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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.

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How it Works
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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.  

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Analysis
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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. 

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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

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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).

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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).

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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).

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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.

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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

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Notes
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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.

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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

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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

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Source: Compete, 19 May 2011

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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%

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Finovate Alumni News from Expensify, FiLife, Mint, and Prosper

By Andrew Dolbeck on March 26, 2010 4:17 PM | Comments

Following are summaries of the articles posted recently on our Finovate blog. More alumni news is available on our Finovate Twitter feed.

Expensify: One Year Anniversary

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Online expense-report generator Expensify marked the first anniversary of its product being live and available to a mass audience on March 10. Some notable accomplishments for the year:

For more on Expensify and its accomplishments, read the full post here.

FiLife and Mint Remain on Top of Finovate Alumni Traffic Chart

Each month we survey the U.S. Web traffic data for Finovate alumni websites. In our second survey, FiLife and Mint kept the top spots, with 1.5 million and 1.1 million unique visitors respectively. FiLife also showed the highest year-over-year growth, gaining more than 1.3 million visitors.

TradeKing took the prize for month-over-month growth, gaining an additional 69,000 visitors in February for a total of 78,800 -- nearly eight times as many unique visitors than the month before.

And the highest growth for a site not in operation a year ago belongs to Credit Karma's private-label site for Sears' Sears Credit Score which reached 139,000 visitors in less than six months of operation (full post here).


Mint Holds iPad Sweepstakes on Facebook

clip_image004Mint was the first company we'd seen capitalize on the recent iPad publicity by giving one away to Facebook followers.

To enter the sweeps, users first register as fans of Mint's Facebook site, an action that is usually visible to the user's Facebook friends, further increasing Mint's visibility on the social network. The contest also allowed entrants to name the person who referred them, with the referrer also winning an iPad (full post here).

Prosper Launches Talk Taboo Site

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Prosper launched a new social website called Talk Taboo where users can share stories about their finances.

The site includes a simple interface for users to post stories, a page displaying the stories, and a debt-consolidation guide. The landing page contains a link to Prosper, inviting consumers to consolidate their debts with a Prosper loan (full post here).

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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.

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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)

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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

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Categories: Finovate, P2P Lending, Prosper

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)

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.

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Categories: P2P Lending, Prosper

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)

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)

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)

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)

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)

Discovering the Social Economy at Net.Finance

By William Azaroff on January 27, 2008 9:16 AM | Comments (17)

Last week’s Net.Finance conference entitled Online Innovations in Financial Services Marketing brought thought leaders together in New York to examine trends and breakthroughs in the world of banking.

For me, there was one clear take away: The new social tools that allow people to connect with each other online are ushering in a new economy.

We are moving into a social economy, where collaboration and participation between and among consumers will sway their choices more than marketing messages do. Those companies that enable social participation, add value to people’s lives and create authentic experiences for their customers will lead in this new economy. There were other topics discussed, but this theme kept creeping into the presentations and conversations in a way I had never before encountered. I’m going to narrow in on this one theme, which ran throughout the two days of the conference, and I apologize to those companies and speakers I’m not highlighting here.

ING DirectJurie Pieterse – ING Direct
Jurie outlined several of the key ways that ING is handling the power of its marketing and messaging to consumers by opening up its brand to customer participation. It is clear from ING’s early experimentation that it has a brand with strong emotional appeal and resonance. The bank opens the doors to people who engage with the brand to create photos, videos and prose about how their relationship with ING helps them manage their money.

Jurie explained that when they delivered the prizes in their user-generated content contests, which ranged from $1,000 to $15,000, most winners said that they entered the contests more from a sense of fun and participation than for the money. After this initial experimenting, ING will begin to examine the data to determine if these contest entrants are more loyal and profitable than less engaged customers. I would bet my Electric Orange account they are.

Prosper.comChris Larsen Prosper
It is fascinating to watch Prosper evolve their model. Chris spoke at length about the importance of social capital to improving its default rates. The idea is that people who have peer pressure built into their borrowing habits will pay back at a better rate than they do to traditional financial institutions.

Prosper has found that people who receive at least one of bid from friends or family have significantly lower default rates than those who only borrow from strangers. By leveraging this social capital, the entire community acts more honestly, even if lending to friends and family is a small part of the overall equation.

WesabeJason KnightWesabe
Jason sees Wesabe as a community of interest focused on money. By allowing members to tag their financial transactions and share whatever information they choose with the greater community, they create a collective intelligence I find very exciting. I see them as the long tail of financial advice. People discuss better ways to use their money, from smarter investing habits to buying better cuts of meat. All of this collective intelligence fuels a social economy where people rule their situation by having a much healthier relationship to the way they spend their money.

Verity Credit UnionShari StormVerity Credit Union
Shari oversaw the creation of the first “bank” blog, which Verity started in 2004. She has strong information and advice to other FIs considering jumping into the world of blogging. It is clear that the blog is an excellent way to humanize the company and engage with their community in an honest and transparent way.

TradeKingThomas A. Desmond TradeKing
I was blown away by TradeKing, a company I had not heard of before. Their marriage of social tools inseparable from their trading platform is perhaps the very best example of social media being used strategically by a company that I have seen.

