. And higher rates would lead to lower volumes, so even though interest margins would be higher, there could be substantially fewer deals. And that also increases the risk of adverse selection with only higher-risk borrowers accepting the higher rates.

Comments

GreenNote Introduces P2P Student Loan Hybrid: Virgin Money Meets Facebook with a Dash of Prosper

By Jim Bruene on June 5, 2008 6:27 PM | Comments

image This week two Finovate Startup alums launched the
services they demo'd a month ago at our conference:

We'll start with GreenNote and look at CheckingFinder tomorrow. Although I'd seen the GreenNote demo, since it was in closed beta, I hadn't had a chance to use it until earlier this week.

My first impressions are favorable. The site helps students reach out to family and friends to put together a "personal loan consortium" to finance educational expenses (also called a "pledge drive"). While GreenNote does not currently provide access to funds from outside the student's own network of friends and family, the service does offer tools to solicit loan pledges via email. It also collects the resulting loan pledges from interested parties, then sets up and services the resulting loan. 

The process:

  • Students solicit loan pledges from their network, and hopefully the networks of their network
  • Interested friends, family, or anyone else who's received a loan request from the student (either directly, or through forwarding) create a GreenNote account and make loan pledges (minimum $100)
  • Once the loan is funded (minimum $1,000, no maximum), GreenNote verifies enrollment, collects the money, and packages it into a single loan agreement with the student
  • When it comes time to repay the loan, lenders can choose to forego the principal and/or interest and gift it to the student; lenders will also be able to lower the rate

The terms:

  • Loans are deferred for up to five years while the borrower is in school, then initiate a six-month grace period before repayment begins
  • Interest accrues during the deferment period
  • Repayment is over a 10-year period, meaning that lenders must commit their money for 15 years
  • The rate is currently 6.8% fixed, but GreenNote takes 100 basis points of that, so lenders receive a 5.8% return (which they can elect to lower at repayment time)
  • GreenNote charges a 2% loan fee at funding, with a minimum of $49

Coming soon:

  • Allow third parties to browse loans they might want to fund (e.g., alumni)
  • Facebook integration

Analysis
At first glance, it looks like an expensive way to put a nice wrapper around funds that have already been made available by the student's family. And certainly, if moms and dads are providing the bulk of the cash, it's not necessary to pay 2% for a promissory note. For most loans, you can do that for less at online paperwork specialists such as Virgin Money or LoanBack.

However, the power of GreenNote's model is tapping into the friends of friends, and the friends of those friends, and so on. As a student puts together an email pledge drive, recipients are encouraged to pass the request on to appropriate parties who might be willing to participate. For example, Pat who is headed to Michigan State, knows Jon whose uncle is a successful alum of the school. Jon's uncle, who'd be highly unlikely to simply write Pat a check, might be very interested in putting a few thousand dollars into a long-term 5.8% deposit that earns him a fair rate of return and helps someone go to Michigan State.

GreenNote is well thought out and well implemented. The main problem though, is finding enough deep pockets willing to put thousands of dollars on deposit for up to 15 years with no guarantee of repayment.

Financial institution opportunities
Lenders have taken some heat recently as they've cut back on student lending during the credit market turmoil. A bank or credit union could gain some positive PR by facilitating this type of lending among their own customer base and community. It could be built from scratch or potentially in partnership with GreenNote.

Background
GreenNote is backed by Menlo Ventures, among others, and has an impressive board and advisors including prolific blogger and partner at Glenbrook Partners, Scott Loftesness. Bill Harris of Intuit, X.com (now PayPal), and Passmark (now RSA) fame is on the board. The launch was covered this week by TechCrunch, VentureBeat, and C|Net among others.

GreenNote homepage (5 June 2008)

image

Comments

Virgin Money's Student Payback Could be the Beginning of Something Disruptive

By Jim Bruene on May 19, 2008 1:01 PM | Comments

image After talking to founder Asheesh Advani on several occasions, we expect Virgin Money (US) to become a disruptive force in the student loan business. And with college costs rising and financing options declining (see previous coverage here), there's a need now for new approaches.

Against that backdrop, I was thrilled to see a link to Virgin Money's press release (here) in a Payments News roundup this morning. I eagerly fired up the blog editor to write about it, but quickly realized it was not the product I was hoping for.

image While it's a good line extension, it's not so new (think Diet Coke adding lime). Student Payback is a well-named service to formalize friends & family loans to students, something the company already did with its Handshake and Handshake Plus services (see note 1).

The main difference, and why it costs $100 more, is that Student Payback allows up to 10 increases in the original loan amount with no additional fee. For example, each semester a new loan can be added without needing a new loan doc each time.

Analysis
Strategically, Student Payback appears to be right on the money. It allows VM to better target the P2P student loan market with the eventual goal of moving upstream, graduating from merely formalizing existing loan agreements to actually brokering multi-party financing deals. For example, initial seed money could come from mom and dad with help from government/school programs. Then as the student progresses through their studies, additional financing could come from Virgin Money partner bank(s) and/or individuals/organizations with an interest in helping students at particular schools (e.g., alumni) or those entering certain fields. Scholarships, grants, internships and other related activities could also be thrown into the mix.

Anyway, there's lots of opportunity especially with the growth of social networking and the exit of several large student lenders. Two startups showed new solutions at our Finovate Startup conference several weeks ago: GreenNote and SimpleTuition. And there are others entering the market such as Fynanz (previous post here) and Qifang, a Chinese startup TechCrunch wrote about in February (here).

Note:
1. See our Online Banking Report on P2P lending for more information.

Comments

Prosper Kicks Off Nationwide Lending with New Slogan and TV/Radio Advertising

By Jim Bruene on May 7, 2008 6:29 PM | Comments (1)

imageArmed 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. 

