PORTADA
TFM – Peer to Peer Lending
Sergi Herrero Noguera [email protected]
1. Abstract
Money is an invention that we made in order to be accepted as payment for goods and services that we have get. We created it 100.000 years ago, and since then we have never stopped evolving it. At the beginning they were small pieces of gold with some kind of inscription that made them different from the rest, nowadays most of the money we use is a piece of paper with some pictures and holograms on it.
Money has evolved a lot, but the way we trade/exchange it almost remained the same. This is starting to change with the arrival of Internet, which will enable to by-pass one of the oldest institutions in the world: Banks. What started as a new way to share files and music with friends over the net is just about to become a new way of exchange one of the most important assets in our lives: Money.
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2. Summary
In this study, « P2P Lending » is used to mean the action of borrow or lend money by using services of a Peer To Peer website. Those kinds of websites enable Internet users (professionals or not) to exchange information between each other.
This emerging phenomenon, visible since almost ten years, stays in the fringe compared to the credit and microcredit market. Its development is still local (mostly in the US and UK). The market is still in embryonic stages.
But some analysts are predicting a significant development on a middle term basis. We notice indeed more and more P2P Lending experiences in Europe and Asia. Banks are more and more interested into those new kinds of platforms, capable of collecting savings and distributing online loans.
Study's goal is to map a state of the art of P2P Lending in the US in the first semester of 2010, to find key information in order to let big European Banks understand this changes and integrate them to their strategically vision and innovation projects.
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1. ABSTRACT ...... 2 2. SUMMARY……………………………………………………………………………………………………..3 3. WHY BEING INTERESTED INTO P2P LENDING PLATFORMS? ...... 8
3.1. P2P LENDING WEBSITES ARE CONCEIVED TO COLLECT SAVINGS AND DISTRIBUTE ONLINE CREDITS. THEY CAN ALSO BE USED AS A WAY TO DISTRIBUTE OTHER PRODUCTS AND SERVICES COMING FROM BANKS, FINANCIAL INSTITUTIONS OR INSURANCES...... 8
3.2. DEVELOPMENT OF P2P LENDING WEBSITES IS A CORE STAKE OF (UN)REGULATION AND LIBERALIZATION OF CREDIT MARKET AND BANK SERVICES...... 9
3.3. P2P LENDING COULD GROW SIGNIFICANTLY ...... 10
3.4. P2P LENDING WEBSITES ARE R&D E-COMMERCE BANKING...... 11 4. WORLWIDE P2P LENDING MARKET IN JUNE 2010 ...... 12
4.1. P2P LENDING IS ON THE INTERNET FOR ALMOST 10 YEARS ! ...... 12
4.2. NONE OF P2P LENDING PLATFORMS ARE BENEFICIAL SO FAR. ALL ARE DEPENDING OF CAPITAL RISK'S FINANCING...... 12
4.3. TWO MODELS OF P2P LENDING COEXIST NOW ...... 13
4.4. PEER TO PEER PRACTICES ARE MOSTLY ABOUT MARKETING FEATURES ON P2P LENDING WEBSITES, RARELY THE LOAN ITSELF...... 14
4.4.1. For the « North-South » models, means asymmetry prevents real P2P mechanisms to appear...... 14
4.4.2. Peer To Peer mechanisms are mainly useful to recruit and develop the loyalty of new clients for financial institutions and banks...... 14
4.4.3. In most of the case, « Peer To Peer » uses consist in enabling lenders to choose the payee...... 15
4.4.4. Financial flow on a majority of P2P Lending websites are more about relationships between financial institutions and consumers than about consumers relationships...... 17
4.4.5. « North-North » P2P Lending actors have maintained for a few years the myth of direct mediation without banks. This is a myth because these websites are precisely working with banks. In the future, this role could be more and more attributed to banks...... 18
4.4.6. For « North-North » P2P Lending actors, the website is not only an e-commerce platform dedicated to products and financial services distribution...... 19
4.5. P2P LENDING MARKET IS STILL NEW, IMMATURE, UNSTABLE ...... 20
4.6. P2P LENDING MARKET IS ESSENTIALLY AMERICAN AND ALMOST EXCLUSIVELY ANGLO-SAXON UNTIL NOW...... 21 5. MAIN IDEAS ...... 22
5.1. DISCUSS WITH NATIONAL BANKS ABOUT RISKS RELATED TO MICROCREDIT ACTIVITIES AND P2P LENDING.23 SYNERGIES EXISTS BETWEEN MICROCREDIT DISTRIBUTION AND CLASSICAL FINANCIAL PRODUCTS
5.2. DISTRIBUTION. USE THEM...... 23 6. SYNTHESIS ABOUT P2P LENDING MARKET IN THE UNITED STATES ...... 24
6.1. AMERICAN P2P LENDING MARKET IS ESSENTIALLY LIMITED TO THE UNITED STATES ...... 24
6.2. ANALYSTS FORECAST A REVIVAL OF P2P LENDING MARKET IN 2010 AND A MIDDLE-TERM SIGNIFICATIVE DEVELOPMENT...... 24
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6.3. AMERICAN MARKET GROWS SLOWLY SINCE ITS CREATION AND HAS BEEN STRONGLY SLOW DOWN AFTER REGULATION AUTHORITIES REACTION TO THE SUBPRIMES CRISIS...... 24
6.3.1. P2P Lending platforms are suffering from a lack of presence...... 24
6.3.2. P2P Lending product offer is still too limited ...... 25
6.3.3. P2P Lending activities are highly depending of financial and banking regulation rules, even if « North-North » P2P Lending leaders try to present it differently...... 25
6.4. IN 2010, P2P LENDING MARKET IS RENEWING IN THE UNITED STATES. BUT THE ACTIVITY IS NOW MORE FOCUSED ON FINANCIAL PRODUCT DISTRIBUTION (SAVINGS AND CREDIT) THAN ON « FREE » LOANS BETWEEN PEOPLE ...... 26
6.4.1. « North-North » platforms are catch by regulation. They have to adjust their model and try to rebounce...... 26
6.4.2. « North-South » platforms are in a better health. The market is really in demand (financing of MFI) and there is a huge growing potential (microfinance)...... 26
6.4.3. Niche markets are interesting P2P Lending actors...... 28
6.4.4. Birth of Peer Financing ...... 28
6.4.5. Actors are focused on the student loans opportunity...... 29
6.4.6. On a middle term, American market could grow significantly, probably with financial products distribution models (one or multichannels) ...... 30
6.4.7. Banking regulation has assured its authority on the P2P Lending market. It will structure the market on a short term, but at middle term lobbying coming from the « Barbarians » of the Internet will continue. 30
6.4.8. Consumer education remains one of the biggest challenges for P2P Lending development: for « North-North » websites, it means more transparency and consistency between what is said and what is done...... 31
6.4.9. Outside of the United States, American market doesn't really exist in 2010. It will probably stay very shy on a short term, waiting for new regulation...... 31
6.4.10. There is still no significant initiative in the United States to develop P2P Lending with social networks...... 31
6.4.11. Social networks could be useful to qualify borrower risks...... 32 7. BLOGS REVIEW ABOUT P2P LENDING ...... 33
7.1. P2P-BANKING.COM ...... 34
7.1.2. Overview of main messages ...... 35
7.2. PEERTOPEERLENDING.ORG ...... 37
7.3. P2P LENDING NEWS ...... 38
7.4. NET BANKER - P2P LENDING COLUMN ...... 39
7.5. BUSINESS EXCHANGE - “PEER TO PEER LENDING” ...... 40
7.5.1. Overview of main messages ...... 40
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7.5.2. Quotes ...... 41 8. REVIEW OF P2P LENDING LEADERS' WEBSITES ...... 42
8.1. LENDING CLUB ...... 42 8.1.1. Key People ...... 42
8.1.2. Key statistics ( May 27 2010 ) ...... 43
8.1.3. Offer positioning ...... 43
8.1.4. Website's mechanism ...... 43
8.1.5. Examples of website features ...... 46
8.1.6. Example of loan published on a platform (back-office side information) ...... 46
8.1.7. Example of descriptive text given to the borrower in order to convince investors...... 46
8.1.8. Example of information given by office credit to the borrower ...... 46
8.1.9. Webbank bank role ...... 47
8.1.10. Banking regulation is an innovation source for Lending Club ...... 48
8.1.11. Lending Club's Business Model ...... 49
8.1.12. Costs paid by the borrower ...... 49
8.1.13. Costs paid by investor to Lending Club, “Investor Fees »: ...... 50
8.1.14. Main ideas to keep ...... 50
8.2. PROSPER ...... 51
8.2.1. Key Persons ...... 53
8.2.2. Website's functioning ...... 54
8.2.3. Website particularities ...... 55
8.2.4. Webbank bank role ...... 55
8.2.5. Prosper isn't really comfortable with banking regulation ...... 55
8.2.6. Business Model ...... 56
8.2.7. Costs paid by borrower ...... 56
8.2.8. Costs paid by the loaner ...... 56
8.2.9. Commercial development founded by Lead Generation partnerships...... 57
8.2.10. Main ideas to keep in mind ...... 57
8.3. KIVA ...... 58
8.3.1. Key People ...... 59
8.3.2. Key Statistics (may 2010) ...... 59
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8.3.3. Business model ...... 59
8.3.4. Main ideas to keep in mind ...... 60
8.4. MICROPLACE ...... 61
8.4.1. Key People ...... 62
8.4.2. Business model ...... 62
8.4.3. Site particularities ...... 63
8.4.4. Main ideas to keep in mind ...... 63
8.5. SMARTYPIG (UNITED STATES, AUSTRALIA) ...... 64
8.5.1. Main ideas to keep ...... 64
8.6. MINT (UNITED STATES) ...... 65
8.6.1. Main ideas to keep in mind ...... 65
8.7. GREENNOTE (UNITED STATES) ...... 66
8.8. PEOPLE CAPITAL ...... 67
8.9. NEW ACTORS ...... 68
9. COMPARATIVE TABLE OF TWO GENERALISTS ACTORS: LENDING CLUB AND PROSPER ...... 70
10. INTERVIEW WITH SAN FRANCISCAN FED ...... 76
10.1. P2P Lending isn’t a good word to promote P2P financing...... 76
10.2. American market on P2P Lending ...... 76
10.3. Why it didn’t work during the credit crunch? Epiphenomenon ? Why banks and institutions don’t launch anything ? ...... 76
10.4. What need P2P platforms to take off? ...... 77
10.5. How regulation works in the United States ...... 77
10.6. New regulation law for P2P Lending – what is the impact for bank reform and which regulation could happen ? ...... 77
10.7. P2P Lending and student loans ? ...... 78
10.8. Community development finance ...... 78
10.9. Bonus ...... 78
11. CONCLUSION ...... 81 11.1. Cost of the TFM in term of hours ...... 82
12. BIBLIOGRAPHY ...... 83
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3. Why being interested into P2P Lending platforms?