They have baked community aspects into everything that happens on their site, so, if traders opt in to the community, they can learn from each other based on their actual trading results (similar to Zecco.com, below)

VZirgin MoneyAsheesh AdvaniVirgin Money
It took me a minute to wrap my head around Virgin Money’s model, but once I got it, I was hooked. Many people who buy houses get side loans from friends and family to make a bigger downpayment. Same with student loans, or with unsecured personal or business loans. Virgin creates a model around this kind of lending, so both sides can take advantage of the tax benefits available via a documented lending relationship. It creates excellent flexibility, because if a borrower needs to skip payments, the lender can adjust the loan accordingly. The loan can always be turned into a gift at a later date. This takes a part of the social economy which was underground and unseen, and brings it above board, recognizing it as an important part of the overall economy.

Zecco.comGabriel DalportoZecco.com
Zecco and TradeKing's models have many similarities (one exception being that Zecco offers 10 free trades each month). Community features are built right into the tools making it easy to track individual investors within the community. That allows the higher performers to gain a following and for newcomers to learn from the veterans. Like TradeKing, Zecco allows community menbers to see the actual trading results and portfolio holding of members (that have opted in), adding an enormous amount of credibilty to discussions about individual stocks and trading strategies.

Summary
It feels more and more to me that we’re at a turning point. I admit that these innovations are small, just barely bubbling up to the surface. But I believe these examples of companies quietly tapping into unmet needs provide a model of the future.

Anyone working at a financial institution who wants to understand the potential opportunities and threats coming our way should watch these companies and understand their models. If my experience is any indication, the social economy will begin to trickle into your FI's strategies and executive discussions and those who best understand these concepts can help inform, influence and shape the outcome.

William Azaroff is the Interactive Marketing & Channel Manager at Vancity where he develops interactive marketing initiatives, and pioneered ChangeEverything.ca, the groundbreaking change-themed online community. William builds on a decade of experience at digital agencies in Vancouver, Seattle and Los Angeles driving strategy, extending brands to the Web and building relationships for companies in several verticals, including Honda, Disney, Intuit Canada and the Government of BC. He discusses trends and noteworthy achievements in social media at his blog: azaroff.com/blog.

Comments (17)

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

Mint, Prosper, Zillow, and Kiva are Crunchie Finalists

By Jim Bruene on January 2, 2008 3:43 PM | Comments (2)

Four online finance companies are finalists in the Crunchies, an awards program sponsored by three major tech blogs: TechCrunch, GigaOM, Read/WriteWeb, and VentureBeat.

  • Mint is one of five finalists in Most Likely to Succeed (here)
  • Prosper is one of five in Best (new) Business Model (here)
  • Zillow is one of five in the Best Consumer Startup (here) and Best Overall (here)
  • Kiva is one of five in Most Likely to Make the World a Better Place (here)

Winners will be determined by a tally of votes at the site between Dec. 21 and Jan 10.

Comments (2)
Categories: Mint, Prosper, Zillow

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)

"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

Mint, Mortgagebot, and Prosper Win Best of Show at FINOVATE

By Jim Bruene on October 5, 2007 3:10 PM | Comments

Following is a press release we just sent out over the wires. While these three companies received the highest ratings across the 117 ballots, ratings were relatively high across the board, averaging 5.02 on a 7-point scale. Eight other companies received scores within 10% (e.g., 0.5 points) of the lowest-winning score and thirteen companies were within 20% (1 point).
_______________________________________________________________________________

Oct. 5, 2007
For immediate release:

NEW YORK(BUSINESS WIRE)On Tuesday, attendees at the FINOVATE 2007 conference voted on their favorite financial product or service from among the 20 innovations presented. Overall, the DEMOs were extremely well received with an average score of just over 5 points on a 7-point scale. The three winners (in alphabetical order):

  • Mint: A new online personal finance company launched
    two weeks ago (previous coverage here)
  • Mortgagebot’s Mortgage Marvel: A new mortgage marketplace launched Oct. 2 at FINOVATE 2007 (previous coverage here)
  • Prosper: The first U.S. person-to-person lender,
    launched in Feb. 2006 (previous coverage here)

About the Voting
One “Best of Show” ballot was issued to all 230 registered attendees. Representatives from the presenting companies were not eligible to vote. Each of the 20 DEMOs was rated on a 7-point scale with the three highest receiving “FINOVATE Best of Show” awards. About two-thirds of eligible attendees voted.

About the FINOVATE Conference
The FINOVATE conference is the first demo-based conference for the financial, banking and lending technology industries. Held annually in New York City, the conference offers a chance to explore the future of finance in a fast-paced, intimate and unique way. FINOVATE is organized by Online Financial Innovations. For more information, please visit www.finovate.com.

About Online Financial Innovations
Founded in 1995 by former banker Jim Bruene, Online Financial Innovations is a Seattle-based research company. OFI is best known for publishing the Online Banking Report, a regular newsletter featuring in-depth analysis, relevant data, and informed recommendations to financial services executives in 50 countries. For more information and free sample reports, visit Online Banking Report, email info@netbanker.com or call (206) 517-5021. You may also find OFI’s blog on the latest in online finance & banking at NetBanker.com,

Contacts
Online Financial Innovations
Jim Bruene, 206-517-5021
info@netbanker.com

Comments
Categories: Finovate, Mint, Prosper

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

Venture Funding Flows to Wesabe and Prosper; Wesabe Launches on Facebook

By Jim Bruene on June 20, 2007 4:15 PM | Comments

Link to Wesabe on Facebook Two potentially disruptive startups, Prosper, the leader in U.S. P2P lending and Wesabe, the first-mover in social personal finance, both announced new funding rounds today:

  • Prosper took in $20 million, bringing total funding to $40 million (previous coverage here)
  • Wesabe added $4 million to its bank account, bringing its funding to $4.7 million (previous coverage here)

These are sizable bets on on niche markets that haven't thrown out a lot of revenues so far. But whether they succeed or not, the money will certainly fund additional innovations that will be educational for those in the banking industry. 