Prosper Brad and Lara tv advertisement

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 

Comments (1)

Deja Vu: The First* Canadian Person-to-Person Lending Service Readies for Launch -- CommunityLend

By Jim Bruene on April 17, 2008 8:10 PM | Comments (4)

imageCommunity 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)
CommunityLend home page pre-launch

 
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?  

Comments (4)

Lending Club Abruptly Shuts Down Peer Lending

By Jim Bruene on April 8, 2008 9:42 AM | Comments (3)

Breaking news: P2P lender LendingClub, which had been gaining ground rapidly on industry leader Prosper (post here), stopped accepting new money for lending through its platform. The company says it will continue to accept loan applications, funding them out of its own account. There is no indication whether the company has secured additional funding to maintain or grow its current $4 million per month origination pace. It's feasible that a bank and/or private investors could step in to fill the void. Some speculation here, here, and here (includes reprint of the email sent to lenders from the company). 

I logged into my LendingClub account, which has a small cash balance, and found that the lending function has been disabled. I could browse loans and withdraw my money, but I could not bid on loans or add new funds. A message appears on most screens telling users they cannot make new loans at this time (see screenshot below).

LendingClub alerts users to the freeze on new lending

The company's blog entry dated 7 April (see below) from founder Renaud Laplanche, offers few details, saying the company has:

...started a process to register, with the appropriate securities authorities, promissory notes that may be offered and sold ... through our site in the future.

Furthermore, due to the registration period:

....the company will undergo a quiet period, and will not be able to respond to press and other inquiries...

Depending on how the promissory notes are structured, they may or may not be a departure from the P2P lending model currently employed. We'll update this post when we get more information.

LendingClub 7 April blog entry announcing freeze in new lenders

For more information on the person-to-person lending market, see our recent Online Banking Report.

Update 8 April, 11 AM Pacific: Prosper's statement:

Person-to-person lending is an increasingly popular way for individuals to borrow and lend money at attractive interest rates. Understandably, it must be done in a secure and trusted way. While we’re not in a position to comment on another company’s regulatory stance, Prosper believes that the way we have structured the Prosper marketplace is in compliance with applicable state and federal laws. Currently Prosper has over 650,000 members, and more than $130 million in loans have funded through the Prosper marketplace.

 

Comments (3)
Categories: Lending Club, P2P Lending

Q1 Prosper/Lending Club Loan Volumes Up 55% (Y/Y)

By Jim Bruene on April 2, 2008 6:39 PM | Comments (3)

lendingclub_logoLast 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.

prosper_logoWhile 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)

  Prosper
All Grades
Prosper
AA-C*
Prosper AA-C
Low DTI**
Lending Club*** Total
Q1 2008 $20.5 $17.1 $10.7 $9.8 $30.3
   March $7.3 $6.0 $3.7 $4.1 $11.4
   Feb $6.0 $4.9 $2.9 $2.9 $8.9
   Jan $7.2 $6.1 $4.0 $2.8 $10.0
Q1 2007 $19.6 $12.6 $8.0 n/a $19.6
'08 vs. '07 +$0.9 +$4.5 +$2.7 -- +$10.7
% change +4.6% +36% +34% -- +55%

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.

Comments (3)

Prosper, Lending Club Traffic Up 100,000 in February

By Jim Bruene on March 25, 2008 11:39 PM | Comments (7)

Looking at February's Compete data, estimated traffic (see comment 3) at the three major U.S. person-to-person lenders grew by approximately 100,000 unique users compared to January, a 16% gain. Prosper still dominates the category with nearly 10 times as many unique visitors as its nearest rival, Lending Club

Update: In terms of funded loans, Prosper had double the volume of Lending Club in February: $6.0 million vs. $2.9 million. In January, the volume was $7.2 million vs. $2.8 million.  

Lender Launch Feb. 2008 Jan. 2008 Mo. Growth % Growth Feb. 2007
Prosper Feb '06 650,000 570,000 +80,000 14% 650,000
Lending Club May '07 70,000 50,000 +20,000 40% *
Zopa.com Dec '07 16,000 14,000 +2,000 14% *
Total   740,000 630,000 +100,000 16% 650,000

Source: Compete.com, estimated unique site visitors during Feb. 2008                                         *Not launched

Prosper vs Lending Club site traffic

Comments (7)

Person-to-Business Lending: A Wake-Up Call for Small Business Lenders?

By Jim Bruene on March 12, 2008 3:16 PM | Comments

image 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. 

Comments

P2P Lender IOU Central Suspended by Regulators

By Jim Bruene on February 29, 2008 4:15 PM | Comments (2)

image 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)

IOU Central homepage


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

IOU Central explains its halt in lending

Comments (2)

Updates on Credit Karma, Prosper, and GlobeFunder

By Jim Bruene on February 27, 2008 4:42 PM | Comments (2)

Here are three updates I've added to the posts from the last week:

  • imageCredit Karma, which we discussed here last week, is in private beta. But they have agreed to give NetBanker readers the invitation code to come in and kick the tires: CKFRND. Let us know what you think.
  • prosper_logo Prosper, discussed here yesterday, was named one of the Fast 50 2008, the 50 most innovative companies in the world by Fast Company magazine (here). The list is in the March issue. 
  • image GlobeFunder: I finally caught up with GlobeFunder founder Ben Decio last week. I noted in my NetBanker post a few weeks ago that the company was not yet accepting money from individual lenders. It sounds like that may be permanent. The company's current business plan is to use money from institutional lenders to fund all loan requests. That doesn't alter the value proposition to borrowers, since money is money, but it does move the company out of the P2P lending space. 
Comments (2)

Prosper Helps Borrowers Tap the Value of Their "Social Capital"

By Jim Bruene on February 25, 2008 11:46 PM | Comments (5)

image This morning I was at the Parc55 Hotel in San Francisco to hear Prosper CEO Chris Larsen's "state of the union" address at his company's annual user meeting, Prosper Days. I've heard him speak four times in the past year, and I learn something important every time (see note 1).

