Entries in Lending Club (10)


"Zynga for real men": a troubling blend of FX trading and social gaming

Online platform eToro is opening up the complex world of foreign exchange trading to the masses through a simple and social user interface - but is this democratization of currency speculation good for the market?

Much like online prediction markets, eToro makes trading easy and fun, with leaderboards, discussion threads, and neat visualizations, but the truth is that the FX market is not fun and games. Participants are not betting with fake cash on who will win the World Cup in the pursuit of prizes, but rather are speculating on the currencies of real countries. The FX market serves a very important purpose: to facilitate transactions worldwide in all currencies. A collapse in currency can have very a real impact on individuals who never have even heard of the FX market and certainly never chose to gamble their future on it (ask the people of Malaysia or Thailand in 1997).

Admittedly, the concept behind eToro is brilliant: providing access to the largest financial market in the world that has largely been the domain of large financial institutions.  Even better, the market is entirely over-the-counter with no regulation or central oversight. So you can short at will, there is no up-tick rule, it operates 24 hours a day during the week, and the concept of insider trading doesn't exist. But herein lies the danger. Already, most trades are purely speculative (a full 80% where no currency ever actually changes hands) and while this influx of cash daily gives the market tremendous liquidity which is good for trade, it also puts the fate of countries' economic well-being in the hands of bankers. Adding in novice traders allured by what investor Howard Lindzon described as "Zynga for real men" would seem to make the market more volatile, not stable.

Of course, eToro's influence on the market is negligible. While $100 billion already traded on the platform is some nice volume, FX trading accounts for nearly $4 trillion daily. So novice traders can have fun and muse publicly on the geopolitical factors that will cause X country's currency to depreciate, raising their individual stature on an eToro leaderboard and maybe getting new followers to mimic their trading habits. Michael Arrington describes this all as very fun and as it goes more social, increasingly "funner".

Yet let's remember that foreign exchange trading has a real impact on lives and is not just a game. Of course, there is no reason to think that institutional investors take this into consideration, but as an individual, I can choose differently. That is why I invest in Lending Club, a platform that is also fun, but also transparent about risks, returns, and the impact on the people participating (and without the potentially devastating externalities to people outside of the market altogether).

Addendum: Hacker News has a great comment thread on this post.


I'm robbing the bank, you should too: earning 13.59% through peer-to-peer lending

These days, it's easy to hate the banks. The government has managed them with bailouts and now special taxes, policies that you and I may agree or disagree with but likely have no impact upon. But there is a micro, market-based way to fight the problem: steal their business.

Traditional banks charge exorbitant rates for personal loans, as high as 29%. In the peer-to-peer marketplace, I can undercut the banks by funding loans at far more reasonable rates and still make a nice profit. My current expected returns? 13.59%. After kicking off my $1,000 p2p lending portfolio on Lending Club in early December, I've slowly built up my portfolio over the past few months, periodically adding $500 every couple of weeks until this week when I felt comfortable enough with the platform to drop in the final $2k. My portfolio at a glance:

Through these first few months, there are a few things I've learned....

Click to read more ...


Doubling the p2p portfolio on Lending Club

Since I wrote recently (and critically) of the recent negative articles about p2p lending, I thought it was time to put my money where my mouth was, so tonight I doubled my Lending Club investment portfolio.


Of the initial $1,000 that I invested last month, $250 didn't clear (because loans either fund fully or not at all so if a borrower fails to attract enough investors, the lenders who initially pledged retain their money), so I began backfilling that portfolio. Then I used their investing tool to screen by a few filters - less than 3 defaults in the past 2 years, approved by Lending Club - and create a customized "moderate risk" portfolio. I scanned the 50 proposed notes and eliminated those that seemed particularly egregious. Like last time, "egregious" to me meant poor grammar, failure to answer investor questions, and bad business ideas, such as this gem:

I help executives with 15+ years of experience start their own businesses as solo Entrepreneurs, or "Solopreneurs". After streamlining the setup process and creating an "incubator" that has most of the systems already setup for them, I am now ready to deliver this service via the web using an interactive website. (Emphasis added)

I then filled in the gaps with handselected loans that met my most stringent criteria - verified income, no defaults in the last 2 years - plus an effort to get loans that will clear more quickly - notes that end in less than 7 days. My expected return, accounting for expected defaults, is just shy of 12%.