Case in point: Wesabe launched an app on the Facebook platform, becoming the first personal finance company to do so (screenshot below). So far it's a simple front door to their group discussions, but with more development resources, it could become a full-fledged "bank" running within the Facebook community.

For more information on Wesabe refer to our latest Online Banking Report, Social Personal Finance (here).     

Wesabe's application on the Facebook platform

Comments
Categories: Facebook, Prosper, Wesabe

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 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)

Update on Prosper.com Traffic Numbers

By Jim Bruene on May 17, 2007 1:01 PM | Comments

Last week we reported on the apparent traffic spike at person-to-person lender Prosper. Compete's Snapshot showed Prosper with 1 million unique visitors in March.

Based on that observation, Compete dove into the Prosper numbers and found that the domain had not yet been added to its more rigorous monitoring system, and in fact, there appeared to be some panel bias in the original March traffic numbers. Under Compete's revised assumptions, Prosper's March traffic estimate is a third less, just under 700,000 visitors, instead of 1-million plus. 

Also, Compete has now released its April estimates and found that Prosper's traffic declined 25% to 500,000 visitors. While that no longer puts Prosper at the same level as Suntrust, the lender does have considerably more visitors than the nation's 23rd largest bank, Comerica (see revised traffic chart below, Prosper is the blue line).

Compete traffic estimates

Comments

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

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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)

Prosper Traffic Spikes, Hits Major Bank Levels

By Jim Bruene on May 10, 2007 11:54 AM | Comments

Prosper homepage Preparing a table for our upcoming report on social finance, we were slogging through website traffic at Compete.com and discovered a startling statistic. In March, traffic to the person-to-person lender Prosper.com was four-fold that of January, growing to more than 1 million unique visitors. That puts it in rarefied company, approximately the same as a top-20 bank such as SunTrust, which according to Compete had just 10% more traffic in March (see chart below).

If those numbers are accurate, and they weren't driven by unsustainable events such as a a mentions in major blogs or media, Prosper may have moved past the early adopter stage, and into the more mainstream web-based financial services arena.

It appears the traffic is converting to registered users. The last time we checked, April 25, the homepage said it had 240,000 registered users. Today, it says 270,000. That's 12% growth in 15 days.

Comments

Online Banking and Marketing Statistics from Net.Finance

By Jim Bruene on April 20, 2007 4:24 PM | Comments (3)

Net.Finance 20007 landing page Since I'm a numbers junkie, whenever I'm at a conference, I try to note as many meaningful statistics as possible. By meaningful, I mean a number that provides an outsider with some insight into the business. Merely saying, "we beat our expectations by 63%" does NOT qualify, unless the speaker also shared their expectations. 

The flow of numbers was about a bit below average during the three days I attended Net.Finance, but the two professional researchers on the agenda, Jim Van Dyke of Javelin Strategy and Asaf Buchner of Jupiter Research, delivered slides chock full of statistics. I will check with them to see if they are willing to share with our readers. 

Here's some of the nuggets buried in the presentations from the other experts on stage: 

Most Eye-Opening Stat

  • Link to Prosper homepageDuring the past 14 months, more than 280,000 messages have been posted on the Prosper.com discussion forum, according to CEO Chris Larsen (see here for Colin Henderson's complete notes on this session).

    My take: That's an amazing level of consumer engagement with the new lending platform. To put that in perspective, Wells Fargo's Student Loandown blog has received 98 total comments during its eight months online.

Best Stat to Drop in a Business Case:

  • Link to VerityCU homepageShari Storm, CMO, Verity Credit Union, said that 1% of its new members named the blog when asked how they heard about Verity; the new members had an average of 2.7 accounts with $9,000 in deposits and $11,500 in loans (excluding mortgage); furthermore, the CU's blog, launched in Dec. 2004, now has 1,000 readers (see here for Colin Henderson's complete notes on this session)

    My take: While I don't recommend trying to turn this single data point into an ROI calculation, it's the first time I've heard a financial exec say something about blogging that the finance folks will appreciate (chalk up another first for Verity).

Stat that Most Contradicts My Previous Position:

  • Link to Vancity's changeeverything blogVancity's ChangeEverything.ca blog, launched commercially in Sept 2006, now has 1,000 registered users who've generated more than 2,000 blog entries and comments; in total, the site has had 45,000 unique visitors according to William Azaroff, Interactive Marketing Manager (see here for Colin Henderson's complete notes on this session)

    My take: Despite my reservations about whether it would gain traction without a financial services perspective (see our Online Banking Report on Bank 2.0 here), Vancity's unique blog has gained a small, but growing, worldwide following, and, more importantly, has contributed measurably to Vancity's efforts to help its community and create positive brand positioning for the CU. Nice work.  