The highlight today was an analysis he unveiled showing the performance of loans made to borrowers who've been endorsed by friends and family. About a year ago, Prosper added an important social networking feature that allows friends and family of potential borrowers to post endorsements. Even more important, Prosper shows whether the friend has put their money where their mouth is and made a bid on the loan (see screenshot below; note green number in upper right showing the amount of the bid made by the endorsing friend).

image

Analysis
The theory is that the social endorsement(s) will have two important benefits:

  • Help lenders identify quality borrowers 
  • Provide borrowers with more incentive to repay the loan so as not to disappoint their endorsing friends

The first year's worth of data are in and the results are promising. The loans with higher social capital (i.e. endorsed by and bid on by friends) are performing significantly better so far:

  • Loans with a single friend bidding on the loan are performing 35% better than similar loans without that endorsement
  • Loans with multiple friends bidding are performing 50% better

Because Prosper makes its loan performance data public, investors will be able to track the value of these endorsements over time. If it turns out that endorsements do correlate with better long-term loan performance, loan rates will be bid down accordingly, and the borrower will capture the value of their social capital/reputation through lower loan rates. Already, the rates to these endorsed borrowers are running 10% lower. 

Lenders can even search on these so-called "social elements." Prosper's advanced search includes 43 searchable fields, four in the social area (see screenshot below).

 image

Note:

1. Prosper will be demo'ing their latest platform improvements at our upcoming FINOVATE Startup conference (previous coverage here).

2. For more information on Prosper and person-to-person lending, see our Online Banking Report, published in December.

Comments (5)

IOU Central Launches First P2P Lending Exchange in Canada

By Jim Bruene on February 12, 2008 5:45 PM | Comments (4)

image

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).

IOU Central homepage on launch day 12 Feb 2007

Comments (4)

New Person-to-Person Lender GlobeFunder Now Accepting Consumer Loan Applications

By Jim Bruene on January 16, 2008 7:37 PM | Comments (2)

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

  • 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.
  • imageFynanz 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.
  • imageLoanio: 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).  

image

Comments (2)

Ask the CEO: Asheesh Advani of Virgin Money

By Jim Bruene on January 14, 2008 2:04 PM | Comments

image Next week, I'll be interviewing Virgin Money USA CEO and Founder Asheesh Advani on stage at the Online Innovations in Financial Service Marketing Conference hosted by the Net.Finance (World Business Research) folks in New York City. Our main topic will be "Why consumers aren't buying mortgages online, yet," but I'm sure we'll cover the entire person-to-person lending spectrum in our 35-minute session Thursday morning (24 Jan).

If anyone has any questions for Mr. Advani, leave them in the comments here, or email me. I'll post the response here next week.

Comments

Prosper Increases its Loan Fee by 100%

By Jim Bruene on January 7, 2008 9:59 AM | Comments

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.

Comments

Zopa Credit Union Partners Give it Top Billing

By Jim Bruene on December 19, 2007 6:12 PM | Comments

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.

  • Addison Avenue FCU ==> Square ad on right side of hompage
  • Affinity Plus FCU ==> Banner on homepage 
  • First Tech CU ===> Two places on homepage, banner in the middle rotating with
        four offers and square box on right (see screenshot below)
  • FORUM CU ===> Small graphic and link on bottom of homepage
  • Provident CU ==> Banner on homepage rotating with four offers 
  • USA Federal CU ==> Not mentioned on website
  • 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.  

    Comments

    New Online Banking Report Published: Person-to-Person Lending 2.0

    By Jim Bruene on December 18, 2007 11:41 AM | Comments (1)

    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.

    Comments (1)

    Giving the Gift of Microfinance

    By Jim Bruene on December 11, 2007 9:20 PM | Comments

    Instead of giving yet another gift card, how about making a difference for someone 5,000 miles away?  The biggest online microfinance lender, Kiva, with $12 million loaned to date, offers gift certificates (here) as does Danish microfinance startup, MyC4, that just launched its public beta in September and offers microloan gift certificates (here).

    The recipient of the gift certificate logs in and chooses an entrepreneur to assist. For example, the inset is from a listing for a Cambodian village looking to Kiva for $600 to purchase a second cow and a motorbike trailer.

    For your kids, it's a great lesson in business, demonstrating how a small amount of capital can make a huge difference in someone's life. And it's a gift that keeps on giving. As the loan is repaid, it can be lent back out to someone else.


    Kiva Gift Certificate


    MyC4 Gift Certificate

    Comments

    How Zopa Operates Nationwide Through Just Six Credit Union Partners

    By Jim Bruene on December 7, 2007 9:40 AM | Comments (2)

    One of the first questions that arose when Zopa began facilitating loans and deposits for six U.S. credit unions earlier this week was, "What about (CU) field of membership requirements?" (see coverage here). It turns out that four of the six credit unions working with Zopa offer membership to anyone in the United States as long as the prospective member joins one of the supported organizations. And Zopa handles that hurdle during the signup process for its marketplace.

    For example, when I purchased a Zopa CD earlier this week, I was given the choice of joining either First Tech Credit Union, which offers membership to anyone in my state (Washington) or Addison Avenue Credit Union, which anyone can join provided they pay $5/yr to join the Financial Fitness Association. And to make the process simpler, Zopa covers the first year of association dues (see screenshot below).

    Bank Deals blog dug out the membership requirements of the six Zopa partner credit unions (here). Here are the four that offer membership through one or more organizations: 

    Comments (2)

    Zopa Launches U.S. Loan Marketplace Monday Night

    By Jim Bruene on December 4, 2007 12:55 PM | Comments (1)

    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.

    Comments (1)

    First Look: Zopa Opens in the United States with Depository Model

    By Jim Bruene on December 2, 2007 4:53 PM | Comments (3)

    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

    Comments (3)

    Congestion at the Starting Gate? Three New U.S. P2P Lenders Set to Launch: Zopa, GlobeFunder, and Loanio

    By Jim Bruene on November 28, 2007 10:59 AM | Comments (8)

    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.