My standards are rather lower than I thought they would be. I suspect that if I actually knew these people, I wouldn't lend to the majority of them. Maybe I'm being elitist. The questions asked by the lenders also seemed particularly invasive, "e.g., what steps are you taking to ensure that you will not end up in this financial hole again?" I thought about signing up as a borrower as well to see the experience, but now realize that I would prefer not to be so examined by strangers myself.

Still, I'm really excited about my Lending Club investments. I've begun to receive my first deposits and I look forward to continuing to grow the portflio.


Continued criticisms of p2p lending

A slew of articles criticizing the emerging p2p lending industry appeared this week, beginning with Mark Gimein's post at Slate's the Big Money, "You are Unlikely to Prosper". Felix Salmon soon after wrote "The Problem With Peer to Peer Lending" and then Techdirt followed with "Person to Person Lending Not Saving the Economy...Actually Looking Really, Really Bad".

The message of all of this coverage? That p2p lending is riskier than advertised, most lenders have lost money, adverse selection abounds, and really the whole venture is a failed innovation in finance. As usual in articles about p2p lending, the comments are full of testimonials from lenders about their terrible losses on Prosper.com and how p2p borrowers tend to be deadbeats.

If we were back in 2008, these criticisms would all be noteworthy. Prosper undeniably made terrible, risky gambles, produced misleading advertising, and failed to adequately screen borrowers in the early years. Investors are still reeling from those mistakes (see Fred93 who dropped $800K into the site), but why are we still focusing on earliest years and the losses incurred during the height of the credit crunch? This seemed like old news back in April.

By contrast, Lending Club (scarcely mentioned in these articles) launched with SEC approval, institutes stringent borrower requirements, and has a happy lender community (no hate blogs that I've found yet). Gartner predicts that p2p lending will increase by 66% over the next three years. It's 2010. Let's look forward and let the new crop of p2p lending companies learn from Prosper's early mistakes and do better.

Note: The best discussion forum to get a sense of p2p lender frustration is prospers.org.

Flickr credit: amalthy


My $1,000 Lending Club p2p lending portfolio

Since the closing of Pertuity Direct, I made my first move back into the domestic p2p lending market this weekend, opening a Lending Club account with a friend. Our goal is to earn a healthy and stable return of around 10% with minimum monitoring required and full transparency of the status of our investments at all times.

My approach was first to use LendingMatch, their automated tool, to give me a decent, diversified base portfolio. [On a design note, the user interface of LendingMatch is extraordinary; it ranks up there with Etsy as among the most fun and intuitive browsing and selecting tools]

I selected three filters:

  1. $1,000 total investment
  2. Target return (after accounting for expected default and the service fee) of 11%
  3. No delinquencies in previous 2 years

There were certain other filters that I wanted to choose—notes that were both approved by the Lending Club credit team and where the individuals had their income verified—but they too restricted the portfolio, bringing me down to only a handful of notes, so I let them go.

This search gave me 32 notes to compare. I went through them individually to eliminate certain notes that failed in certain less scientific ways:

  1. Inability to spell (especially in the case of the two word loan title, e.g. “Debt Consoalidaton”)
  2. Bad business ideas (e.g., fixing up and flipping houses in a depressed housing market)
  3. Failure to adequately answer questions asked by other lenders

At this point, my portfolio was a bit more aggressive than expected. Lending Club rates their notes from A (less risky) to G (more risky) and I had no A or B loans and an excessive number of F and G loans. I filled in with more A and B loans, filtering for verified income, which obviously brought my expected return down a bit, but I was more comfortable with the final result, summarized here:


The historical default for this blend is about 3.5%, plus the fee of about 0.7%, so my final expected rate of return is between 10 and 11%. My plan is to continue to expand this portfolio to $5,000. I was actually prepared to invest all that at once, but there are simply not enough notes on the site to create my desired portfolio at that scale. Rob at Lending Club indicated to me last month that the company is focusing on attracting additional borrowers. Now I fully understand why a sufficient number of borrowers is so crucial to taking p2p lending mainstream; while it remains hard to invest a significant amount of money, Lending Club’s reach is limited.