Blogging/Podcasting:

  • Key Bank's most popular podcast, top stock picks by John Caldwell, has recorded 70,000 visits and 12,000 unique users, according to Interactive Marketing Manager Mickey Mencin
  • Colin Henderson, BankWatch blogger and former BMO exec, mentioned that 39% of Canadians are now reading blogs 

Online Marketing:

  • Colin Henderson also cited Forrester findings that 50% of recent financial buyers did 100% of their research online; 30% performed both on- and offline research; and just 20% conducted all the research offline. In Citibank's late 2005 new checking account promotion, the bank gave away 275,000 iPods, according to Charles DeFelice, SVP customer information environment (it wasn't specified if this was the POTENTIAL or ACTUAL number given away, since consumers had to follow through with a number of electronic activities over a period of months in order to qualify for the freebie
  • Jon Kaplan, head of Google's financial services group, said that 60% of Google users have a personalized (Google) page and that 20% of Google search volume originates from these pages
  • GE Money's SVP of Strategy Vincenzo Picone said the company has 300 million customers with $190 billion in assets across 54 countries which led to a net profit of $3.5 billion in 2006; the company has 2010 targets for 300 million unique visitors; $20 billion in online originations and 1 billion transactions via the online and mobile channel
  • U.K.'s Lloyds TSB experienced a 71% revenue lift (against a control) on its homepage by implementing Touch Clarity's (now Omniture) targeted ad server which uses a number of variables to determine which ads should be shown to an individual visitor; according to Omniture's Brent Hieggelke who showed results from a case study presented by Lloyds TSB at a recent conference

Mobile Banking:

  • Jennifer Vos, director of Citi Mobile, Citibank's new mobile banking service, said that one-third of current Citi customers have input mobile phone numbers into the bank's alert system; furthermore, the new mobile offering was piloted by 100 employees, who have recently been joined by another hundred users in the southern California market

Small Business Banking:

  • Wells Fargo has 150,000 "very active" small-business online banking users according to Eskander Matta, SVP of internet services group; businesses are making $45 million in payments per month with the bank's DirectPay service launched just a year ago

Branding:

  • 94% of ING Direct's customers would recommend it to a friend, according to John Owens, Head of Marketing

Online Banking:

  • Customer satisfaction in online banking, while on the rise, still trails online retailing by five percentage points, 78% vs. 83%, according to Larry Freed, CEO Foresee Results
Comments (3)

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)

Social Lending Pioneer Zopa Celebrates Second Birthday

By Jim Bruene on March 7, 2007 5:09 PM | Comments

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

Zopa's homepage on its second birthday (7 March 2007)

The Latest Numbers out of Zopa

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

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

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

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

 

Comments

Prosper Raises Prices, Adds Features on First Anniversary

By Jim Bruene on February 12, 2007 10:41 AM | Comments

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

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

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

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

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

Credit data available to lenders at Prosper


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

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

Prosper borrower endorsement box

Notes:Prosper example loan listing with endorsement CLICK TO ENLARGE

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

More Supply than Demand at Zopa

By Jim Bruene on December 15, 2006 2:41 PM | Comments

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

Comments
Categories: Loans & Credit, Prosper, Zopa

Top 25 Web 2.0 Financial Websites

By Jim Bruene on December 5, 2006 11:10 AM | Comments (1)

Since its September launch,  Your Credit Advisor <yourcreditadvisor.com> has posted several trendy lists to attract traffic to its credit card application portal. The latest entry, "Top 25 Web 2.0 Apps for Money, Finance, and Investment."

The article includes helpful summaries of each site's capabilities. It's a good jumping-off point to do a little outside-the-box thinking about Web-based finance (see also, Online Banking Report #135/136, "How to Web-2.0 your Online Banking").

This list includes:

  • Two loan sites: Zopa and Prosper (see previous coverage here)
  • Six personal finances sites: Three we've covered: Dimewise, foonance, ioweyou (see our previous coverage here) and three new entrants: NetworthIQ, MedBillManager and Wesabe, a fascinating social money site we'll cover later this week
  • Five real estate sites: Homethinking, iiProperty, Rentometer (owned by iiProperty), Trulia, and Zillow (see our Zillow coverage here)
  • Two miscellaneous sites: PayScale, cFares
  • Ten investment sites: BullPoo, Motley Fool's CAPS, DigStock, FeelingBullish, GStock, MoneyTwins (foreign currency), SaneBull, StockTickr, WikiFinancial
Comments (1)

Zopa to Offer Lender Guarantees

By Jim Bruene on November 23, 2006 10:05 AM | Comments

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

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

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

Comments
Categories: Loans & Credit, Prosper, Zopa

Prosper Books its 4,000th Loan

By Jim Bruene on October 31, 2006 10:53 AM | Comments

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

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

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

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

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

Comments
Categories: Loans & Credit, Prosper

Prosper Markets to Savers at Google

By Jim Bruene on October 27, 2006 1:36 AM | Comments

If you thought it was tough competing with the direct banks and their 5% savings products, now you have a legitimate company advertising rates of 8% or more. Of course, this is no FDIC-insured product; it's the interest rate paid to lenders at Prosper's person-to-person loan marketplace.

The person-to-person lender was bidding aggressively today at Google on both "high yield savings" and "online banking." The ads typically made the fourth position in the right-hand column, putting them "above the fold" (see inset).

The company is testing three different ads, all focused on rate levels substantially higher than the 5% to 5.5% advertised by the competition. Prosper is testing a straight up "8%" ad, an "8% to 12%" ad, and an "8% to 29%" one (see below). 