    Comments (8)

    "Prosper Days" User Conference Videos Repurposed to Educate Customers

    By Jim Bruene on November 27, 2007 4:48 PM | Comments

    Prosper is one of the few (only???) national retail financial services companies that holds a users conference. The second annual Prosper Days is scheduled for Feb. 25/26 in San Francisco (more info here) and costs $55 in advance or $75 after Jan. 31. This year, they've added a famous keynoter, Freakonomics co-author Stephen Dubner. I will also be on stage later as part of a panel discussion of bloggers covering the space.

    The conference is an excellent idea, creating a buzz around the company and providing a platform for its most loyal customers to share success stories and network. It's a model eBay has used successfully for years. The addition of Dubner should increase press coverage and attendance.  

    I'm also impressed at how Prosper reuses the content created for the conference. The sessions are recorded and posted to its website to help educate borrowers and lenders. A total of ten videos are available here (see screenshot below).

    Comments

    Virgin Money P2P Lending on the Cover of Fortune Small Business

    By Jim Bruene on November 26, 2007 6:42 PM | Comments

    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. 

    Comments

    Virgin Money USA Launches in Boston/NYC Today

    By Jim Bruene on October 15, 2007 10:22 AM | Comments

    Link to Virgin Money USA 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)

    Virgin Money US homepage

     Goodbye page at CircleLending.com (15 Oct 2007)

    Circle Lending referral page to Virgin Money USA

    Comments

    Geezeo iWants Facebook Users

    By Jim Bruene on September 26, 2007 10:27 PM | Comments

     

    I check Facebook about once or twice per week to see what new financial apps have been posted. So far the ones we've looked at include (see previous coverage here):

    • Lending Club's P2P marketplace
    • Prosper's Fantasy Banker
    • PayPal
    • Wesabe
    • Buxfer
    • TD Bank's Split It
    • Obopay's BillMonk

    The latest entrant, iWant from online personal finance specialist Geezeo (see screenshot below). iWant is an application that allows Facebook users to share with friends their wants and needs, such as "buy an iPhone" or post more goal-oriented items such as, "pay off my student loans" or "throw a graduation party." And Geezeo ties it up nicely by tapping PayPal's API to facilitate "contributions" to the financial goals. It's also integrated into Geezeo's online personal finance application so users can track their goal progress in real time. ChipIn offers similar payment functionality in its Facebook app (previous coverage here).

    I wonder if Geezeo will make a P2P lending play here? If Geezeo's software included a repayment option, the iWant "donors" could easily become iWant "lenders" and a whole new market might open up. 

    If you are attending our upcoming FINOVATE conference next week in New York, you'll be able to ask co-founders Peter Glyman and Shawn Ward yourself. We are fortunate to have not only Geezeo, but two other early Facebook innovators, Prosper and Lending Club on the DEMO stage. If you can't make the event, check our website in two weeks for full length videos of each DEMO.

    Comments

    FINOVATE 2007 Lineup: The Lending Innovators

    By Jim Bruene on August 27, 2007 4:38 PM | Comments

    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.

    Comments

    Zopa's International Expansion

    By Jim Bruene on August 25, 2007 10:40 AM | Comments

    Link to Zopa ItalyI 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.  

    Comments

    Lending Club's YouTube Contest Off to a Slow Start

    By Jim Bruene on July 30, 2007 6:24 PM | Comments

    Update July 30: I don't know if it was me or YouTube's search function (probably the former), but I missed at least six other entrants into the Lending Club contest. While I'm still surprised there are so few — as of 11 AM Pacific today, there are 10 total entrants here — that's MUCH better than three. What's more important: several are approriate and relatively clever. The current leader here, and probable winner, has nearly 5,000 views and will be hard to catch. Another thing I missed, the company DID put the contest in its blog here. I apologize for the errors.

    Start-up, P2P lender Lending Club is sponsoring a user-generated video contest on YouTube. The most popular video wins $5,000, and in addition to its blog, the contest is also discussed in the lender's Facebook Group (screenshot below). Despite this exposure, the contest doesn't seem to be widely known. We read about it last week on a P2P lending blog called Prosper Lending Review.

    Right now, it looks like someone's going to make off with an easy $5k. The contest, which began July 17, and ends on Aug. 10, has only two entrants posted on YouTube, at least using the correct tab "Lending Club." One is recorded so softly, you cannot understand a word of it, another features a guy reading website copy on his couch, and the last one is a dubbed-over 1-minute clip from the Hound of the Baskervilles. I don't want to skew the results by linking to them. Trust me, you don't need to watch them.

    And since the winner is the video with the most cumulative plays on Aug. 10, new entrants have less than 2 weeks to rack up more than the 2,000 views of the current leader. 

    A few lessons from this effort:

    Lesson #1: While the contest is a great idea to generate low-cost buzz, and perfect for a Facebook-based app like Lending Club, the lesson here is that you need to run it longer so the contest can create its own viral momentum. Three and a half-weeks just isn't enough time for the word to get out to enough creative types and for them to get something interesting recorded, uploaded, and for it to catch on with YouTube viewers. In contrast, see our coverage of Intuit's TurboTax Rap which generated more than one million YouTube views (previous coverage here).

    Lesson #2: Lending Club was apparently testing the power of FaceBook groups, creating a special one just for the contest called, "Lending Club Contest -- Win $5,000." The lender did not mention the contest (see update above) on its website. But unfortunately, the Facebook club has only 57 members after two weeks and doesn't appear to have the horsepower to spike enough word-of-mouth buzz on its own. I'm sure they will do it differently next time.

    Lesson #3: You might want to include a clause in the contest rules stating that videos containing pirated content or profanity, are unintelligible or not understandable, are not allowed. That would eliminate all three current entrants. Here's the official rules posted at Facebook.