The company’s customer service remains stellar. When I experienced a technical issue, I Twitter DMed @RobGarciaSJ, their Senior Product Strategist, who wrote back nearly immediately.  A colleague who is also looking at opening an account shared with me several e-mail exchanges he had with one of their VPs, all answered in great detail within a few hours. Through those emails I learned that Lending Club is allowing accounts to be opened on behalf of dependents. My colleague is looking for a way for his kids’ savings accounts to earn more than 0.5% interest and thinks Lending Club may be a good option.

I’m looking forward to expanding my Lending Club portfolio as the company grows and tracking how it is going here. With expectations of a 10% return, warnings of “if it sounds too good to be true, it is” ring in my ears, but I remain optimistic that p2p lending is simply offering a simpler, better investment opportunity. It’s one I’m willing to bet on.


Five things to ask yourself if you are interested in social lending

There is significant buzz around the concept of social lending these days. From the dramatic re-opening and prompt re-closing of Prosper Marketplace, to the calm (and dare I say bank-like?) steady returns of Pertuity Direct, mainstream borrowers and lenders across the spectrum are wondering whether social lending may be a legitimate pursuit. But who is it for? Is it an alternative reliable source of returns for investors? An option for borrowers who seem to have no other options? A platform to lend to the working poor around the globe? A risky, high-payoff avenue for lenders? A way to feel good about helping people reach goals that you support?

The truth is that social lending is an incredible diverse market space. If you’re thinking about entering the social lending sphere, ask yourselves these questions to know which platform may be right for you:

  1. What originally drew you to social lending? I see three main classes of people interested in social lending: 1) Investors looking for an alternative return stream; 2) Idealists looking for a concrete, high-impact way to contribute to social good; and 3) Casual lenders intrigued by the possibility of cutting out the bank to earn returns and create a more transparent financial experience. You should know immediately which type you are—investor, idealist, or casual lender—and your options will narrow considerably based on these goals.
  2. How much personal connection are you looking for? As the term “peer-to-peer lending” has evolved to the broader “social lending”, some sites are moving away from the direct p2p connection. Pertuity Direct, for example, has very consciously tried to move to the mainstream lending market by relegating the typical “borrower profile” to an optional community page. Instead, lenders buy into a pool of borrowers of a given asset class. This approach is excellent from an efficiency standpoint—no need to browse through profiles to try to create your own diversified portfolio—but the lenders looking for the feel-good sensation of getting to know your borrower will be disappointed. Lending Club offers the more traditional profile-browsing approach which gives you a direct connection to your borrowers. On Kiva and Microplace, you choose a microfinance institution who finds individual micro-entrepreneurs according to filters—in your chosen country, target demographic, etc.—whereas on LendforPeace, the entrepreneurs are all Palestinian. Through Virgin Money, you simply formalize deals with people you already know; no new relationships are gained, rather the site creates the framework to help prevent existing relationships from deteriorating when they are complicated by a financial bond. The latest entrant Unithrive connects Harvard alumni with current Harvard students – the possibility for a durable bond between individuals is there with both the financial and university connection.
  3. How much risk are you willing to take? Initial challenges with high default rates when the p2p lending space was in its infancy led to many charges that borrowers on these platforms are an adversely-selected population and lending is risky business. The industry has made great strides since then and has instituted far more stringent borrower requirements, but the risk factor is still relevant. Pertuity Direct and Lending Club are the only two companies that are registered with the SEC, so if the government’s blessing matters to you, your options are quite limited. The international microfinance sites have very low default rates (1.7% on Kiva). Pooled lending, like on Pertuity Direct, achieves the highest rate of diversification, but if you’re willing to accept the risk, you can choose borrowers paying a higher interest rate based upon their profiles at Lending Club. Prosper is still shut down, but many early lenders were burned on the site – often due to their own lack of judgment, but an issue nonetheless.
  4. Do you want to make money? At Kiva and LendforPeace, p2p microfinance sites, you earn no interest, but the sites offer a high-impact way for you to park additional money (as little as $25). At Microplace, you can earn up to 6% interest (although most investments fall more in the 1-3% range). At Pertuity Direct, the average interest rate is around 13.4% (minus fees). Lending Club claims a 9.05% average annual performance.
  5. Are you interested in a particular cause? Many sites target very niche markets. If you are appalled by the usury of payday lending, check out alternative Yadyap (“payday” spelled backwards). Passionate about education financing? Look into People Capital or Unithrive. If you are looking to provide economic opportunities in Palestine, LendforPeace is your site. To help mainstream American families, Prosper and LendingClub are the best known.