The ads lead to one of two landing pages. Here's the slick one that looks more "bankerish": 

Landing page from Google ad

Or the more "Web 2.0" version that no one will confuse with a bank ad. There is even a small eBay logo visible in the screenshot (used by one of the participants seeking to bankroll an eBay store), a smart touch for a company that is positioning itself as "the eBay of lending." 

All-in-all, it's a good effort put forth by Prosper, which can only succeed if it attracts enough money into the marketplace. 

For more information on Prosper, Zopa, and the entire person-to-person market, see Online Banking Report #127.


Comments

Prosper Launches Group Ratings, Schedules User Meeting

By Jim Bruene on October 23, 2006 10:44 PM | Comments

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

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


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

For more information:

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

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

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

Bofa_ads_aboutdotcom

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

Bofa_nofeemortgage_url

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

Bofa_mtg_landing

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Zopa Emphasizes Community with New Homepage

By Jim Bruene on October 18, 2006 12:51 PM | Comments

Although you may have little interest in the niche market for person-to-person loans (previous coverage here), you should keep tabs on the websites of Zopa and Prosper to see how they build a community of borrowers and lenders.

The new Zopa homepage (see screenshot below) features several interesting community-involvement devices:

  1. "I'd like to meet..." tool in upper left
  2. Community factoid ticker running across the middle of the screen (see list of factoids below)
  3. Community tab in primary navigation (top)

Zopa home 18 Oct 2006 CLICK TO ENLARGE

"I'd Like to Meet" tool
This tool, placed in one of the most-viewed areas of the homepage (upper left), allows users to find like borrowers and lenders. Using drop-down boxes, users may narrow their search to just borrowers in a single city, oI'd like to meet tool CLICK TO ENLARGEr those of a certain age or age range, and so on (see inset). 

Unfortunately, we were unable to see the results since our search queries just showed an endless "search in progress" graphic image.

Community factoid ticker
Even though scrolling tickers are annoying, they do draw attention. Since Zopa must make prospective users comfortable with its novel service, it makes sense to be mildly annoying to get the point across that Zopa is a vibrant and fast-growing community. However, the 3-minute cycle time (before stopping) is too long; a 30-second scroll along with a link to more factoids would be better.

In our test at 7:00 PM London time Oct. 18, there were 17 items running across the screen in this order: 

  • 1,571 Johns have joined since we launched ...
  • 4,350 members have registered so far this month ...
  • 480 Zopa members have logged into their accounts today ...
  • 553 Sarahs have joined Zopa so far ...
  • Adrian from HULL has just joined ...
  • In the last hour, 8 new members joined ...
  • Lorraine just offered 50 to Zopa borrowers ...
  • Mark from OXFORD just had a loan reserved in the B market ...
  • More members come from London than anywhere else ...
  • The average age of a Zopa member is 36 ...
  • The last member from the Isle of Wight to lend was Laurence ...
  • The last person to join from Aberdeen was Clare ...
  • The most common name amongst Zopa members is David ...
  • There have been 4,875 requests for loan quotes in the last 24 hours ...
  • Thomas recently paid in using their debit card ...
  • We have 595 members from Leicester ...
  • Yesterday, 251 new members signed up ...

Community tab
The Community tab in the site's main navigation leads to a page jammed with more community-building features and tools including (see screenshot below):

  • Company blog
  • Member discussion board
  • Finance news as gathered by "Zopa and friends"
  • Zopa newsletter
  • Member story (monthly feature)

Zopa vmain community page CLICK TO ENLARGE

Summary
A good effort by the person-to-person lending pioneer. We look forward to the company's U.S. launch while passing along our regrets to the recent passing of its founder Richard Duvall (memorialized in this Oct. 17 Zopa blog entry).

Comments
Categories: Bank 2.0, Prosper, Zopa

Zopa Courting U.S. Credit Unions

By Jim Bruene on September 13, 2006 9:01 AM | Comments

Zopa_logo_2According to OpenSourceCU, a blog operated by website designer Trabian, person-to-person lender Zopa is actively soliciting credit unions to partner with the U.S. version of its service scheduled to open later this year (see NB Sep 7). One idea floated by Zopa's Wade Lagrone to attendees of the Taps Lending Symposium put on by Forum Solutions, was requiring Zopa borrowers to join a credit union in order to participate.

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

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Categories: Loans & Credit, Prosper, Zopa

Update on Zopa's U.S. Release Date

By Jim Bruene on September 7, 2006 10:30 AM | Comments

Zopa_usnewsletter1Zopa <zopa.com> continues to work towards a 2006 launch of the U.S. version of its person-to-person lending exchange. The company is trying to spur a bit of word-of-mouth in advance of its launch by buying a case of beer for anyone sponsoring a Zopa barbecue this summer.

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

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

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Categories: Loans & Credit, Prosper, Zopa

Peer-to-Peer Loans from Zopa and Prosper

By Jim Bruene on April 4, 2006 10:08 AM | Comments

Circlelending_logoA few weeks ago we published our first report on so-called person-to-person lending (see OBR #127). Two companies have created P2P lending exchanges, Prosper in the U.S. and Zopa in the U.K. (see NetBanker Feb. 25). While we like the concept, these exchanges have a number of hurdles to overcome. One of the challenging issues is how to convince individuals to loan money to strangers.

