Armed with a new national lending capability (note 1), new slogan, "Let's bank on each other," and a window of opportunity to gain ground on the competition (note 2), person-to-person lending pioneer Prosper is preparing new marketing initiatives which includes 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 interesting to see how the advertising is received. From a branding perspective, I think they 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 (eg. Lending Tree's $100-million "When banks compete" campaign in the late 1990s) or going so over the top (think WaMu) that you can't recall who made the ad (see previous coverage here). 

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

Notes:

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

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

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

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

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

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

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

__________________________________________________

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

CommunityLend pre-launch homepage (17 April 2008)

 
Note:

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

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).

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.

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.

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

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

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

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

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

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

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

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

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.  

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

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

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

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

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

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

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

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

IOU Central homepage (29 Feb 2008)

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

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

• Credit 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, 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. 
  
• 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. 

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

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

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

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

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

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

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

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

Note:

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

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

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

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

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

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

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

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

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

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

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

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.

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

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

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

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

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

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

Weighted
  Average*** 2.4%          1.2%

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

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

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

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

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

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

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

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

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

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

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

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

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

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

________________________________________________

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

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

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: 

• Addison Avenue FCU ==> Financial Fitness Association (cost = $5/yr)
• Affinity Plus FCU ==> Affinity Plus Foundation ($25 one-time)
• Provident CU ==> Sierra Club ($25/yr), American Cancer Society and others
• USA Federal CU ==> Prime Meridian Association ($10)
  

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.