3.1. P2P Lending websites are conceived to collect savings and distribute online credits. They can also be used as a way to distribute other products and services coming from banks, financial institutions or insurances.
Despite their lack of profitability, leaders P2P Lending websites have shown that a good Peer to Peer marketing approach can be highly efficient to collect savings and distribute credit. It's even more right for niche markets (local clients, community of common interest, economical categories that are not related to traditional retail banking, cultural minorities, …).
This approach could be highly strategic in the future: massive development of non-bank market (next billion consumer) or develop massively emerging markets with micro-savings and micro-credit products. New domestic market niches could also be concern by P2P Lending (student loans for example).
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3.2. Development of P2P Lending websites is a core stake of (un)regulation and liberalization of credit market and bank services.
By encouraging regulation authorities to be even more vigilant, 2007-2009 financial crisis has considerably slow down P2P Lending development. A large part of P2P Lending websites leaders are found on the idea of avoiding bank regulation.
In 2010, despite the warning of some P2P Lending websites by banking regulation authorities, the question of making banking rules less strong is still in the front of the scene. Rise of microcredit in the world needs exceptions.
P2P Lending platforms are now seen as a mean to develop microfinance and just begin to catch government's interest. It happened already for « North-South » Model actors and it begins to happen for « North-North » Model actors. Kiva just launched a new platform in the United States destined to fund microfinance institutions.
Microcredit can also play the first role in online banking e-commerce. We should see in the next months or years to come, some regulation relaxing. P2P Lending could benefit from those measures, even if their first goal isn't social development.
Questions are mostly about P2P Lending's rise but also risk measurement and banks functioning costs. Microfinance and P2P Lending promoters are defending use of positive credit files. Regulation authorities react positively to these ideas. These questions are still studied but could come to changes in federal laws, on a short-middle term basis that could help microfinance to grow. These changes will impact general credit activity. Companies have to get ready in order to take advantage of these new mechanisms.
In a few word, future of P2P Lending market regulation is still unknown. 2007-2009 economic crisis plays now an important role into regulation's reinforcement. On a short- middle term basis, laws could be relaxed.
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3.3. P2P Lending could grow significantly
è Companies have to watch the market closely in the next months in order to get ready and be the first in line.
After a slack in P2P Lending business in 2008 and 2009, business seems to be back in 2010.
Thanks to new regulation rules, new actors are now playing the game. They have a long term and beneficial strategy based on respect of regulation rules and partnerships with banks1.
This change is a good sign that P2P Lending just reaches a new maturity stage. P2P Lending could grow significantly by playing the card of e-commerce banking. Gartner Group thinks that proportion of adults using Social Finance websites in the US (leader market) will rise from 3% (Q4 2009) to 25% in 2013.2. This group also anticipates that the P2P market is going to grow exponentially from now till 20133 (from 2 to 4B$).
But P2P Lending models are not yet enough capable of enabling a durable growth (risk management, profitability, conformity...) These predictions have to be taking cautiously.
Next months will be decisive for US and European markets.
1cf. Lending Club, better strategist than Prosper. 2 “Categorizing Social Financial Websites to Facilitate Bank and Broker Engagement” – Gartner Group – mars 2010 3 “Predicts 2010: Executive Decisions in Banking and Investment Services Demand a Longer View” – Gartner Group – November 2009
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3.4. P2P Lending websites are R&D e-commerce banking.
P2P Credit diversifies its target by being present on social web. New population can now be reach.
So far, P2P Lending platforms are not beneficial. Completely new issues that are not easy to solve challenge most of them4. New standards are appearing from this wave of innovations. The main stake is to develop banking products distribution with new industrial processes that are less expensive and more efficient than those from Web1.0. From 10 years, P2P Credit websites are inventing new ways to reference the banking offer, to estimate borrowers' risks, to calculate their own risk, to study and decide credit folders, to manage refunds, etc. Their activity leads them to invent distribution processes more easy to understand for the public and less expensive and risky for banks and financial institutions.
Thanks to a mix between technological, marketing and financial innovation, websites leaders are already able to distribute financial products and to simulate loans between people.
Source: www.kiva.org
4 Main issues for P2P Lending: risk management and profitability. 11
4. Worldwide P2P Lending market in June 2010
4.1. P2P Lending is on the Internet for almost 10 years! First P2P Lending websites (or P2P Credit) Les premiers sites Internet de P2P Lending (or P2P Credit) date from early 2000s. Circle Lending.com and Kiva.org have been officially launched in the United States in 2002 after one or two years of tests and preparation. The dot- com bubble explosion in 2001-2002 has slow down the development of those first experiments, but:
- In 2006, Prosper begins its activity in the United States. o Chris Larsen, actual CEO of Prosper.com is also the founder of E-Loan, specialized in online personal credit distribution. Chris Larsen founded Prosper.com on the same model than eBay. It's a marketplace for users (professionals or not). They can buy financial product (savings or credit) with by making bids.
- In 2007, Lending Club begins in the United States, Zopa in Italy and in the United States, Smava in Germany and in the United States; Circle Lending becomes Virgin Money (acquisition).
- Since 2009, P2P Lending websites are increasing all around the world.
4.2. None of P2P Lending platforms are beneficial so far. All are depending of capital risk's financing. 5
According to actual models, it costs a few millions dollars per year to develop and manage a P2P Lending website (cf. Prosper and Lending Club attached). A few years are necessary to reach financial balance. Until now, none of P2P Lending start-ups has ever reached the break even. Some of them have been launched ten years ago.
And so far, none of the projects have had a positive ROI: none of the start-ups have been launched on the stock market. The cost of the part acquisition from the English Virgin Group on the American Circle Lending in 2007 has not been said publicly. Virgin tried to enter the US financial market but Circle Lending wasn't finally a success story (Virgin P2P Lending's activity seems to be stop since 2008).
5Cf. Acquisition of Circle Lending (USA) par Virgin Group (UK) in 2007
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4.3. Two models of P2P Lending coexist now
On the one hand, there are « North-South » lending websites. Their goal is to help micro financial institutions in the poor countries by enabling rich countries to lend money.6 The main actor of this kind of websites is Kiva.org (financing of micro financial institutions in the South with collective savings from the North)
www.kiva.org
On the other hand, « North- North » lending websites are destined to distribute savings products (collect savings and credit selling mostly) to loaners and borrowers from the rich countries (in the same country usually). A good example of this kind of websites is Prosper.com.
www.prosper.com
6MFI: Micro Finance Institution 13
4.4. Peer To Peer practices are mostly about marketing features on P2P Lending websites, rarely the loan itself. 7
The name P2P (Peer To Peer for Person To Person) doesn't mean that P2P Lending websites are enabling loans and credit distribution between persons. This situation stays really rare.
4.4.1. For the « North-South » models, means asymmetry prevents real P2P mechanisms to appear.
In the majority of south countries, microentrepreneurs don't have any access to the Internet. Actors like Kiva are mainly useful to raise funds in order to finance MFI that will then finance microentrepreneurs. The process remains traditional (yet no computer-based front office designed for microentrepreneurs)
www.kiva.org
7www.lendingkarma.com is different by offering a real loan contract service for users. Its business model is based on commissions for the service of contract creation.
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4.4.2. Peer To Peer mechanisms are mainly useful to recruit and develop the loyalty of new clients for financial institutions and banks. P2P Lending websites are inciting members to lend or invest thanks to mechanisms similar to sharing between persons on the Internet. In most of the case, what is the most exchange is information from « person-to-person », not money.
www.prosper.com
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4.4.3. In most of the cases, « Peer To Peer » consist in enabling lenders to choose the payement method.
P2P Lending website role consists more in doing « as if » everything was an effective money transfer between a loaner and a borrower.
From a P2P contract «Nord-Sud » ( www.babyloan.org )
In general contracts signed between two users – respectively loaner and borrower – don't engage anyone.
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4.4.4. Financial flow on a majority of P2P Lending websites is more about relationships between financial institutions and consumers than about consumers’ relationships. In general, loans between members are simulating on P2P Lending websites thanks to use of financial products coming from specialized institutions. It's really typical to see notes collecting loaner's money 8). From institutions' point of view, P2P Lending websites are playing a role of platform. P2P Lending website becomes a distribution platform for financial product distribution (multiple brands).
www.prosper.com
Kiva.org is a good example. The beneficiary selected by the loaner has in most of the cases already received its credit by the time the loan is contracted. Member lends money to a microfinance institution proposed by the website.9. For regulation and process rules, money funded by Kiva is actually useful to finance MFI.
1 3 4
2 5
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Source: www.kiva.org
8 Savings products can be then used for a second market (cf. Lending Club et Prosper). 9From website's point of view, the loan is MFI. Mircoentrepreneur is just the beneficiary. 17
Biding mechanisms are also negotiation means. They are used to negotiate and encourage to buy. They are no bids between users. 10
10cf. Zopa
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4.4.5. « North-North » P2P Lending actors have maintained for a few years the myth of direct mediation without banks. This is a myth because these websites are precisely working with banks. In the future, this role could be more and more attributed to banks.
Most of « North-North » P2P websites base their marketing message on this misunderstanding. Financial institutions specialized in credit and savings are not exactly banks. P2P Lending websites that claim not being in a relationship with banks let users think P2P Lending Credit is a complete new independent financial system. On the contrary, P2P Lending website is another intermediate between credit institutions and clients.
Source: www.prosper.com
Source: www.p2plendingnews.com
This lack of transparency is harmful to P2P Lending industry in general. In reaction of the 2007-2009 financial crisis, American banking regulation authorities called to order P2P Lending websites. From now on, they have to indicate all partnerships with financial institutions and banks in their website's legal credit page.
www.prosper.com
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4.4.6. For « North-North » P2P Lending actors, the website is not only an e-commerce platform dedicated to products and financial services distribution.
In order to work, all P2P Lending websites are based on financial institutions that provide products and financial services letting users to « simulate loans between users ». For the lender, it's mostly investments (subscriptions coupons, etc.), savings, deposit products. For the borrower, it's mostly credits.
!
http://uk.zopa.com
A P2P Lending model exclusively based on mediation between users that are lending money to each other doesn't exist. Volumes and profit margins are too small to let a website reach economical balance.