    Comments

    Prosper Borrower Seeks "iMoney for iPhone"

    By Jim Bruene on June 7, 2007 3:38 PM | Comments

    When researching my earlier post, 10 Ways for Banks to Leverage Apple iPhone Hysteria, I happened to search for "iphone loans" at Google (see results below). Not really expecting to find anything, I was shocked to see the first result pointing me to a recent loan listing at Prosper (see inset, full listing here).

    Unless this is a stealth PR ploy from Apple (doubtful), the enterprising NY waitress who posted this Prosper loan request, is riding the iPhone wave to nail down decent terms on a $1,000 loan, which she says will be used to buy the phone.

    Julestar01, who by the way has a great future in marketing ahead of her, used the eye-catching graphic above along with the killer title, iMoney for the iPhone. After being highly recommended by the leader of her Prosper Apple User Group, including his/her first bid for the full grand at 13.20%, the loan is now fully funded at 12.55% with more than seven days remaining. It has already attracting 20 bidders causing the rate to fall 20 basis points even as I wrote this post. I'm sure there will be many copy-cat requests after the success of this one.  

    It does provide another way for a bank to leverage the iPhone hype: jump in and fund this loan, then you can say you are the first bank to make an iPhone loan.

    Another fascinating observation, and the real reason for this post: Prosper, not Apple, or AT&T, or even Citibank, has the number one organic link on Google for "iPhone loans" at absolutely zero cost. That's the first-mover advantage at work.

    Page 1 Google search results for "iphone loans"
    (10:00 AM PDT, 7 June, 2007, from Seattle IP)  

    Comments

    New Online Banking Report Now Available: Social Personal Finance

    By Jim Bruene on June 4, 2007 3:18 PM | Comments (1)

    Link to Online Banking Report Wow, I can breath again. I just loaded the latest Online Banking Report on to our website, Social Personal Finance: Will social networking revolutionize personal finance? I'll post a summary later. Subscribers, you can download it now (here) free of charge. Everyone else, it's US$395 on its own, or for "just" $700 more you get the new report plus a stack of others, including our report on Web 2.0-ing your Bank, Mobile Banking, Mobile Payments, the latest online banking forecast and more.

    Thanks to Scott at Payments News and Colin at The Bankwatch, who've already given the report a mention. And thanks to the Bryan Donovan and the folks at Compete, who provided a new online financial services data snapshot that I know you are going to find extremely valuable. More on that tomorrow.

    Now, back to our regularly scheduled blog.  

    Comments (1)

    New Person-to-Person Lender Loanio Readies for Launch

    By Jim Bruene on June 1, 2007 9:29 AM | Comments (9)

    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)
    Comments (9)

    New Person-to-Person Lender, Lending Club, Hopes Facebook Linkage Allows it to Prosper

    By Jim Bruene on May 25, 2007 12:13 PM | Comments (1)

    Link to Lending Club homepage 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 mockup

    LendingClub homepage from inside Facebook

    LendingClub page inside Facebook

    Comments (1)

    Virgin Money to Enter U.S. Market Through Acquisition of CircleLending

    By Jim Bruene on May 17, 2007 10:44 AM | Comments

    This is a very interesting bit of news today. Virgin Group PLC, the high-flying UK-based company run by Richard Branson, says it will be using Waltham, MA-based CircleLending to enter the U.S. financial services market. Virgin's financial services are marketed under the Virgin Money brand in the UK (see screenshot below) and several other markets.

    If you take a broad view, CircleLending was the first pure peer-to-peer lender in the U.S., five years before Prosper got its start (see previous coverage here). However, CircleLending has historically limited its involvement to servicing loans made between family members, not brokering the deals or vetting the applicants like Prosper and Zopa.

    However, from the sounds of it, that will be changing under the new majority ownership by Virgin USA. According to Asheesh Advani, CEO/Founder of CircleLending:

    "(CircleLending will be the) launching pad to brand Virgin in the U.S. in financial services"

    According to the American Banker article here, the new venture's first product, sold under the Virgin name, will be a direct mortgage that blends "friends and family" funds with capital from a financial institution and/or the secondary market. They also said they will have a credit card and are looking at student loans.

    It will be interesting to see how they use peer-to-peer finance in its efforts. Anthony Marino, Virgin USA's SVP Corporate Development told American Banker:

    "(the CircleLending platform) provides a broad opportunity to address consumer needs, and the Virgin brand allows us to bring a unique tone of voice to the market,"

    And,

    "We are … building a major, Virgin-branded financial services company in the U.S."

    Analysis
    These are not new concepts, but with the Virgin marketing muscle behind them and the integration of peer-to-peer tools, the newcomer could carve out a significant niche in the massive U.S. mortgage lending business. The new entity could also leverage the CircleLending platform to compete directly with Prosper and Zopa in the U.S. and  importing the resulting product into the UK to compete with Zopa there.

    Virgin Money UK homepage

    Comments

    Prosper Advertising on BankRate.com

    By Jim Bruene on May 11, 2007 1:05 PM | Comments (2)

    After posting yesterday about the apparent traffic spike at Prosper (here),* I ran across this ad this morning at BankRate.com (here). Prosper's excellent landing page is shown at the end of the post.

    Prosper ad on BankRate.com

    I've seen Prosper advertising a bit on Google (here), but this takes the lender's marketing to a whole new, and expensive, level. At BankRate, a site littered with 5% APY come-on's, this orange 12% rate offer will attract a lot of attention. But given the typical acquisition costs of $100+ for advertising at BankRate, it will be tough for this to pan out from an ROI perspective. With Prosper's 1% loan fee plus 0.5% servicing charge, it would take roughly $7,000 in lending volume per new customer to break even in the first year, if acquisition costs average $100.