Most P2P lending is between family and friends. And that won't change no matter how big the loan marketplaces becomes. Government reports peg the interpersonal loan market at $80 to $90 billion.

Circlelending_process_2One of the stickiest issues in friends-and-family lending is keeping the borrower current on their agreed-upon repayment schedule. It's easy for kids to "forget" that loan payment to mom and dad; likewise, parents don't want to put a damper on Sunday dinner with a discussion of junior's financial situation.

Financial institutions could play a role in automating personal loan repayments, by putting the repayment transactions on autopilot. It can already be done through bill payment systems that support automated recurring payments. But users still need to do their own research to come up with the correct amortization schedule.

How it would work
With a little programming, a bank could develop a module that allows lenders to set up a repayment plan by entering the loan details (amount, interest rate including zero, and term) and borrower info (name, email address). An email would go to the borrower asking them to agree to the terms, authorize the deduction from their bank account, and provide bank account details. The borrower would also be required to authenticate their access to the account through username/password or by correctly identifying small deposits made to their account.

The lender or borrower (if authorized) should be able to log in at any time and suspend or alter the automatic deductions.

The business case
Borrowers and/or lenders could be charged a set-up fee for each loan, plus small transaction fees each month. For example, a $75 set-up fee plus $3 per payment. Pricing could be tiered by loan size.

If 2% of your online banking base eventually used the service, it could generate $1,000 to $1,200 in annual revenues per 1,000 online banking users (assuming average loan term of three years). For Bank of America, that's $15 to $20 million per year. But for a community bank or mid-size credit union, it might generate only a few thousand dollars annually.

Unless you are large, that's not enough to justify programming it yourself; however, if a software company made it available for a reasonable fee, it might make a good new feature for online banking. As the industry matures, banks will need to add value to their services to attract more users. Also, the long-term nature of loan repayments, especially with family lending, could help tie both the lender and borrow to your bank for years.

Service providers
Circlelending_homeThere is already one company that's been facilitating person-to-person loans for more than four years: CircleLending.com, a company we first learned about in a favorable Wall Street Journal article published in 2002. The company has taken the concept to a high level, facilitating not just personal unsecured loans, but also owner-financed real estate, commercial loans, and other complex secured funding (click on screenshot right for details). It charges $199 plus $9 per payment for simple loans, up to $1000 or more for mortgages.

Paltrust_appAnother newcomer, PalTrust, is an apparently small startup that has a two-page website, <paltrust.com> with a mockup of its personal lending application. The patent-pending process looks much like PayPal (click on screenshot for a closeup).

--JB

Comments
Categories: Loans & Credit, Prosper, Zopa

Capturing the Blog Buzz about Prosper

By Jim Bruene on March 6, 2006 11:45 AM | Comments

Prosper_blogger_listings If you've got it, flaunt it. Or so the saying goes.

In an online financial services first, newly launched person-to-person loan marketplace Prosper (Netbanker Archives) includes an "In the Blogs" section in its online Media Room. The link, positioned between the traditional "In the News" and "Press Releases" sections, allows users to easily read about the company in pre-selected online blogs (click on inset for a closeup).

This provides much more material to view than the three news articles and single press release the 3-week-old company has posted. The company has control over the content; so don't expect to see links to any ProsperSucks blogs down the road. 

For Prosper, the blog links provide several benefits:

  • Several are authored by Prosper group leaders, so they contain ongoing encouragement for the lending exchange
  • The newness of their business model provides good fodder for inclusion in wide variety of blogs
  • They are too new to have much negative talk in the blogs

Action items
Most financial institutions receive little press play, there just isn't that much newsworthy in the daily battle to sell and service deposit and loan accounts. However, if you are well received in your community, you may be receiving good feedback from local bloggers. Linking to these posts could be a valuable addition to your "About Us" section.

--JB

Comments
Categories: Prosper, Public Relations

Interview with P2P Lender Prosper's Chris Larsen

By Jim Bruene on February 25, 2006 12:06 AM | Comments

Prosper_homepage_chart_1Chris Larsen, who helped invent financial e-commerce by creating E-Loan <eloan.com> in 1997, is back on the scene mere months after selling the company to Popular Inc. last summer for $300 million. His new company, Prosper.com, first discussed here on Feb. 6, is built around the idea of creating communities of people who lend to and borrow from each other. The idea, he says, isn’t too far away from Jimmy Stewart’s savings and loan in Frank Capra’s film, It’s a Wonderful Life, where ordinary people lent to each other and made them all more prosperous.

The business premise is comparable to the model of Zopa, the UK-based, person-to-person lending site that opened last summer (see NB Nov. 22) with funding from Benchmark's European unit. But while Larsen concedes the similarity, he says he had the idea first. “This is something Bob [Kagle] and I talked about long before the Zopa guys had come to Benchmark [Europe] —since 2003, in fact,” he says.

Robert Kagle is a Benchmark Capital partner who provided much of the original financing for E-Loan, and who served as an E-Loan director. The Prosper idea attracted them, adds Larsen, because while the E-Loan idea worked relatively well—it originated and sold $26.7 billion in mortgages between 1997 and June 2005—it wasn’t really what they’d wanted to do, which was more along the lines of Prosper.

Larsen says, “[At E-loan] we were beholden to the capital markets, rather than being able to create a whole new marketplace that’s supported just by people. This is more of a pure model, an opportunity to start from a clean sheet of paper and design something from the ground up.” Plus, he adds, the public that could support a Prosper didn’t exist in 1997. “You couldn’t do [Prosper] back then. PayPal very much blazed a trail, and you really couldn’t do this until they had come along.”