« North-North » websites users can't work as paid credit loaners without becoming professionals. It means that they need a licence to do it. Credit supervision prevent C2C model to grow. The massively amateur C2C model remains theoretical. « North-North » P2P Lending websites that tried the C2C model haven't be successful to gather enough traffic and volumes to be beneficial. They have quickly decided to use B2B or B2B2C models: product and financial services distribution.
http://us.zopa.com
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4.5. P2P Lending market is still new, immature, unstable
After 10 years of existence, P2P Lending market represents a really small part of credit market in the world. Estimations show that all financial credits in the world made by P2P credit websites come to 570 millions Euros in January 2009.11 To compare, consumer credit revenues in the world are estimated to 4700B Euros for the only year 2008.Totality of microfinanced loans in the world come to 54B Euros (for thirty years of activity).
As a reminder, one of the two big P2P Credit model is the financing of microfinance institutions. These statistics show that P2P Credit market is so far still weak compared to microcredit market. And microcredit market is not much developed compared to to consumer credit.
P2P Lending leaders haven't yet found their balanced point. For some of them, the future is unknown (cf. Virgin Money and Prosper). It seems obvious that today viability of those websites depend – for the years to come – of their integration in the classical financial and banking market by doing partnerships with financial services institutions and banks (or acquisitions...)
P2P Lending websites seem to go to financial products distribution, even if some P2P Lending opinion leaders are still defending the idea of a « person to person » finance, independent from regulated financial networks. Lobbying activity is based on two different conceptual schools. The first one is the liberal side that says that credit shouldn't have too much regulation in order to be favorable to competition. The second one is more social economics. It's based on the theory of the economist Mohamad Yunus about microfinance.
Some actors of P2P Lending want to gather those two approaches by making rules easier for microcredit. If regulation authorities seem to listen the specific needs related to microcredit, the situation is different for rules applied to financial products in general. But every relaxing of the rules made to help microcredit to be stronger could also help « villains » projects on the Internet..
11Source: Jasmin 21
4.6. P2P Lending market is essentially American and almost exclusively Anglo-Saxon until now...
So far, market leaders are American websites. Virgin Money12, Prosper, Lending Club, Kiva and Lending Club realized more than 89% of loans financed since the beginning of P2P Lending. With Zopa UK, they realized, in January 2009, about 95% of loans financed since the beginnings of P2P Lending.
Source: Jasmin
Prosper counts now more than 950 000 members and Zopa 150 000 (June 2010). This number counts all the members, even if they are not all active. Virgin Money is no more active since 2008 but the website should logically re-launch its activity thanks to the value of stocks coming from Circle Lending.
12In 2007, Virgin Group (UK) took a majority of stock part in CircleLending (USA) in order to launch a brand and an online financial service offer destined to the United States. Circle Lending was the historical leader of « North-North » P2P Lending because it was the oldest one and the one that generated the biggest amount of loans. The brand is less famous than Prosper.com. The CEO of Prosper.com, Chris Larsen is also an opinion leader and a really active lobbyist.
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5. Main ideas
P2P Lending SWOT
STRENGTHS WEAKNESSES
- Worldwide multichannel platform and its - Right now, impossible to imagine a P2P innovative approach Lending activity in the United States - Excellent job covering between Personal Finance and Investment Solutions - Excellent covering of European market (France, Italy, Belgium,...) - Risk expertise on consumer loan (Personal Finance) - Wave of micro credit development
OPPORTUNITIES THREATS
- Market ready for a back-office offer - Brand image risk because of the based on multichannel platform (white « barbarian » of historical actors. Mistrust brand). This could contribute to finance of regulation authorities. R&D for products Web distribution. - On a short-term basis, evolution of credit - P2P Lending is a good addition to regulation could penalize banks and credit consumer credit specialized activities & specialists. investments. - Marketing costs are high and necessary to - On middle term international P2P develop the market for everyone. Lending platform could be a strategically - There is also a risk of revenues asset to contribute to develop activities. cannibalization on classical credit - Image synergies between traditional revenues. activities, microfinance and company's activities.
5.1. Discuss with national banks about risks related to microcredit activities and P2P Lending. To work with benefits, P2P Lending websites should use new risk analysis methods.
5.2. Synergies exist between microcredit distribution and classical financial products distribution. Use them. Microfinance is one of the main factors of the development of P2P Lending market.
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6. Synthesis about P2P Lending market in the United States
6.1. American P2P Lending market is essentially limited to the United States
Community Lend13 seems to be the only Canadian actor in activity in June 2010. It has been launched in the beginning of 2010 on the same model than Prosper. Two Brazilians actors were announced but none of them were in activity at the end of June 2010. A platform could also appear in Chili. But so far the market is mostly unknown. Actors are waiting signs and good opportunities.
6.2. Analysts forecast a revival of P2P Lending market in 2010 and a middle-term significative development.
In 2010, P2P Lending activity in the United States seems to start again, after a strong slow down in 2008-2009. Economical crisis and banking regulation authorities new rules against «North-North » market leaders (Lending Club, Prosper...) are the two responsible 14.
Market statistics estimations are just a few but market's value is small compared to credit market. In 2009, Forrester estimated the totality of loans given by all the platforms since their creation to $500M. Cumulative total sales are around 3-4%. It represents $20M in 2009. Forrester predicts a development of the activity in 2010 that could reach between 550 and $600M cumulative loans in 2010 (that is one year of production estimated between 10% and 20% total production generated between 2002 and 2009).
In 2009, Celent predicted a cumulative production of $5.8B for 2010. That seems really under market reality but Gartner Group waits a big growth too, with a cumulative production of $5B for 2013. Gartner inspires estimations of field's leaders (Prosper, lending Club, etc.) that estimated total production of p2P Lending between 2 and $3B for end 200915.
6.3. American market grows slowly since its creation and has been strongly slow down after regulation authorities reaction to the Subprime crisis.
Since its creation almost 10 years ago, American P2P Lending market stagnates for a few reasons.
6.3.1. P2P Lending platforms are suffering from a lack of presence. A very few number of people know P2P Lending existence. It has been for a long time only limited to a small bunch of happy few. It remains really limited. A study conducted by Aite Group and PMN in 2010 shown that 96% of American Internet users have never heard about Prosper (media landscape leader of P2P Lending websites).
13In Canada, IOU Central created in 2008 has no more activity and Peermint hasn't been launched yet. 14SEC - Securities and Exchange Commission 15“Predicts 2010: Executive Decisions in Banking and Investment Services Demand a Longer View” – Gartner Group – November 2009
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This lack of presence could be explained by a lack of means16 in advertising and marketing. The needs are huge. (« North-North » platforms' targets are loaners (savings collect) and borrowers (credit distribution).
This situation could be also explained by bad choices in communication and lack of transparency or pedagogy. Leaders have found their advertising campaigns on the theme of direct connections without banks even if they quickly need to fin financial products to stay alive. Difference between bank and credit institution is too small and not enough easy to understand for the public.
At least, « North-North » platform's satisfaction promises isn't hold because it lets people think that everyone can obtain a credit. The reality is that credit process is really difficult. Advertising is mostly focused on a risky population.
6.3.2. P2P Lending product offer is still too limited
The maximum length of 3 years for a maximum of 25 000 dollars isn't enough. P2P Lending platforms can't be really innovative in order to fight against credit institutions and banks. 17
6.3.3. P2P Lending activities are highly depending of financial and banking regulation rules, even if « North-North » P2P Lending leaders try to present it differently.
« North-North » P2P Lending leaders (Prosper) have used the fake idea that their activity weren't dependent of banking regulation.18 This misunderstanding comes from the fact that loan between people is legal and doesn't depend of banking regulation except if people become professional. This last thing avoids model to grow massively.
Until now none of the platforms have succeed to develop a viral mechanism enough big to make people's loans beneficial. P2P Lending model can't grow without using financial institutions that have already the right to distribute credit and collect funds or deposits.
The financial crisis of the last years has made regulators particularly sensitive to transparency of financial services. P2P Lending leaders have been reprimanded in 2008 and 2009. They were not able to take advantage of the crisis and they didn't win banks' clients (no new loan were allowed). Since 2008, American regulator (SEC) suspended their license to operate. Some of these actors are still not in activity.
16Platforms are not yet beneficial and Venture Capital financing are limited since the dot-com bubble explosion. 17Lending Club is the only one to propose 5 years length loan. 18Quite modest for general public. 25
6.4. In 2010, P2P Lending market is renewing in the United States. But the activity is now more focused on financial product distribution (savings and credit) than on « free » loans between people19
6.4.1. « North-North » platforms are catch by regulation. They have to adjust their model and try to re-bounce.
Since its launch in 2006 until end of May 2010, Lending Club gave $125M loans, Prosper $190M. But Lending Club has a better strategy by adopting earlier a model in conformity with banking legislation. It grows much faster than the others. Prosper's « Barbarian » posture has been reprimanded by SEC and had to stop its activity for 9 months in 2009. It was the time to be in conformity (acquisition of financial institution license). During the month of May 2010, Prosper realized $2M loans against $10M for Lending Club. Prosper was close to the end in the beginning of 2010 and stills trying to catch up its former production volumes.
6.4.2. « North-South » platforms are in a better health. The market is really in demand (financing of MFI) and there is a huge growing potential (microfinance).
On the side of « North-South » platforms, Kiva is significantly growing with null rate social loans towards countries in development (first semester 2010: almost $150M loans distributed since the launch of the website in 2005).
source : www.kiva.org
19Even if marketing strategy of P2P remains the same on the websites
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Since this year, specialized platform in refinancing of MFI from the south experiments also a « North-North » model in the United States to finance American MFI (so far two MFI: Accion USA and Opportunity Fund). The number of microentrepreneurs that have difficulties to receive a credit in the United States is estimated to more than $10M. (Source: Action USA)
On its side, Microplace develops a model of « North-South » loans with interest rates. Investors are encouraged to invest. Interest rates are limited even if they exist. Microplace is an actor with a huge potential even if it stays calm. Paypal and eBay are both motivated to help it grow quickly.
www.microplace.com
27
6.4.3. Niche markets are interesting P2P Lending actors.
A few years ago, many actors positioned themselves on the double market of funding and investments with social websites (Crowd Funding20, student loan, familial loan...). For a few moths, startups from the Silicon Valley are in effervescence.
Media is in a good mood to support the projects. Multiple projects of Crowd Funding are born in the United States and everywhere else.21 Each of them want to develop niche markets: art creation (music, cinema, fashion...), entrepreneurship (cf. Peer Financing next page) or non- profit.
www.globalgiving.com
This attempt of market segmentation by community of interest isn't new but is back on the front scene for the P2P Lending.