    But after visiting with Prosper's founder, Chris Larsen, at the recent Net.Finance conference, I have a renewed respect for what they are doing. We're working on a Prosper 2.0 report, as a followup to last year's initial look at person-to-person lending (here).

    Prosper landing page after clicking through the above BankRate.com banner ad

    Prosper landing page from BankRate.com banner

    * Compete told me they are looking closer at the data to see if there were any anomalies in the latest estimates for Prosper.com traffic. 

    Comments (2)

    Zopa Provides Update on U.S. Launch Plans

    By Jim Bruene on April 19, 2007 8:14 AM | Comments

    Zopa email 19 April 2007 update on US launch plans Without providing specific dates, Zopa sent an email to its house list today providing a progress report on its upcoming U.S. launch (see inset). The person-to-person lending exchange now expects a national launch rather than the state-by-state approach previously announced.

    The company said it's completed its site redesign, underwriting system, ID verification system and product lineup. And signaling the importance of its U.S. launch, Zopa named a new CEO, Doug Dolton, who will run both the U.S. and U.K. operations out of San Francisco.  

    The email raised more questions about the exact business model to be employed, saying only that it's "made adjustments to Zopa necessary for launching in the U.S." Zopa has been talking to credit unions about partnering, but no announcements have been made (previous coverage here).

    Comments

    First Peek: CommunityLend, Canada's P2P Lending Startup

    By Jim Bruene on March 21, 2007 4:14 PM | Comments (5)

    CommunityLend banner

    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

    Comments (5)

    Ideal Bank P2P Payments Programs and User Benefits

    By Jim Bruene on November 7, 1999 12:41 PM | Comments

    If you work for a smaller bank or CU, you may be thinking, is this appropriate for us? Absolutely. As good a product as we think this will be for DotBank, Confinity, and Checkfree, it will be even more successful when offered by a bank as part of its online banking program. We’ll explain why after we outline how a bank could incorporate personal payments into their online banking program:

    The Ideal Bank-Based P2P Product

    1. Personal payments should be tightly integrated with other online banking and bill payment functions.*

    2. Users type the recipient’s email address, payment amount, and actual name (for authentication) into a Web-based form (see mock-up on next page). The email payment consists of a personal message from sender A to recipient B along with your bank name and potentially a guarantee of good funds (see mock-up next page); giving the transaction the credibility that will take Confinity years to earn.

    3. The recipient receives a message informing them that sender A has authorized recipient B to draw x dollars out of A’s bank account. Unlike Confinity’s PayPal, where funds are moved immediately into Confinity’s account, the ideal bank program keeps the money in the sender’s bank account until recipient B initiates a retrieval transaction. The bank and its customers maintain their historical hold on the float.

    4. To claim the funds, recipients click on an imbedded link that takes them into a secure area on your bank’s Web:
    – New users must register and be authenticated
    using a combination of email, snail mail, and
    credit card authorizations depending on the size
    of the transaction, nature of the payment, etc.
    – Previous users simply point and click to move
    the funds into any U.S. bank account or have a
    check mailed to them.

    5. Pitch your bank and/or online banking services to recipients.

    Source: Online Banking Report, 11/99

    *For most financial institutions, the degree of integration will depend a great deal on how your Net-banking platform vendor decides to support the feature.


     

    Following is a mock-up of how the service might be delivered on your Web, followed by an example of the email payment advice generated by the program. It’s much like PayPal’s system except we’ve added the ability to personalize the heading and message.

    Mock-Up of Web-Based Entry Form

     

    Information Requested

    User Enters this Information

    Password* user-selected password
    Recipient’s name first name, last name
    Recipient’s
    email address
    user@isp.com (or choose from drop-down box of previous entries)
    Amount to be sent $xxxx.xx
    Subject line of email message
    (user editable)
    User selects one of the following:
    -- Here’s the $xxx I owe you
    -- Here is payment of $xxx
    -- A gift for you
    Message text
    (user editable)
    This message contains an electronic money order for $xxx. The funds are waiting for you in a secure and private area at yourbank.com. To retrieve the money, click on the link below and follow the simple two-step process (after registration). It’s free and only takes a minute or two, far faster than depositing a paper check. For more information on yourbank.com epayments, click the Help button after following this link:

    http://pay.yourbank.com/cgi-bin/abc

    If you have questions, please reply to this email, or call me at (206) 517-5021.

     

    *We recommend an extra layer of password protection for functions that allow funds to be moved out of the user’s account (see OBR 4/99). Better yet, allow users to set the maximum dollar amount allowed before the extra password is required.


     

    Mock-Up of Email Sent to User

    To: Linda Culp

    From: Kate Schultz kate@netbanker.com

    Subject: Here’s the $20 I Owe You

    This message contains an electronic money order for $xxx. The funds are waiting for you in a secure and private area at yourbank.com. To retrieve the money, click on the link below and follow the simple two-step process (after registration). It’s free and only takes a minute or two, far faster than depositing a paper check. For more information on yourbank.com epayments, click the Help button after following this link:

    http://pay.yourbank.com/cigi-bin/abcd

    Linda, if you have questions, please reply to this email, or call me (206) 517-5021.

    Thanks.

    Kate Schultz

    P.S. Once registered, you too will be able to zap money via email from yourbank.com.

    Source: Online Banking Report, 11/99

    Such a system has a number of benefits for users:

    P2P User Benefits

    Recipient (of funds)

    •  Receive money faster than mailed paper checks
    •  No paper checks to deposit
    •  No need to track the deposit to see if it clears; and no fees to pay if it doesn’t
    •  Assurance of good funds
    •  Electronic records can easily be maintained by filing email notifications in a computer folder
    •  No need to reveal bank account numbers to senders

    Sender (of funds)

    •  Easier/faster than writing a paper check
    •  Cheaper (most likely) compared to the $0.33 to $0.50 cost to write and mail a paper check
    •  Better communications: recipient receives an immediate email notification of payment and can easily respond with questions
    •  Electronic records can easily be maintained by filing email notifications in a computer folder
    •  Money can be sent worldwide
    •  For ecommerce, recipients know you have sent good funds and can ship the goods faster
    •  No worry about accidentally sending a NSF check

    Source: Online Banking Report, 11/99

     

    Summary: Building the Service

    In partnership with Confinity, or built in-house, you could be the first on the block with email personal payments. Not only will it put you on the PR map, it could be both a profit center and lucrative source of new accounts.