The company
Prosper is funded by venture capital funds that include Accel Partners, Benchmark Capital, Fidelity Ventures, and the Omidyar Network. Prosper opened with something of a bang the week of Feb. 6, getting plenty of high-profile press in the mainstream media, and, according to Larsen, attracting more than $750,000 to its loan pools in the first week of business. And the first week’s business seems promising: As of Feb. 24, 301 loans were up for auction, up from 168 a week earlier. Loan sizes range from $1,000 to $25,000.

How it works
Prospective borrowers are first given a credit rating by Prosper after being vetted by credit score, a fraud check, and income. The borrower then lists the reason for their loan, uploads pictures if desired, and selects a starting interest rate, essentially the highest rate they would accept.

Individual lenders, who go through their own authentication process before being allowed to participate, can bid for as little as $50 of any particular loan, specifying the minimum rate they will accept. Prosper charges the borrower a 1 percent loan-origination fee and levies a 0.50 percent annual servicing fee to the lender on the outstanding balance.

Analysis
One of the problems faced by the venture is adverse selection, the tendency for loan applications to be dominated by those most in need of credit and least likely to repay. If poor credit risks overrun the venture, higher quality applicants, and the investors looking for them, will desert both Prosper and Zopa.

Another question is whether lenders will feel adequately compensated for their risks. Larsen says he wants his lenders to “capture the 10 percent spreads between short-term money and credit card deposits,” and compares the expected returns at Prosper to the AA corporate credit market, which currently gives investors a 7 percent return, or 6.5 percent after defaults. Zopa says it has provided lenders a 7 percent average return with no defaults in the seven months it’s been open for business, but this is not a period statistically significant enough to predict future performance.

On the other hand, much of business is betting on horses, and on jockeys, and Larsen has proven himself adept at both picking horses and riding them. It may be that the time is right for a business built more along the lines of Jimmy Stewart’s small town savings and loan, and less along the lines of a modern bank's unyielding underwriting algorithms. (Contact: Prosper.com, Chris Larsen, 415-362-7272)

--AR

Previous articles:
-- Prosper Feb. 6
-- Zopa Nov. 22

Comments
Categories: Loans & Credit, Prosper, Zopa

Prosper.com Re-launches Chris Larsen of e-Loan Fame

By Jim Bruene on February 20, 2006 5:09 PM | Comments

Prosper_homepage_chartChris Larsen, who helped invent financial e-commerce by creating E-Loan <eloan.com> in 1997, is back on the scene mere months after selling the company to Popular Inc. last summer for $300 million. His new company, Prosper.com, is built around the idea of creating “communities” of people with similar interests who lend to and borrow from each other. The idea, he says, isn’t too far away from Jimmy Stewart’s savings and loan in Frank Capra’s film, It’s a Wonderful Life, where ordinary people lent to each other and made them all more prosperous.

Continue reading "Prosper.com Re-launches Chris Larsen of e-Loan Fame" »

Comments
Categories: E-Loan, Prosper, Zopa

P2P Lending Rates a NYT Article

By Jim Bruene on February 6, 2006 10:58 AM | Comments

Prosper_logoWhile person-to-person (P2P) lending will never create the buzz or user base of eBay's PayPal or Google's GBuy, it passed a milestone yesterday with a favorable article in The New York Times. The short article looked at UK-based Zopa <zopa.com>, a recent OBR Best of the Web winner (NetBanker Dec. 1) and a similar service being hatched in Silicon Valley, Prosper <prosper.com> (formerly CircleOne).

Prosper_homepageProsper, like many Internet startups before it, bears watching not only because of its relatively minuscule user basecurrently, just 12 transactions are pendingbut also because of its VC backers, Benchmark Capital, Accel Partners, Benchmark Capital, Fidelity Ventures, and Omidyar Network, along with its famous founder Chris Larsen, who launched E-Loan nearly a decade ago. The company has raised $20 million according to its website. Click on the screenshot, right, for a closeup of its homepage.

We'll look at both companies in more detail in the next Online Banking Report (Number 127), due out at the end of the month.

--JB

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How to Profit From Bill Presentment (in your lifetime)

By Jim Bruene on November 5, 1997 11:02 AM | Comments

We think bill presentment could be a significant business development tool, both on the consumer side and with small and mid-sized business. And you don’t have to be a mega-bank to play in this market. Suffolk County National Bank, with assets of $843 million, could well be the first bank in the country to use electronic bill payment to attract new business.

 

Billing is still a regional opportunity. In each city and town there are certain billers, primarily utilities, that have a relationship with nearly every consumer and business. These are the so-called “marquee” billers in your market. But many won’t be big enough to register on the radar screens of MSFDC or Checkfree for another year or two.

Local financial institutions have the inside track in winning the bill presentment/payment business from these billers. But it’s not an opportunity that will last forever. As soon as an MSFDC hits stride in 1999 or 2000, you can bet they will be partnering with companies that can bring on the smaller billers, just as ISOs brought on smaller merchants in the credit card market.

We think it’s time to move bill presentment up the priority list. If you’re not talking to your clients about bill presentment within the next 12-18 months, you can bet someone else will.