20Financing of a project with sharing of many individual contributions. 21See French’s example www.Mymajorcompany.com , www.Ulule.com
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6.4.4. Birth of Peer Financing
Peer financing uses mechanisms of Crowd Funding to finance startups. It's also called VC 2.022 and it's really used now in the Silicon Valley. Some people think that this model of traditional Venture Capital23 isn't adapted anymore because startups are less and less financed (development and exploitation's costs are going lower and lower those last years: decline of developers incomes).
The dot-com bubble explosion the development of off-shoring, decline of material price (Moore's law) and decline of exploitation costs (cloud computing, off-shoring…).
Some people think that Peer Financing is better adapted to new needs of financing for young companies. They are also thinking that startups interests will be better serve by communities of users than P2P Lending platforms and professionals of capital risk...
22 Venture Capital 2.0 23Risk Capital 29
6.4.5. Actors are focused on the student loans opportunity.
Each year, more than $100B are loaned to students in the United States by Federal States, $10B by private companies24. Regulation that defines the way government gives loans changed last April. Actors are now waiting to now how these new rules will apply. So far, advantages given by the State make P2P Lending less interesting. It seems that Federal State wants to create its own bank to manage its loans.
The part of private actors would be even smaller. Startups that are ready to invest in this market hesitate between a Social Business type model and a model of alternative financial products distribution. So far, private market is in gestation. One of the most visible actors, Fynanz is a multichannel distribution platform for American Credit Unions.
Platform has already a B2B2C website (www.custudentloans.org ) and proposes to student that are already registered on the website those Peer To Peer features. But it's not loans between people.
www.fynanz.com
24 Source: Finaid.org. cf. http://www.dailyfinance.com/story/credit/are-private-student-loans- worse-than-credit-cards/19506452/?icid=sphere_copyright.
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6.4.6. On a middle term, American market could grow significantly, probably with financial products distribution models (one or multichannel)
P2P Lending market will grow in the United States: most of specialists are waiting for a renewal of the activity on a short term and a bigger development on a middle term. Historical actors are leading the new actors. But the new regulation could be a good opportunity for new platform to grow.
Partnership and alliance with a bank could also create a surprise. It could also be a good strategy to enter with a niche market in order to reach quickly a beneficial level. If this period of renewing in the P2P Lending market is confirmed, P2P Lending websites should logically evolve on a middle term towards products distribution platforms and banking services for one or multiple brands.
6.4.7. Banking regulation has assured its authority on the P2P Lending market. It will structure the market on a short term, but at middle term lobbying coming from the « Barbarians » of the Internet will continue.
Laws on finance are voted now and it's still complicated to know how it will influence P2P Lending platforms. New financial regulation institutions will be created and the knowledge sharing between expertises is also in discussion. Prosper and Lending Club's reprimand by SEC in 2008 and 2009 has limited actors' motivation to grow. But lobbying is still ahead.
Source: www.kiva.org
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6.4.8. Consumer education remains one of the biggest challenges for P2P Lending development: for « North-North » websites, it means more transparency and consistency between what is said and what is done.
Until now, « North-North » P2P Lending actors have missed their main marketing goal (educate the market), probably because of a lack of means but also certainly because of the bad positioning (refuse regulations) and unknown messages (banks and financial institutions misunderstanding) or not efficient. There is an obvious lack of transparency.
« North-South » platforms actors have better managed their pedagogy about their activity. Without spending more money, they have attracted public's attention with a clear and simple marketing message (even if it could be even better). It's simpler to defend microfinance's social values than have non-banking values and distributing financial products or adopt a low- cost marketing positioning without being capable of controlling risks or support costs. I
6.4.9. Outside of the United States, American market doesn't really exist in 2010. It will probably stay very shy on a short term, waiting for new regulation.
In Canada, Community Lend25 has given 36 loans this last weeks for a total of 282 000 dollars with an average rate of 17%. The model is similar to Prosper's one with a reverse biding system. So far, it's only accessible from Ontario and Quebec.
2 Brazilians actors are now in their launching phase: Fairplace26 on Lending Club's model and Savanza27 for student loans.
Despite the rumor, we don't have any sure information about the eventual launch of a P2P Lending website in Chili.
In the other countries, we are not waiting new actors on a short term. We have to wait regulation conditions stabilization before to launch new companies.
6.4.10. There is still no significant initiative in the United States to develop P2P Lending with social networks.
Despite the geographical proximity between P2P Lending leaders and main social networks actors in the Silicon Valley, these two types of actors haven't yet gathered their activities.
If some people think that P2P Lending would be more successful with social networks partnerships in order to reach a much larger public, the reality seems different. These two types of actors are potentially competitors because social networks are also distribution platforms. It seems that a first look at P2P Lending is more about using information coming from social networks without necessarily doing partnerships with websites operators.
25http://www.communitylend.com/ 26www.fairplace.com.br 27 www.savanza.com
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6.4.11. Social networks could be useful to qualify borrower risks.
Discussions between specialists show that P2P Lending actors are using information already accessible on big social networks in order to identify risks for borrowers. These practices seem to grow also in Europe. (cf. Friendsclear in France)…
Source: http://www.post-gazette.com/pg/10148/1061287-28.stm
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7. Blogs review about P2P Lending
In the same time than P2P Lending websites, blogs dedicated to the theme have appeared in the United States. They are mainly created and managed by websites' founders. They have been useful to create buzz and lobbying to defend the idea of credit market deregulation.
But subprime crisis and its afterward-on economy have on the contrary making regulation stronger. Most of these first-generation blogs stopped their activity after SEC reprimand against P2P Lending websites that didn't respect banking regulation. From now on Kiva and Lending Club are the only media in the United States talking about this new industry. Their audience is not really high.
On the other hand, new P2P Lending actors that are launching all around the world are blogging directly in their website. They can animate their « fans » community and create buzz in transparency.
Outside of these blogs, generalist and economic press are not really interesting into the phenomenon even if they are talking a little bit more about since beginning of 2010. Other specialized blogs on money management or personal investment themes can talk about the subject, but rarely. They usually use texts already written by P2P Lending websites leaders.
Globally, blogosphere use messages inspired by marketing campaigns on P2P Lending websites themselves. Critical mind and pedagogy could be missing. Most of the websites content is coming from actors from the field and are destined to sector specialists.
We can criticize the fact that for the public, the press and banking regulation institutions there is a lack of information, transparency and understanding of the true mechanisms and real stakes of P2P Lending.
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7.1. P2P-Banking.com
Source: www.P2P-Banking.com (redirige vers www.wiseclerk.com/group-news )
First blog that gathers P2P Lending actors, P2P-Banking.com is a primary source of information on market evolution. The website is German (Claus Lehmann, alias « Wiseclerk ») but covers international subjects – essentially the United States. European and Anglo-saxon publishers are specialized journalists or P2P Lending actors. Field’s specialists mainly read it. 28 The blog is regularly updated and archives are going until June 2007. We can consider than its goal is before all to create a media showcase with different P2P platforms in the world.
28Actual contributors: ‘Wiseclerk’, Claus Lehmann - Allemagne (Editor and main writer), Michal Kisiel – Pologne, Jesus Martin Calvo – Espagne, ‘ekwiti’ – France (blog on P2P trends in France). Former contributors: Anders Brownworth – USA, Ivan Martelli - Australia (Director Lending Hub), Jean-Christophe Capelli – France (Founder of Friendsclear), Peter Petrovics - Hongrie (Founder of Noba.hu) 35
7.1.1. Overview of main messages
Source: www.wiseclerk.com/group-news
The main question with P2P Lending websites is their profitability and market growth perspectives. Analysis have shown that P2P Lending are optimistic but don't recognize the weak growth of P2P since 2007.
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Source: www.wiseclerk.com/group-news
Social networks are also a big question for P2P Lending leaders. Their main concern seems to be to use them in the most efficient way possible in order to better manage the risk (thanks to the pressure of the community) or to improve the confidence (with Linkedin recommendations for example).
But in all objectivity these concerns are really on a short-term and hide the true question, which is to know if social networks will take some part of financial services market (will they be partners or competitors for P2P Lending leaders?)
37
7.2. PeertoPeerLending.org
Source: http://www.peertopeerlending.org/
The blog Peertopeerlending.org is a press review of articles talking about P2P lending, without any specific analysis. Contributors are not clearly identified and audience seems to be mostly made by field's specialists. This secondary source blog that help create buzz generated by P2P Lending websites.
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7.3. P2P lending news
Source: http://www.p2plendingnews.com/
P2Plendingnews is one of the best websites to understand evolutions of different P2P Lending platforms. Contributors are not clearly identified and audience seems to be essentially made by sector's specialists. The blog seems sadly to be no more active since beginning of 2010.
39
7.4. Net Banker - P2P Lending column
Source: www.netbanker.com/p2p_lending
« P2P Lending » column on Netbanker29 isn't updated for 6 months. Contributors are Netbamker's consultants and field's specialists. Audience seems to be mainly made by specialists. The last update dates from October 22, 2009.
29Finovate organizer, consulting and media company specialized in banking.
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7.5. Business Exchange - “Peer to Peer lending”
Source: http://bx.businessweek.com/peer-to-peer-lending/news/
Business Exchange « P2P lending » is an content aggregator in English that let user have a good understanding of press reviews on P2P Lending in the United States (not only in Businessweek). The service is still in beta version. It can talk about « North-North » P2P Lending websites or « North-South » microfinance websites. Contributors are not clearly identified and audience neither (Beta version).
7.5.1. Overview of main messages Main messages coming from specialized press are: - A few niches could appear - It's complicated to anticipate the regulation - So far, leaders are « winners by default », not « giants » - Lots of questions are still there about this really new industry Main messages coming from generalist press30 are: - P2P approach is a trending subject for those that criticize Wall Street and big American banks. - P2P Lending is close philosophically from Credit Unions31
30Essentiellement la presse économiques : NYT, Businessweek, Washington Post, Forbes… 41
- Kiva is the most famous website and the leader of American P2P market. - P2P Lending is a trusted alternative to invest and diversify the wallet.
7.5.2. Quotes
“In recent times social lending networks like Prosper, Lending Club, Zopa, SmartyPig and others have burst onto the scene to offer an alternative to 'greedy banks'.” http://www.huffingtonpost.com/brett-king/what-loss-of-trust-in-ban_b_584435.html
« In terms of the best interest rate that you will get, getting loans from Lending Club or Prosper Marketplace will generally be a bit better than what you could get from Citigroup or Wells Fargo and much lower than what you would be paying on a credit card, however this can vary depending on your credit situation.” http://www.americanbankingnews.com/2009/12/28/peer-to-peer-loans-is-lending-club-wells- fargo-wfc-or-citigroup-c-the-best-option-for-online-personal-loans/
“Credit may be loosening for big companies, but it remains tight for little guys. Thanks to social-lending Web sites, needy borrowers can ask their neighbors for a little help online.” http://www.forbes.com/2010/04/21/social-lending-prosper-entrepreneurs-finance-social- lending.html
This press uses most of marketing messages given by P2P Lending websites, without any pedagogy to explain mechanisms to the public or understand who is really behind those websites.