    Why? New accounts come from the viral nature of the program. For someone to send or receive funds, they must be registered with <pay.yourbank.com>. They don’t actually have to open a traditional bank account (that would severely hamper usage). But must tell you who they are and what account they are using. Armed with that information, you could pitch special offers for years to come.


     

    Bank Benefits from P2P Products

    •  lower transaction costs than paying Checkfree to mail a paper check
    •  viral way of getting your name in front of new prospects
    •  a good way to help small merchants, especially those that don’t accept credit cards, receive payments faster and more conveniently
    •  a potential source of fee, loan, and other income
    •  good copy point for the online banking brochure
    •  an easy-to-use and easy-to-explain feature that could boost activation and usage of online banking and bill payment across the board
    •  excellent PR and promotion possibilities
    Comments
    Categories: CheckFree, P2P Lending

    Who Has Peer 2 Peer

    By Jim Bruene on November 6, 1999 12:39 PM | Comments

    Most online business banking/cash management programs have featured ACH origination functions for many years. CompuBank was the first to put the service in front of retail users a year ago (OBR 10/98). Several other banks, including USAccessBank (OBR 2/99) have added the feature, but it’s still not widely available.

    However, even the bank currently offering Web-based ACH origination are missing two key ingredients for the Net:

    •  bank account masking (for the recipient)
    •  email integration

    We expect the Internet banking platform vendors (Digital Insight, S1, Online Resources, Q-UP, etc.) to quickly add this feature, both the straight ACH interbank transfer, and the more private person-to-person variety described here, to their retail offerings (probably in partnership with Checkfree and/or other payment specialists). Two years from now it will likely be an expected feature of a Net banking service. However, there is still time to jump in front of your peers by launching person-to-person payments in the next six to nine months.

    Person-to-Person Revenue Streams

    1. Transaction fees from sender and/or recipient

    2. Funds conversion fees (moving money out of the digital cash system into real money)

    3. Float income (like a prepaid cash card)

    4. Abandoned funds (like travelers checks)

    5. Currency exchange fees (translating money into different currencies)

    6. Funds guarantee fees (good funds guarantee, like credit cards)

    7. Escrow service fees (shepherding the delivery of the goods before releasing funds; like COD)

    8. License fees from banks and others using the system

    9. Sponsorship/advertising revenues

    10. Revenues/commissions from credit lines attached to the P2P accounts

    Source: Online Banking Report, 11/99


     
    Business Model

    One reason investors are excited about the person-to-person payment space is its ten potential revenue streams (see table below left). That’s nine more than many Web-based companies who rely solely on banner advertising.

    Pricing: With 10 potential revenue streams, venture funding pouring in, and no first mover yet established (though it looks like Confinity will grab that position), pricing will likely be all over the board. But based on what we’ve seen leading Net companies do in the past, we predict that plain vanilla person-to-person payments will carry no explicit fees. Companies will instead earn revenues from value-added services such as (see example price schedule below): · good funds guarantee
    •  rush payments
    •  large-dollar payment surcharges
    Evidence for this prediction comes from Confinity, which up until a few weeks ago, had planned to charge users a 4.5% withdrawal fee after the first $500 withdrawn every six months. The company dropped the fee altogether so that they can simply say it’s free. Period.

    Hypothetical P2P Payments Fee Schedule*

    Service

    Fee

    transfer <$100 within 2 days

    free

    transfer >$100 within 2 days

    0.5%

    rush transfer (same day)

    0.5% (min. $0.50)

    funds guarantee*

    0.5% (min. $0.50)

    custom gift card (snail mail)

    $2.50

    custom email message to recipient

    free

    reminder service

    free

    funds sent via prepaid cash card for ATM withdrawal

    2%

    confirmation when funds picked up

    $0.50

    Source: Online Banking Report, 11/99

    *see the table for an example using this fee schedule


     

    Pricing Example*

    Transaction

    Calculation

    Fee

    send $75 in 48 hours

    n/a

    $0

    send $75 same day 0.5% x $75 =

    $0.50 (min.)

    send $300 in 48 hours 0.5% x $300 =

    $1.50

    send $300 same day (0.5% + 0.5%) x $300 =

    $3.00

    send $300 same day with funds guarantee (0.5% + 0.5% + 0.5%) x $300 =

    $4.50

    Source: Online Banking Report, 11/99

    *using fee schedule from previous table

    Business Case: If person-to-person payments roll out in a rational fashion (not likely, see Pricing on previous page), with providers pricing the service above cost and appropriate for its value, reasonable profits could be expected. With the price schedule outlined on the previous page, banks could expect annual gross revenue of $28 per customer and profits of $15 to $20 per year (see below for calculations).

    Scenario: YourBank.com has 100,000 users. Each user makes two person-to-person payments per month, one for less than $100, which is free, and the other averaging $175. The split between same day and two-day delivery is 50/50. Ten percent opt for funds guarantee/insurance at an extra fee.

    Results: As shown in the table below, a total of 2.4 million payments would be processed, 1.2 million of which would generate fees. Total fees collected would be $2.8 million, or $28 per customer. Variable costs would vary by bank, but shouldn’t be more than $5 to $10 annually per customer, resulting in gross profit of about $20 per year.