Bill Presentment as a Consumer
Account-Acquisition Program

The opportunity right now isn’t the $0.25 transaction fees on the few bills that will be paid online before year 2000. It’s the new customers you can attract with an innovative program that is highly beneficial to the biller. So you might try offering it for FREE.

Why would anyone offer a unique, highly valuable program for free? To get first crack at the early adopters that will seek out the bill presentment program as soon as they hear about it on the news. As these affluent, wired users register to pay bills online at the biller’s site, they will be provided ample opportunity to sign on with your online banking services to pay the rest of their bills online. (Since you are offering the presentment program free-of-charge to the biller, you will require the biller to display your logo/link on its billing Web.)

And your selling efforts don’t have to be limited to just the first time bill presentment is used. Depending on your contract with the biller, you could cross-market your banking services every time the user logs in to pay their bill. You’ll also know where the user banks from their registered checking and/or credit card numbers, so highly customized sales pitches can be crafted.

Eventually as transaction volume picks up, and sales to new billers slows as competitors emulate your offerings, you could begin charging fees at whatever the market will bear. It might even be the other way around, with banks or others paying the biller in order to get the exclusive right to present the company’s bills and collect the payments. One can envision Web content providers such as Yahoo, paying top dollar (perhaps through comp advertising) to get a chunk of the 1.5 billion monthly bills presented on its site. There would be many synergies with Yahoo’s other content areas.

Consumer Account-Acquisition
with Surcharges

Don’t want to give it away entirely? Here’s an alternative that brings in immediate fee revenue AND attracts new accounts. Adopt the ATM surcharging model. Provide bill presentment/payment services free to your customers, but charge customers of other financial institutions a nominal fee, less than the cost of a stamp, each time they make a payment. This should keep everyone happy. The biller can offer a new service that cuts its billing and remittance processing costs; your customers get a value-added service for free; and customers of other banks can still pay their bill online for less than the cost of a postage stamp.

One caveat. This approach might not work for highly regulated utilities that have to be careful not to favor one class of customer over another. But given that ALL of its customers stand to save on the transaction, the proposal might fly.


 

Bill Presentment as a Small Business Acquisition Device

If you’re the first in your market to offer bill presentment/payment services, it could be a powerful method for bagging new small business clients whose billing operations may be extremely costly, especially on a per-item basis.

To create momentum in the market, concentrate on signing at least one marquee biller before soliciting other businesses. Once other billers hear that xyz is doing it, they will call you.

You may want to bundle Internet billing with other payment products. Those using your billing product might also be required to maintain a checking account for depositing payments and a line of credit to cover returned items.

Provide an Option to Pay Bills Directly
from a Special Line of Credit

Who said bill payment was all about transactions? When consumers are paying their bills, they are forced to think about their financial situation. Especially if money in the primary checking account is running low. This is the perfect time to cross-sell loan products, such as an overdraft line of credit or bill consolidation loan secured by home equity.

On your bill presentment menu, users could choose from various credit options for paying their bill. If the biller accepts credit card payments, that could be one choice. But that’s not where you want to drive customers. Card payments add costs to the merchant, and unless you are the card issuer or merchant acquirer, they don’t do anything for your bottom line.

Instead offer a special bill payment credit line. We can envision the tagline, “extra credit for paying your bills on time and online.” Or offer a cobranded line of credit in the biller’s name, for example the Con Ed Credit Line. In our fictitious example, the utility would benefit by a shortened payment cycle, reduced collection costs, and fewer calls to customer service on payment-related matters.

Credit approval will be the biggest obstacle to a successful program. You probably would need a “while you wait” approval process like Beneficial 2-Minute Loan which takes two minutes to apply for and two minutes to receive credit approval .

Provide a “Check My Balance” Function on the Biller’s Web Site

Whether users pay their bills directly at the biller’s Web, or at Checkfree’s, or yours, their likely first step will be to check their checking account balance before authorizing payment. Negotiate a hyperlink (exclusive?) within the bill payment section of the biller’s site that takes your customers directly to the balance inquiry section of your Web. Not only does this provide added utility for your customers, it would be a powerful way of advertising your online services to non-customers.

Provide Bill Payment Automation Functions

Many large billers offer numerous payment options such as pay-by-phone, preauthorized direct debit, payment-budgeting services, and credit card payments. Their Internet payment processor should be able to duplicate these options in cyberspace, and then some.

There is no reason why users would have to visit a biller’s site every month, though the biller may want them to for marketing purposes. New users registering online with the biller (or with you on behalf of the biller) could choose from a series of automated payment preferences. Then they would only need to return to change preferences or investigate a specific bill or perhaps to run some statement analytics.

Billers could still maintain the monthly contact with their customers by sending HTML-laden e-mails confirming the automatic payment and cross-selling additional services.

Move Up the Billing Value Chain

Gary Glanz, President of Electronic Funds & Data Corporation www.billsite.com , has created a virtual billing company which companies can use to outsource their entire billing process, or just pieces, such as Internet billing. Glanz figures it costs billers $5 or more per month per customer to operate their billing function. This includes metering the bill, calculating the payment amount, processing/printing the statements, delivering the bills, handling customer service on billing questions, processing remittances and exception items, and finally trying to collect late payments.

A financial institution such as Suffolk County National Bank (see p. 15) can essentially resell EF&D’s full menu of billing services to meet a broader array of billing needs than simply Internet bill presentment.

Comments
Categories: Bill payment, Prosper

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