31Mutual American Banks
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8. Review of P2P Lending leaders' websites
8.1. Lending club
Source: www.lendingclub.com
Lending Club was created in June 2007 in the Silicon Valley32 by Renaud Laplanche and Soul Htite. In 2008, the website has suspended its activity after 6 months to obtain a license thanks to SEC. It's now operational in almost 30 American states. The company has received $48.8M in risk capital whose $24.5M in April 2010 (last investment in Round C). It counts actually about 50 employees.
8.1.1. Key People Renaud Laplanche is Co-Founder & CEO. He has been CEO and founder of TripleHop Technologies (semantic search engine) sell to Oracle in 2005. Before that, Renaud was associate senior in Cleary Gottlieb Steen & Hamilton (lawyer firm) in NYC. He has received the « HEC entrepreneur of the year » price in 2002 and has a HEC MBA and LBS.
John Donovan is COO. He is in charge of credit, recovery, member’s relationships and Lending Club's financial operations. Johan has spent more than 20 years in the financial sector, essentially at Mastercard International.
Soul Htite is Co-Founder, Vice-President and Chief Engineer. He's in charge of all technical and operational aspects of Lending Club. He is the one in charge of being sure that Lending Club is at the cutting edge of industry and entirely secure.
32In Redwood City, CA 43
8.1.2. Key statistics (May 27 2010)
Source: www.lendingclub.com
Total of allocated loans: $116 864 575 Total of allocated loans in April 2010: $9 510 575 Interests paid to investors since platform's creation: $8 189 379
8.1.3. Offer positioning Lending Club is a platform that « connects investors and borrowers ». It uses a P2P marketing approach to sell saving products to users and distribute credit for tier. They have a low-cost positioning compare to traditional banks.
Source: www.lendingclub.com
Lending Club distributes loans of which total is between $1000 and $25000 on 3 to 5 years lengths. Those loans are given to users that want to consolidate their debts or refund their
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debts by taking new short-term debts (credit cards, consumer credit, etc...). 7% loans are using to finance small and middle-size businesses33.
8.1.4. Website's mechanism On Lending Club's website, loaners invest item coming from Lending Club in order to cover a loan given by a borrower or a bank partner.
Source: www.lendingclub.com/info/prospectus.action
1. The borrower saves his loan request on Lending Club's website (total requested, personal information, etc.). He can also add comments (why he needs this money, credit historical, etc.)
2. Loan is given to the borrower only if a certain amount of criteria are verified: « score credit » of 660, less than 25% debt/revenue ratio, credit historical without problems, at least 3 open banking accounts, not more than 10 credit verification in the last 6 months, credit history of less than one year.
3. If every conditions are filled, Lending Club publishes a loan request, a « loan offer » with a note (see table) explaining loan type (risk) and interest rate depending of risk's level. Capital isn't guaranteed.
4. Once offer is published on the website, potential loaners can propose amounts that they want to invest « to participate to loan offer », with a rate given by Lending Club. When loan total is reached by loaners propositions, offer is launched with a bunch of items produced by Lending Club34. In compensation of this savings collected on the website, Webank bank, Lending Club's partner, gives a loan to borrower.
Source: www.lendingclub.com/info/prospectus.action
5. When loan is subscribed, Webank transfers to Lending Club its right on the loan given to the borrower. Lending Club collects money with investors, eventually augmented with investments given by Lending Club.
33Those statistics are made thanks to website's users declarations. 34Cf. www.lendingclub.com/info/prospectus.action 45
Source: www.lendingclub.com/info/prospectus.action
6. Lending Club is in charge of collecting loans reimbursements and reversing money to investors. 1% is taken from the total effectively given to the borrower. s
Source: www.lendingclub.com/info/prospectus.action
7. Loans are not guaranteed. The borrower is responsible in case of failure to reimburse the money. Loaners are the one that support losses if total failure. They support also default risk of Lending Club itself.
NB. Investors select loans in which they want to invest. They have the choice between invest into individual loans or invest in loan baskets that fill their criteria. It's kind of transparent for loaner and borrower.
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8.1.5. Examples of website features
8.1.5.1. Example of loan published on a platform (back-office side information)
Source: www.lendingclub.com
8.1.5.2. Example used to descriptive the text given to the borrower in order to convince investors.
“Borrower added on 05/31/10 > I am planning to use the loan to pay off higher interest rate credit cards and also to have one bill instead of three. I do not have a problem paying any of my bills; it is just that I wanted to consolidate them to one bill. My place of employment is stable as they are hiring more instead of lying off employees. I have been in the field for 31 years. Borrower added on 06/10/10 > My stable employment and ability to make on time payments are qualities that make me a good person to invest in. I am close to my 60% goal to obtain the loan and I hope that in the remaining days of my funding, investors decide that I am a good investment. Borrower added on 06/13/10 > I don't have much time left, but I am hoping that the funding reaches my goal of $16,000 so that I can payoff my three credit cards with higher interest rates into one payment.”
Source: www.lendingclub.com
8.1.5.3. Example of information given by office credit to the borrower
Source: www.lendingclub.com
47
8.1.6. Webbank bank role As for Prosper, Lending Club signed partnerships with WebBank35, Utah-based bank that gives banking loans to borrowers of Lending Club and sell loans' right to Lending Club. This mechanism lets Lending Club exercise its activity in conformity with American banking law. Webank is specialized in banking back-office activity in white brand. It works with debit/credit card issuer.
Source: www.lendingclub.com
35http://www.webbank.com/
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8.1.7. Banking regulation is an innovation source for Lending Club
In 2008, Lending Club has registered at Securities and Exchange Commission (SEC) to be able to issue notes, financial tools that let it having letters of credit on loans sell by Webank and then redistribute to investors on the website. Lending Club is the first platform that creates such a system in 2008. They had a better strategy than Prosper36.
This process has cost money and time but has been useful for Lending Club that is becoming the only actor on the market in the beginning of 2009. He had a better production than Prosper.
Lending Club has also worked to create a « second market » for its notes in order to augment amounts and let investors « get away from the deal » before the end of the loan. Lending Club signed a partnership with FOLIOfn Inc., a SEC authorized broker37 in order to take in charge technical aspects of this second market. Lending Club predicts 1% trading costs to buy or sell Lending Club's notes on the market38.
36Prosper tried to resist to SEC but failed. 37Notes reseller 38Prosper began a similar approach but so far these markets are not operational because they create questions about risks that let regulators perplexed and users suspicious. 49
8.1.8. Lending Club's Business Model Lending Club let investors and borrowers pay
8.1.8.1. Costs paid by the borrower Loan issuing costs Lending Club charges borrower the right to present its loan request when credit is accepted. Paid price is a percentage of loan amounts depending of risk note affected to loan, following this schema:
Source: www.lendingclub.com
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This grid is working for 3 to 5 years old loans. If loans are made for company's need, there is an increase of 1.5% justified by additional difficulty to estimate borrower's situation.
For example, for a $5000 loan with 6.39% interest rate and 2.5% issuing cost ($112.50), monthly repayment is $152.99 with an APR 39 rate of 7.93%.
Source: www.lendingclub.com
Costs for an Unsuccessful Payment Fee When automatic payment isn't issued or isn't accepted by borrower's bank, a $15 fee is issued to cover Lending Club's transaction costs. It could happen if there is not enough money on the account or if the banking account has been suspended. Each attempt to collect monthly payment is seen as a real transaction.
Late Payment Fee When borrower's repayment is 15 days late, Lending Club charges 5% of late payment or $15.
“Check Processing Fee » If the borrower wants to pay by check, Lending Club charges $15 for « Check Processing Fee ».
8.1.8.2. Costs paid by investor to Lending Club, “Investor Fees »:
“Service Charge” Lending Club charges investors for costs related to loan processing, notes issuing and account management. Those costs are 1% of amounts repaid by borrowers.
“Collection Fee” In case of payment delay, Lending Club deducts these costs:
- 30% of the amount to recover if repayment is less than 60 days late and loan has been attributed less than 90 days (if first monthly payment is late).
- 35% of the amount in every other cases except if there is disputation.
In case of disputation, it costs 30% of additional amounts or lawyer hours. If the money is still missing, there is no repayment costs and repayment costs can't exceed repayment cost.
8.1.9. Main ideas to keep - Lending Club is the most “serious” actor of the American market for the “North- North” model: it limits risks with severe selection criteria but its growth is good, with good feedback. - It has a specific risk qualification model and its advanced strategy to integrate social networks is ambitious: it would like to make online identity another guaranty criteria to loan acceptation. Existing peer pressure in money loan inside family and relations could then be recreate online with the community.
39Annual Percentage Rate 51
8.2. Prosper
Source: www.prosper.com
Chris Larsen created Proper.com in February 2006 in the United States. He is a serial entrepreneur of the Internet financial sector in the United States. The website knew a wide success at the beginning, bringing the entire sector after it. With the strong idea of changing the American system of credit, Chris Larsen has under-estimated the brunt of the regulation set up after the 2007-2009 financial crisis, loosing by the way the first three-year-round.
This strategic mistake ended with the order of closing the website between the 26th of November in 2008 and the 10th of July in 2009 and with 4$ millions (included a fine). Prosper no longer announce its figure in the website because the loans granted before the « administrative closing » were not all refunded… The Prosper service is now available in 27 American states.
The company received 54.5 M$ in capital risk, included 14.5 M$ in April 2010, and employs currently around 30 people.
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Key figures by Prosper (on the 27th of may in 2010) : - Amount of granted loans: 193 M$ - Amount of granted loans in April 2010: 2M$ - Interests paid to investors since the creation of the platform: NC
Evolution de l’octroi des prêts sur Prosper (arrêté début mai). Source: www.prosper.com
In blue the number of new membres in the website, in green the number of new borrowers and in red the number of new loaners (monthly base, stoped at the beginning of May). Source: www.prosper.com
There was a difference between the before and after the « recovery by the SEC (Security Exchange Commission). In May 2008, Prosper registered 30 000 new members and around 10 $ millions of granted loans.