    Revenue Calculations*

    Metric

    Calculation/Result

    Total transaction volume 100,000 x 2 x 12 months = 2.4 million
    Transactions generating fees 100,000 x 1 x 12 months = 1.2 million
    Dollar value 1.2 million times $175 = $180 million
    Total fee revenue $180 x 50% x 0.5% = $900,000
    plus $180 x 50% x 1.0% = $1,800,000, plus $180 x 10% x 0.5% = $90,000
    = $2,790,000
    Annual revenue $27.90 per customer

    Source: Online Banking Report conjecture, 11/99

    *optimistic scenario where competition does not drive the price to zero

    Comments

    How P2P Payments Work

    By Jim Bruene on November 5, 1999 12:37 PM | Comments

    It’s impossible to predict precisely how these systems will play out as the product matures. Expect to have a jumble of competing, and non-interoperable systems in use until the market shakes out with a “standard” system in five to ten years. However, we can describe the basic functionality, which is relatively straightforward:

    Prime Ecommerce Application: Buyer A purchases an $11 CD from Seller B on eBay. Neither party wants to reveal their bank account information to facilitate an ACH (electronic) transaction. Buyer A could stand in line at the 7-11 to get a money order, but that takes time and money, hardly worthwhile for an $11 purchase. So usually Buyer A sends a personal check, exposing their bank account number to Seller B, and delaying shipment by two weeks as Seller B waits for the check in the mail, deposits it at their bank, and waits some more to make sure it clears. Internet payment eliminates virtually all the delay and lost privacy as follows:

    1. Seller provides Buyer with Seller’s unique ID and a link to a trusted Web site to arrange payment.

    2. Buyer logs into the trusted payment site (registration required for first time users) and instructs the server to transfer money from the Buyer’s account to the Seller’s account. Only the trusted server knows the bank account numbers of each party.

    3. An ACH entry is made debiting the Buyer’s account for the $11 purchase price.

    4. Seller automatically receives an email informing them that payment has been initiated.


    5. Another email is generated to the Buyer and Seller after the transfer clears the ACH system (48 hours maximum), informing both parties that good funds* have been transferred.

    6. Seller ships the goods, slashing the shipment delay from two weeks to two days.

    Other Applications

    The basic person-to-person payment engine can be used to drive a number of other applications. The three most important are interbank transfers among the user’s own accounts; interfamily transfers where the recipient doesn’t mind sharing account data with the sender, for example a college student receiving money from his/her parents; and automated versions of both.

    •  Interbank Transfer to Your Own Accounts (aka SelfPay): The P2P payment structure can easily be used to transfer funds among one’s own accounts at any financial institution or brokerage, as follows:
      •  Bank account info is registered at a trusted payment site, e.g. PayPal.com.
      •  User logs in and designates amount to be withdrawn from account A.
      •  User designates amounts to be transferred to account B.
    •  Interbank Transfers to Family Member Accounts (aka FamilyPay/StudentPay): Same as above except the user also registers family member bank accounts to receive funds.
    •  Automated Interbank Transfers: The next logical step is to augment the manual transferring of funds with automated, rules-based systems. The easiest application would run on calendar days, e.g., transfer $500 from account A to account B on the 15th of every month. But once the transfer engine is coupled with a statement aggregation function (see PayTrust), it gets far more interesting. Users could establish transfer rules to accomplish financial goals such as: minimizing loan interest paid or maximizing deposit interest earned. The scan-and-pay companies, with their rules-based bill payment mechanisms, are already on this path.

    * In the U.S., Reg. E consumer protection claims would still have to be addressed if the buyer claims they didn’t get what they paid for.

    Niche Offerings: A full-featured payment engine can also be deployed in a variety of niche applications:

    Niche Market Offshoots

    Name

    Description*

    AuctionPay Payments especially designed for auctions.
    AutoPay Payments are made automatically unless the user intercedes.
    EMailPay Payments with integrated email.
    EscrowPay Money is held in escrow until the buyer approves the merchandise received.
    FedExPay Next day payment guaranteed.
    GiftPay For use in sending money as a gift; or as a gift certificates.
    InternationalPay International payment with built-in currency exchange.
    PayLater Integrated with a credit line so you can send money now, repay later.
    PayYourselfFirst Makes it easy to fund a savings plan with a few keystrokes.
    PayOff Loan repayments via email.
    PayFaster Extra principal payments on mortgages and other loans.
    OneClickPay One click mechanism for secure payment, aka eWallet.
    PayCards Credit card payment plan; enter all credit cards and it automatically pays the optimum amount to each card to minimize interest paid.
    PayGuilt
    /AnonPay
    Charity payments and anonymous reparations.
    PaySure/PayNow/PayGuarantee Guaranteed on-time payments (real time) for highly important bills such as insurance and credit cards.
    PaySpouse Child support payment plans.
    PrivatePay/
    Anonymous Pay
    Payment service that shields the name and/or address from the seller, and vice versa; for digital goods, all the seller needs to know is that good funds are available; for physical goods, a mail drop system could be employed. PayPal
    offers near-anonymous payment; recipients need only provide an email address to senders; senders must divulge email address and name (both must fully identify themselves to PayPal in order to move money in and out).
    Scan-and-Pay Scan-and-pay bill presentment
    Source: Online Banking Report, 11/99 *Most of these services are described in detail in previous OBR issues (OBR 3/99, 2/99, 6/98, 12/97, 11/97, 11/96, 10/96)

    Comments
    Categories: P2P Lending, Virtual Bank

    Upcoming Events

    Recent Research

    • NEW! Mobile Banking Security: The new channel is a boon for improving security, both real and perceived - Find out more
    • NEW! Money 3.0: Payments Go Mobile Apple, Bitcoin, & mobile apps are changing the game. What’s a bank to do? - Find out more
    • NEW! Digital Banking Forecast: Current, future and historical usage: 1994 to 2023 - Find out more

     

       

    RSS Subscribe via RSS
    RSS Subscribe to Comments



    Email:


    @NetBanker Twitter Feed



    See all @NetBanker tweets