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Prosper.com and peer-to-peer lending in the economic downturn

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Peer-to-peer lending
Prosper is one of my favorite startups, on a personal level, since what they are doing with peer-to-peer loans makes the market more efficient and generates gobs of graphs to play around with. For those of you who are not familiar, here’s a description of Prosper from Wikipedia:

Prosper Marketplace, Inc. is a San Francisco, California-based company that operates Prosper.com, an online auction website where individuals can buy loans and request to borrow money. Borrowers set the maximum interest rate they wish to pay[1], and loan buyers, called “lenders,” bid on specific loans by committing a portion of the principal and setting the minimum interest rate they wish to receive on a particular loan[2]. Prosper manages the reverse dutch auction, assembling bids with the lowest interest rates in order to fund the loan.

Prosper verifies selected borrowers’ identity and personal data before funding loans[3] and manages loan repayment. These unsecured loans are fully amortized over three years, with no pre-payment penalty. Prosper generates revenue by collecting a one-time fee on funded loans from borrowers, and assessing an annual loan servicing fee to loan buyers. The idea for the service is derived from group banking concepts, such as rotating savings and credit associations. Other motivating ideas derive from the concept of microlending.

And because of their open API where you can query for pretty much every piece of loan data in their system (examples here), there’s been a large ecosystem of Prosper-related websites that have sprung up, including one of my favorites, LendingStats. They have a number of charts on their site which I’ll run through below.

The main thing I’m interested in is how the recession has affected the Prosper marketplace, and how it might affect other companies in this area as well. Obviously a bad recession is bad for almost every consumer startup, but it’s interesting to dive into this particular example.

Prosper Total Member Count
First off, the growth around Prosper has been good albeit mostly linear. That’s OK since the site actually involves money, versus non-revenue generating web 2.0 sites ;-)

Interestingly enough, you can see that new Borrowers outpace Lenders, and that right near the end of the chat (in the upper right), there is a bit of a plateau as membership growth stalls. Given the state of the economy, I’d assume that the reason is that Borrowers now have cheaper sources of credit and/or Lenders have less money, so fewer of them are on Prosper.

Sharp drop in membership growth and active lenders/borrowers
You can see the same drop here, where since April/May 2008 there’s been a substantial drop in membership.

Another view of this is just the Active members, rather than new users coming in:

One interesting note for the above graph - why do Lenders rapidly outpace Borrowers? My guess for why there’s more Active Lenders than Active Borrowers has to do with the fact that the Borrowers are just trying to get a big lump sum out of the system, whereas the Lenders are likely to re-invest their money and keep the returns coming in.

How does the economy affect YOUR startup?
This example of Prosper is an interesting datapoint of one particular company is being affected by the economic downturn. Being in the loans business obviously makes them affected by the fact the economic downturn has its underpinnings in the credit markets - but it’s still a non-advertising business affected by the recession.

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Written by Andrew Chen

September 2nd, 2008 at 8:00 am

Posted in Uncategorized

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Viewing 6 Comments

    • ^
    • v
    >> Borrowers now have cheaper sources of credit

    I think the fact is the opposite - the subprime saga tightened the creteria for lending ...But i am not sure why borrowers are not flocking to the site.
    • ^
    • v
    ah, good point. I think it just depends on where you are in the credit market? The fed rates are lower, but you're right that the banks are more stingy with their loans. Wonder if one cancels out the other.
    • ^
    • v
    Hmm, the undoing of capitalism; Welcome to Adam Smith's free market!
    • ^
    • v
    If you look closely at the lending stats page (all the way at the bottom right), it notes that the data is as of 8/19/2008. Which means August is a stub, not a full month. While this wouldn't affect the drop in membership growth over the past few months, it does explain the others.

    As opposed to membership, a better indicator of actual transaction activity on the site over time would be here: http://www.lendingstats.com/loansFunded. While this doesn't indicate fast growth, it doesn't show the site falling off a cliff either (especially when taking into account 20 days in August, a traditionally slow month).
    • ^
    • v
    Yep, great points. I had considered that it was just an intra-month thing, but give the fact that previous months seem to be affected also, it strikes me that the macro-economic situation is affecting Prosper. We'll see how this all shakes out though.
    • ^
    • v
    Prosper.com is a very interesting study in light of our current economic crisis'. I was actually on the inside there, and I found the User Experience of Prosper.com to be deeply flawed. If you are lending money you make the best returns on your investment by lending to people with a lower credit score. You make more money in interest by lending to somebody with a "C" credit score than somebody with an "A". Even more still lending to a "D" or and "E". If you're a borrower you get to go through the rather humiliating process of publicly begging a bunch of strangers for a loan. I was there a year ago, so I'm not sure if they still have the auction mechanism in the site. That whole mechanism just created a barrier-to-entry for users which is unnecessary in the whole context of what they were trying to do. I feel like the whole concept of Prosper.com is good but their implementation of it from a UXD standpoint is bad. Bad enough to create user loss. Andrew, I kinda wish you could tie together your traffic analysis to the actual User Experience. Perhaps in a follow-up post?

    What am I doing with my start-up in this down economy? I'm in stealth mode right now but I'm creating a business and and audience around something very new but very OLD-school, non tech. Using the web as a platform to promote a practice which goes on every day, right under everyone's noses.
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