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8.2.1. Key Persons
Chris Larsen is the CEO and co-founder of Prosper. He was Chairman and CEO of E- Loan (big website of online loans). He monitored the use of the credit score for E-loan clients. During the past, he militated in order to active a law aimed at reinforce the protection of consumers private life in financial services. He was a member of boards of some companies and institutions like ACCION, International’s Center for Financial Inclusion, CreditKarma, EPIC, Progresso Financial, Oifang, …
His career reveals that his word at Prosper is included in his work of lobbyist to make better American bank laws, and enhance another financial way. His activity, namely in blogosphere, shows that he would like a liberal and libertarian world bank.
Kirk Inglis is COO and CFO of Prosper. He brings 15 years of work experience in financial services, was a consulting manager at Wells Fargo and before that, worked for 9 years at Providian Financial Corporation.
Sachin Adarkar is general Counsel. He worked for 13 years as business lawyer, and worked as VP and Deputy General at GreenPoint Mortgage Funding, which was in charge of the credit mortgage of Capital One Financial Corporation.
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8.2.2. Website's functioning
1. The loaner records his loan request on the Prosper website with the amount he wants and the maximum interest rate he is able to pay. Loans rise between 1000 and 25000$, with a 3-year due-date. The loaner adds as much personal information as he wants (personal history, pictures, explication of his loan request, links to social networks…)
2. If minimal conditions are filled (credit score less than 640, etc.), Prosper allocates a mark, which permits to qualify loan (this mark is purely indicative for borrowers).
Source: www.prosper.com
3. After the agreement by Prosper, the offer is published with a countdown. Borrowers see this offer and can make some proposals indicating the amounts of loans they are ready to invest in and the interest rate they would like to obtain. At the end of the countdown, an upturned bid system set up: it selects the lower interest rates proposed by the borrowers and complete the total amounts with the others lower interest rates. The average interest rate for the loan is calculated and announced by the borrower. Webbank grants the loan after having materialized the offer with a session of notes of credit with the selected amount of money and interest rates for every corresponding borrower.
4. Just after the subscription of the loan, Prosper pay itself following its mark railings (from 0.5% to 3% of the grant of the loan). The rest of the loan is transferred in the bank account of the borrower.
5. The borrower refunds during 3 years every month the amount, and every loaner is refunded according to his quote part of the amount of the loan. These loans aren’t guaranteed. The loaner’s grant the borrower’s and Prosper’s risk of failure.
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8.2.3. Website particularities Investors can invest by following three modes
Source: www.prosper.com
Prosper proposes an original feature that let investors choose to make their investments automatically on some loans (interest rate, loan type, etc.) and avoid them to select loans manually, as described in the phase 3 of the process. Investors can share their notes on Prosper's second market but this second market doesn't seem yet stable because of regulation rules and Prosper management.
8.2.4. Webbank bank role
As for Prosper, Lending Club agreed on a partnership with WebBank40, Utah-based bank that gives banking loans to borrowers of Lending Club and sell loans' right to Lending Club. This mechanism lets Lending Club exercise its activity in conformity with American banking law. Webank is specialized in banking back-office activity in white brand. It works with debit/credit card issuer.
8.2.5. Prosper isn't really comfortable with banking regulation Contrary to Lending Club, Prosper refused to register at the Securities and Exchange Commission (SEC) before to issue notes. In 2008, SEC and a few American states sued Prosper for having issued unsecured notes and without preventing clients of potential risks. Prosper had to stop its activity for 9 months, time to be in conformity with the law. It cost $4M.
Prosper wanted also to create a “second market” in order to share notes41. It agreed with FOLIOfn Inc., a SEC authorized broker42 to operate technical parties on this second market. This second market isn't open so far but Prosper works to launch it again.
40http://www.webbank.com/ 41In order to augment money in loans and let investors get away from a deal before the end of the loan. 42 Reseller of the titles
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8.2.6. Business Model Prosper let borrowers and loaners pay.
8.2.6.1. Costs paid by borrower
Costs of loan issuing Costs of loan issuing are moving from 0.5% to 3% depends of the rating decided by Prosper. For those that have a low rating, costs are 3% with a minimum of $50. Technically, Webbank deducts the money and charges compensation fees to generate a loan.
Costs for failure of payment In case of payment failure (non-valid check, non-valid transfer...), Prosper charges $15 fees.
Costs of payment failure If the borrower has more than 15 days late in its monthly repayment, there will be an overload of $15 or 5% of monthly total if it's more than $15.
• Collection agency recovery fee
8.2.6.2. Costs paid by the loaner
Costs of services For each loan, Prosper charges a contribution equal to the annual rate of 1% of main total (without interest). Prosper splits the costs proportionally to loaners (a loaner that finances 5% of the loan will pay 0.05% of annual costs). For example, for a loan of $5000 with 10% interest rate, total charge on 3 years will be of $80.70 for the borrower.
Costs of repayment In case of repayment superior to one month, Prosper indicates a repayment agency to collect amount. In case of success, agency deducts 17% of amount.
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8.2.7. Commercial development founded by Lead Generation partnerships.
Prosper agreed in the beginning of 2010 a partnership with People Capital (P2P Lending solution for student loans, still in beta version) in order to enter the niche of student loans. Partnership is an agreement for mutual recommendations: if student borrower is outside of Prosper's criteria, user is redirected towards People Capital. People Capital redirects towards Prosper every loaner/investor that can't find what he's looking for on the platform.
Prosper has made a strong partnership with Zero Motorcycles43 in the beginning of June 2010 to be the online payment/credit solution. Zero Motorcycles buyers will be able to buy a bike by registering Prosper's credit44. This is the first time for a P2P website and it could be copied by the others. Quote of Chris Larsen's interview, June the 8th of 2010:
« Our partnerships with Zero Motorcycles and People Capital are synergistic from the perspective that there continues to be a dearth of traditional financing options available to consumers. The Zero Motorcycles relationship is unique given that it’s the first example of peer-to-peer lending being integrated with a retailer, which is part of our long-term vision. » (Source: http://www.americanconsumernews.com/2010/06/full-qa-with-prosper-marketplace- ceo-chris-larsen.html)
8.2.8. Main ideas to keep in mind
- Its growth outside of legal roads has a really expensive cost for Prosper in term of image, leadership and profitability: 22% of non-payment loans rate for the period coming before its registration to the SEC (before end of 2008).
- Since mid-2009 Prosper has reinforced conditions requested to the borrowers. Prosper's criteria are now close to Lending Club's criteria.
- Prosper is the lobbying head of those who defend financial law liberalization in the United States. Chris Larsen, CEO, is very active in influencing spheres related to online finance and P2P Lending. He goes frequently to Washington DC to try to convince parliamentarians in order to let banking law evolve.
- Recently, Prosper began a few partnerships with other websites in order to have a bigger audience. This partnership approach could spread to social networks.
43 Moto online e-commerce website: http://www.zeromotorcycles.com 44If credit is subscribed by investors, bike is sell
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8.3. Kiva
Source: www.kiva.org
Kiva is an American ONG45 created in November 2005 in San Francisco by Jessica Flannery, former student of Stanford Business School and Matt Flannery, her husband, developer. It's an example of Social Business.
Kiva is today the worldwide leader of “North-South” P2P lending model that consists in financing IMF in countries in development. Kiva tests this year a “North-North” model to finance IMF in the United States. It is also the historical leader of online microcredit. It has inspired a large number of P2P Lending websites.
Association counts 35 employees and is largely based on volunteering and donates of a few Silicon Valley actors such as Paypal, Youtube, Google, Linkedin,etc.
45501(c)(3) non-profit organization based in San Francisco, California 59
8.3.1. Key People Jessica Jackley (married to Matt Flannery) is co-founder of Kiva. Matt Flannery is CEO. Before to create Kiva, he was engineer at Tivo46. Premal Shah is Kiva’s president. He has been Product Manager at Paypal and founding member of Microplace.
8.3.2. Key Statistics (may 2010)
Source: www.kiva.org
Kiva is accessible in a lot of countries but 70% to 80% money collected on the website is coming from the United States47. Total of loans generated is superior to those of Lending Club and a little bit less than those of Prosper. More than 200 000 loans have been done with Kiva, 32 000 for Prosper and 10 000 for Lending Club. This total is another proof of the social goal of Kiva. Default repayment rate is around 2%. It’s a good and useful sign that could help Kiva to develop its activity and microfinance’s activity in general.
8.3.3. Business model Kiva is a society based on American law with a 501(c)(3) status designated an activity that don’t have for goal to make profit (Non-for-profit organization). Its social goal is to connect microentrepreneurs that need funding to grow and people that want to support their projects by contributing to local economic development48.
Its short-term economical goal is to finance IMF with a capital cost the lowest as possible for the IMF and to fill this goal in a profitable and long-term way for its own activity.
So far, money collected by Kiva is loaned to IMF with a 0% rate. Loans are in dollars. IMF is supporting changing rates risks. Individual loaners support risk of payment failure from
46Tivo Inc. Software editor for digital video 47Source: l’Atelier North America conferences’ reports (non verified) 48It’s one of the principles of social economy defined by Mohamad Yunus. Cf . “Building Social Busines”, Muhammad Yunus & Karl Weber - Public Affairs - 2010
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microentrepreneurs that have received a loan. A huge part of Kiva’s work consists to evaluate and select partners IMF.
Its non-profit status has given to Kiva the ability to grow faster than the other actors of the field. For example, Microplace hasn’t received its license from the SEC before 2007 even if the project was born at eBay in the same time than Kiva. It can also receive donations as revenue.
Kiva revenues sources are 4 different types:
- Loaners’ donations in addition to their loan. For each transaction, the website proposes to the loaner to contribute to Kiva’s functioning by giving a donation equal to $5 in addition to their loan. This mechanism generated $2.2M revenue in 2008, 37% of functioning costs.49.
- Individual and institutions donations ($1.796M in 2008)
- Financial revenues coming from unused credits (mainly gifts certificates or repayment of unused loans
- Financial revenues coming from loans deposits that Kiva receives every day and distribute monthly to IMF. This « float » was estimated to $371K in 2008.
Reasons to adopt a non-profit status by opposition to a for-profit status have been in question since the creation of Kiva and still exist. Executive team50, made from Silicon Valley « for- profit » entrepreneurs leaders has always be against the idea of a « for-profit » company. But situation could change for economic or strategic reasons. For example, Kiva could have the right to use capital risk funds. This would create a lot of regulation questions.
8.3.4. Main ideas to keep in mind
- Kiva is the main promoter of P2P Lending in the world, in particular with its very good image for media, regulators, public and ecosystem of the Silicon Valley - Kiva understands really well the spirit of communities and online social networks and knows how to use it to finance microentrepreneurs and its own company. - Kiva is growing in symbiosis with Paypal. The two companies are helping each other to grow, on a free basis. - Social Business model developed by Kiva is full of ideas about marketing, volunteering mechanisms, donation and gratuity to develop an international company. Results of its “non-profit” strategy let think that good synergies could exist between microcredit and P2P Lending.
49Kiva’s functioning costs are $5.9 M in 2009 50Board of directors 61
8.4. Microplace
Source: www.microplace.com
Microplace is an American company Microplace51 created by Tracey Pettengill in 2006 to finance IMF by collecting savings. Society has been buy the same year by eBay to become a P2P Lending website authorized by SEC52. Microplace is also registered at FINRA FINRA53 and SIPC54
Microplace is a « non-profit » company that finances IMF by selling to users savings and investments products55. On the opposite of Kiva, Microplace targets investors that want to contribute to develop microcredit by putting their savings into financial products. But – as Kiva – this is an example of Social Business56 as defined by the economist Mohamad Yunus57. Company employs 15 persons and hosts regularly 20 experts from eBay and Paypal.
51San Jose, CA (Silicon Valley) 52Securities and Exchange Commission. 53Financial Industry Regulatory Authority. Cf. www.finra.org 54Security Investor Protection Corporation. Cf. www.sipc.org 55Securities 56Social entrepreneurship 57cf. http://fr.wikipedia.org/wiki/Muhammad_Yunus
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8.4.1. Key People Tracey Pettengill Turner, founder of Microplace has received a MBA from Stanford58. Before to create Microplace she worked at Mondial Bank and participated to microcredit development in Grameen Bank in Bangladesh59.
8.4.2. Business model To collect funds coming from IMF, Microplace has launched a distribution platform for investments products60 that is destined to individual and companies investments in the United States. This is a multichannel distribution platform61.
MicroPlace User Agreement - Effective as of June 4, 2010
MicroPlace, Inc. (“MicroPlace”), [is] a PayPal company, a broker-dealer registered with the Securities and Exchange Commission (“SEC”) and a member of FINRA.[…]
MicroPlace manages an electronic website that allows you to make investments in the microfinance industry and/or as part of our Gift Program, make gifts to other parties to invest or donate to the microfinance industry. Issuers list securities on our website, and we enable you to place orders for these securities, facilitate payment for them and help you track your investment transaction history. Your payments go directly to the issuer and your securities are issued to you directly by the issuer. We do not hold funds or securities on the issuer's or your behalf.[…]
When you register on microplace.com, you create a MicroPlace account that allows you to interact with the website and use the Services. By creating this account, you represent that you are either: (i) an individual placing orders on your own behalf; or (ii) an individual authorized to place orders on behalf of an entity or corporation.[…]
Eligibility. To be eligible to use the Services, you must be at least 18 years old and a resident of the United States. Different eligibility requirements apply for the Gift Program below. Each investment product and investment service referred to on MicroPlace is intended to be made available only to U.S. residents, entities or corporations and is only available in jurisdictions where that investment product or service may lawfully be made available. You agree that you have all requisite authority to enter into and use the Services contemplated by this Agreement. This website will not be considered a solicitation for or offering of any investment product or service to any person in any jurisdiction where such solicitation or offering would be illegal […]
Our Relationship With Issuers. MicroPlace has entered into an agreement with certain issuers to list their securities on the MicroPlace website. We are authorized to accept your order to purchase these securities, to transmit these orders to the issuers, and to facilitate the execution of your payment instructions. MicroPlace receives compensation from issuers for directing your order to the issuer and for certain administrative costs; the details of this compensation are available in the prospectus of each security. Your funds will flow directly to the issuer; MicroPlace is not a party to the funds. Security ownership is transferred to you directly from the issuer; MicroPlace does not hold securities. The features of the securities available on microplace.com (for example, when a security begins to accrue interest, when interest payments are made, when and if early redemptions are processed, when principal is repaid or when trade confirmations are issued) are at the discretion and control of the issuer and will be stated in the prospectus of each security. We will make the prospectus for each security available to you on our website. It is your responsibility to review and understand the prospectus before placing an order for securities
Source: www.microplace.com
58As Jessica Jackley from Kiva 59Bank created by Mohamad Yunus at the end of 1970 60Securities brocker 61Contrary to Lending Club and Prosper that distribute notes issued by WebBank (no Social Business). 63
8.4.3. Site particularities Microplace proposed to investor’s interest rates between 1 and 3%. Capital cost is low for IMF that has to buy money when they loan to microentrepreneurs.
Source: www.microplace.com
Website tries to motivate investors by letting them choose their microentrepreneurs.
Source: www.microplace.com
Another incentive mechanism is the possibility to offer a gift as a « responsible investment ».
8.4.4. Main ideas to keep in mind Concept of responsible investment free to choose is an opportunity to develop new ethic products and launch really innovative online banking products. - Incentive mechanisms are innovative and efficient. They seem to meet their public in developed countries (search of beneficiaries per geographical zones, per projects types, per familial situation)
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8.5. SmartyPig (United States, Australia)
Source: www.smartypig.com
Is a P2P platform proposing to save money online and make friends participate to the savings.
8.5.1. Main ideas to keep
Understand how P2P finance is associating social web and mobile services. Friends (from Facebook for example) can help another user to finance its project with a donation system. Smartypig has also developed a mobile phone solution and has made some partnerships with e-commerce websites (Amazon, Macy's...) and a bank (West Bank)62.
62 http://www.consumerismcommentary.com/2010/03/18/smartypig-savings-account-opening-review 65
8.6. Mint (United States)
Source: www.mint.com
8.6.1. Main ideas to keep in mind
• User software to manage finances online • Software aggregates all banking accounts and financial services used by users. Financial information is then analyzed and statistics are visualized in graphics. • Software is useful to understand how users are managing their budget (main budget, revenues, banking costs) and to propose adapted financial solutions.
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8.7. Greennote (United States)
Source: http://www.greennote.com/ Specialized in student loans market, Greennote has been bought by TuitionU (www.tuitionu.com) and hasn’t been launched yet (in July normally). They are working to be in conformity with regulation organisms. Model announced is shown above.
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8.8. People Capital
Source: http://www.people2capital.com/ People Capital is an actor working in white brand and that wants to specialize in selection and connection for student loans. They don’t have real partners yet.
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8.9. New actors This is a list of P2P Lending actors but they are still in project or transformation. Some of them are already launched but most of them are still in Beta version.
Services listed :
- Loan management for families and interest groups: o Lendfriend : www.lendfriend.com o Virgin Money USA: http://www.virginmoneyus.com/ o Chittai: http://www.chittai.com
- Student loans: o Fynanz : http://www.fynanz.com/ o tuitionU: www.tuitionU.com o Vittana :www.vittana.org
- Crowd funding : art, projects,… o IndieGOGO: http://www.indiegogo.com/ o Embarkons: http://www.embarkons.com/ o Kickstarter: http://www.kickstarter.com/
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9. Comparative table of two generalists actors: Lending Club and Prosper
Lending Club is a little bit more expensive and stricter for borrowers.
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Date de création 2007 2006 durée mise en conformité 6 mois (8 avril 2008 - 21 octobre 8 mois (26 novembre 2008 - 10 juillet SEC (date) 2008) 2009) montant des prêts $116 236 725,00 $193 000 000,00 accordés depuis l'origine
nombre de prêts délivrés 10 000 32 100 depuis l'origine prêts moyens $11 623,67 $6 012,46 montant des prêts $9 510 575,00 $2 000 000,00 accordés en avril 2010 nombre de prêts accordés 912 440 en avril 2010 montant moyen des prêts $10 428,26 $4 550,00 accordés en avril 2010 https://www.lendingclub.co http://www.prosper.com/welcom
sources m/info/statistics.action e/marketplace.aspx Comparaison du volume d’activité entre Lending Club et Prosper (mai 2010)
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Comparison of amounts given by VCs at Lending Club and Prosper (millions of dollars)
Prosper, media leader has now a serious challenger with Lending Club that signs the double of loans and 5 time more in value. Average loans amount is bigger at Lending Club. Prosper is the first one in term of number of loans because it was there before but Lending Club should be the first in less than one year.
The two platforms have raised $50M for the time of their all existence but they are using $10M per year actually (see table above). Rumors about Prosper’s financial health exist since the beginning of 2010 but company has raised $14.5M in April 2010. It should stay alive at least for one year.
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Statement of Lending Club's operations (Extract 10K, March 31th, 2009)
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Extract of 10K of Prosper December 31th 2009 (knowing that Prosper closed from October 2008 and July 2009) Both platforms need huge volume of activities to reach breakeven point. It could be a chance for Prosper to be acquired by financial institutions or Internet actor.
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Internet traffic comparison between Lending Club and Prosper (April 2009- February 2010) Prosper’ audience has been down since September 2009 while activity was back in June 2009. Today, both platforms are really close in term of traffic. For Lending Club it’s a victory but for Prosper is a defeat (from 800 000 unique views in August 2010). Lending Club remains relatively stable in the time with an average of 130 000 unique views.
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10. Interview with San Franciscan FED
Context: Meeting at FED office during 1h15 with Ian Galloway, Investment Associate, community development department FED San Francisco. Date: Friday, May 7th, 2010
Why Fed and Ian Galloway? Ian worked on P2P Lending subject for FED San Francisco to see if the model could apply to community development financing end of 2009. He has developed a really rare expertise for a regulator and has presented his knowledge in multiple conferences. I talked with him after one of these conferences.
Fed San Francisco is the second FED in size and importance after the federal FED. It takes care of 9 American states including California, Washington or Nevada. FED San Francisco responsible is now the number 2 of federal FED two weeks ago.
10.1. P2P Lending isn’t a good word to promote P2P financing. P2P (Peer To Peer) lending notion is confusing people (users and institutions in general) and doesn’t really explained what is happening. We are mixing P2P Lending and all other types od loans that are not depending of banks. For example, G2B (Government to Business) lending or B2B lending could use same mechanisms than P2P but uses another word. Ian prefers to speak P2P financing to better define this “direct” relation between people and institutions.
102. American market on P2P Lending There is no official data on P2P Lending market in the United States done by FED because the market is so small compared to loan market. Technically, those loans are actually “securities” (made on a first market). SEC regulates them.
A study of Celent cabinet is the only source used by everyone while it dates from 2009 and P2P Lending industry was reaching $5.8M in 2010. It seems that USA are around 300-400M in 2010. When we talk about this total, we are only talking about loans related to P2P mechanisms, the total of P2P startups are not more than $20M.
There are only two real actors on the American market now: Prosper and LendingClub. Kiva is different because of its non-profit status. Loanio will close soon. Other projects are not launched already. Zopa US closed end of 2008 while it has been launched end of 2007. Virgin Money USA is not advertising its service anymore and has no more managers in the United States.
10.3. Why it didn’t work during the credit crunch? Epiphenomenon? Why banks and institutions don’t launch anything? In the United States, P2P Lending market hasn’t took off for two simple reasons: - Lack of people acquaintance with alternative ways to finance P2P Lending (marketing budget are close to zero for Prosper and Lending Club at this time) - Closing of two big actors that couldn’t accept new loans after that they had to be in conformity with SEC: o Lending club from beginning 2008 to October 2008 2008 http://www.nuwireinvestor.com/articles/lending-club-completes-sec- registration-52164.aspx
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o Prosper from end november 2008 to mid-july 2009 http://techcrunch.com/2009/07/14/sec-greenlights-prosper-p2p-lending- resumes-in-14-states-more-coming/ Big credit institutions or banks have never saw P2P Lending as an alternative way to have money by launching platforms (transaction fees and case management fees). It represents a few millions only compared to billions that they need to survive. For Ian, big institutions have a big lack of imagination or have just not yet thought about this possibility.
Only offer of these platforms is a 3 years loan. It limits alternative financing possibilities for borrowers.
10.4. What need P2P platforms to take off? Clearly, actual 3 years limitation is slowing down P2P Lending platforms development. Marketing budgets are missing and development will be very simple.
Generally, a few P2P financing types exist: financing between users, startup financing, specific projects financing (and microfinance).
Platforms’ promises is: - Investor side: secure investment return more interesting than other types of investments with same risk level - Borrower side: possibility to find funding at a more interesting rate than traditional credit institutions for similar amounts and similar time
Platforms’ capacity to be transparent on risks taken by investors at competitive return rates is one of the big things for P2P Lending websites. Most of loans are made on really small amounts and platform wins finally to much money. They say that they have a huge volume of loans because they develop marketing.
There is a « chicken or the egg dilemma »: they need enough investors to finance projects and enough projects to let investors decide who they want to support and do portfolio management (don’t put all their eggs in the same basket, risk management). Those are two DIFFERENT targets and it’s really complicated to communicate about that to public.
10.5. How regulation works in the United States FED regulates everything related to financial institutions. It doesn’t work with Prosper and Lending Club because they are not banks. P2P Lending platform depends indirectly of FED, because they are selling securities. P2P lending platforms are brokerage houses between users. P2P platforms have to register to SED (they are not simply « Craigslist » of loans, as they used to say). There is a state-by-state regulation about what those platforms can loan or borrow and they need on authorization per state (it’s easier for a bank).
10.6. New regulation law for P2P Lending – what is the impact for bank reform and which regulation could happen? For Ian, law that regulates banks and financial institutions will evolve soon and will be more severe. P2P Lending platforms will be strongly impacted because they are very small compared to financial institutions and they won’t be able to do proper lobbying. Hardening of conditions to buy and sell financial assets could be a bad news for such a fragile sector because their business will be even more complicated.
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Everyone is waiting for news and nobody want to invest. They are all afraid of new regulations because platforms could all close soon.
P2P platforms could soon depend of FTC (Federal Trade Commission). There is a power struggle between government agencies to know who will depend of whom in the next months. So far, nobody knows of what P2P Lending will depend because they are so small.
10.7. P2P Lending and student loans There are some startups specialized in student loans but they are limiting themselves to a mediation role for credit unions. Student loans regulation changed recently and the market is not really demanding of anything because the federal State and States have launched « 0 rate » loans. Ian said that he isn’t a specialist of this question.
Mediation role: www.home-account.com
10.8. Community development finance This industry is $50B. « Community development financing » in the United States (Ian’s specialty) is born in the sixties and seventies after the « CRA » law to facilitate access to community credit, especially for those who don’t have a lot of money. (CRA: « Community Reinvestment Act, is a United States federal law designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods”).
Why Ian is so interested in P2P Lending? Second market loans mechanism could be an interesting alternative to let « community development financing » institutions work with individuals or other loans institutions and be capable of financing more. « Opportunity for 2nd market for finance community finance: attract investors not for “social” reasons. Not for gambling ». 10-11% rates for community dev. financing, inferior to standard market for similar borrower profile.
This a simple way to finance its loan by using markets even if actually it doesn't work like this. Goal would be to play the « social » factor game to have limited interest rates (and none null) and enable financing with « community development » institutions of a bigger number of projects for fragile communities.
Why is it so difficult to launch something in that field? Actual platforms are limited in term of loan possibilities and amount. Average loan is around $6000-$7000 and Community Development is around $800 000. For the same reasons that P2P Lending, it's really difficult to do asset pools. It's a basket of loans with a similar profile even if they are all different.
So far, Lending Club and Prosper have « second market » platform for loans (reselling and buying of loans in progress) but they don't do it work.
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10.9. Bonus
- Kiva: Microfinance loan exploitation problem license in the United States. Securities law for investments in the United States. For microfinance loans that Kiva launched in the United States, even if interest rate is null, it's not sure that this is conform to law on securities... Until now, nobody is saying anything but Kiva could Kiva could have to refuse the possibility to finance microloans on the American territory if the situation isn't legal.
- Selection bias with social criteria for money lending. According to recent studies, there is the same bias in P2P Lending that in the loan world in general: borrowers finance more those who are less risky and social « filters » (skin color, handicap, etc.). Profile pictures are even reinforcing those criteria.
- Do C2B (Consumer to Business) or C2G (Government): din the case of « community development », idea to use mobile phone to citizens to let them take pictures of old houses to let community development institutions renovate them. C2B with iphone application for lending: address pictures to community lenders poor houses or infrastructure, working for loans.
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11. Conclusion
The conclusion consist in a summary of ideas I have got while doing this study:
1.-P2P companies aim to fulfill the needs of two very differentiated groups. In one hand you have the investors, who want to obtain a better interest from their assets than the one they are used to get from this current Bank or Stock Portfolio. They are willing to risk, in some cases more than in others, part of their assets (companies doesn’t allow to invest all the money in one loan) in order to obtain more benefits.
The second group is people who need to get access to credit, but they don’t want to pay a high interest rate to a Bank. Here comes an important point: these borrowers can go to a Bank, but they prefer to use a P2P company in order to pay a lower interest. I say can because one thing I learned doing this study is that nobody who does not qualify for a regular Credit, in a Bank or a Credit Card company, will have access to a P2P loan.
That is because every single one of the companies I have studied uses the same credit score rankings to qualify the risk of the borrowers, as any Bank in the US. Which leads me to my second conclusion.
2.-P2P Lending does not want to kill the Banking system, or at least does not want to kill all the Banks.
This was not the idea I had before I’ve started this study. I thought that the goal of P2P lending was to destroy the Banking system. But with this study I’ve learned that the truth goal is to kill a specific part of the Banks and Credit Card companies: The Personal Finance branch, or more common known as the Fast Credits.
The average amount of a P2P Loan is something in between 10.000USD to 25.000USD. Less than we might imagine. But, why bother going to a P2P company for this kind of amounts? For a couple of simple reasons: The rates are way lower than a Bank, and the time of processing and acceptation/rejection is way shorter than the common Banks.
After studying all the elements and data I had been exposing during the study, the ones who have to be more concern about the P2P Lending are Visa, MasterCard and American Express.
If as it seams, the P2P Lending cross the border of United States (there are a couple of actors in Europe and Asia, but nothing serious) this are going to impact negatively in the core business of the Credit Card companies: the fees that they charge for late payments and the Instant Credit that they give.
3.- This brings me to my third conclusion. The P2P Lending is not mature enough to conquer the European market. American customers are much more willing to change their existing method of getting fast money because a vast amount of factors, but for me the most important ones are that by law a single Bank cannot provide all the financial products existing in the market (to avoid monopolistic situations and Bankruptcy damages).
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That means that customers are used to work with several Banks or Financial Institutions, (the average is 4 Banks for each customer). The other reason is that they are more willing to trust newcomers due to financial meltdown of last crisis.
In Europe the consumer use to have just one Bank for all the products, this means that this Bank will always be more flexible and willing to adapt the rates/rules of his financial loans to an existing customer, because it knows that he is “trap” in his Bank. The polarization of the Financial Market will be one of the way milestones that P2P Lending companies has to pass in order to succeed in Europe.
4.- Social Networks are going to be key in the future. Another conclusion I got from this study is that a new way to qualify our Credit Score will be by checking our Facebook profile. Companies are going study our demographics and use it as a new item to analyze.
It is not clear yet how the companies are going to do it, and which objective data can find studying our profile, but for sure all the key actors will add this functionality. This is for sure, a future line of study.
5.- Social Lending is a different approach of P2P Lending. The social aspect of loans is a new approach that ONG got a few months ago in order to attract people to their projects. This is a huge trend I saw during this study.
This approach has two strong points. The first one is that you attract a new kind of lenders that really want to contribute to an ONG, but before P2P Lending they did not contribute. And the second, and most important one, you escape the strong regulation of SEC.
The SEC applies very strong criteria for all the financial institutions that have loan products. The most important one is you are earning some interest in the transaction you need to make “provisions” for prevent eventual defaults. In this case, the lender is not making any money, so the “middle man” has not to make any provisions. That is a huge advantage for this kind of institutions because they are usually short on cash.
6.-And to finish, the study show that there is a huge opportunity in this field, either for pure players and Banks. P2P companies will always going to need banks to offer their loans. They cannot operate without it. And Banks can take advantage (using cross-selling) from that attracting new segments of customers that otherwise will lose in front of Credit Card issuers.
11.1. Cost of the TFM in term of hours To complete this project the total cost in term of hours was approximately of 180 hours, plus 2 hours to do the Interview.
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12. Bibliography
-CashEdge’s Press Release: http://www.cashedge.com/news-events-press-releases-20090814.php
- TechCrunch Disrupt http://www.techcrunch.com
- GigaOm http://www.gigaom.com
- New York Times Tech Blog: http://bits.blogs.nytimes.com
- Mashable http://mashable.com
- Ars Technica http://arstechnica.com
- Robert Scoble’s Blog http://scobleizer.com
- Techmeme http://www.techmeme.com
- Mobile Banking Blog of Brandon Mcgee http://brandonmcgee.blogspot.com
- Payment News http://www.paymentsnews.com
- European Financial Management & Marketing Association http://www.efma.com
- Lending Club http://www.lendingclub.com/home.action
- Prosper
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http://www.prosper.com/
- Kiva http://www.kiva.org/
- Zopa http://uk.zopa.com/ZopaWeb/
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