P2P lending a VC choice in Europe

Paul Jozefak, Partner at NeuHaus in Germany, yesterday talked to ReadWriteWeb about the state of early-stage venture capital in Europe. His number one venture now? Peer to peer lending.

"Smava is in the peer-to-peer lending business...the credit crisis has been a big boost to these ventures. This business also seems like it will have national champions and not be consolidated by a few global players, because A) trust tends to require proximity; B) local regulation still matters; and C) it is such a massive opportunity that a venture that does well even in only one country could still be very big."

P2P lending is doing well with venture capital here in the US as well. Lending Club recently raised $12 million in second round funding.


Can P2P Lending Help to Loosen the Credit Crunch?


Uncrunch America offers consumers a package of tools to help them handle the credit crunchPeer to peer lending sites have undoubtedly had a more prominent role in the context of the financial crisis. Uncrunch America” is a an effort by a group of P2P and social lending sites— namely Lending Club, Virgin Money, and On Deck Capital—to build an awareness campaign that aims to “help resolve the credit crunch and rebuild the economy by delivering consumers with secure, trustworthy tools and infrastructure to finance necessary expenses and make critical investments.”

Along with the three lenders mentioned above, the support team also includes providers of personal finance tools and credit education such as Credit Karma and Geezeo. ChangeWave, a global network of professionals, is also a part of the team and helps to provide marketing and public relations support.

What is this coalition’s secret weapon? By joining powers (read as bundling) they can provide useful and demanded services to the American consumer in this time of need. According to their website, since the start of the year Uncrunch has distributed over $US 74 million (this number represents the amount of money lent via Lending Club, Virgin Money, and On Deck Capital).

There is no doubt that the tightening of credit from traditional lenders has created an opportunity for social and P2P lenders. But are consumers grasping the opportunity presented by untraditional lenders? It seems that lack of borrowers is not the problem. However, two of the three lenders on the Uncrunch team depend on individuals to provide the finance for loans and in today’s worried financial picture it is no surprise that individuals might hold on to their money as tightly as banks. As with any investment, lending through untraditional lenders is a bit of a gamble but most people today have lost their appetite for risk.

Although Uncrunch America provides valuable services for borrowers, questions remain about how it can increase the supply of financing for loans. This is where the real “uncrunching” begins.

Flicker credit: Happy Haggis



Looking to try out P2P Lending?

See the possibilities with our new P2P Lending Primer


Regulation troubles mean slowdown for some markets

Alternative markets are being tra markets and the government is going to treat them as such. The prediction market Tradesports is now permanently shut down due to gambling laws, p2p lending market Prosper will be off-line for months dealing with the SEC, and the viability of craftsmen on Etsy and many other direct seller-consumer markets is threatened by legislation soon coming into effect and more legislation to come. What does this all mean?

Perhaps most importantly, the previous sky-is-the-limit land of innovation in markets is retracting. It took them some time to get started, but government lawyers are hard at work writing cease-and-desist letters and new laws that may spell doom for smaller or newer entrepreneurs in this field. Ventures that survived by operating in gray areas slightly out of reach of the regulators will find that they can hide no longer.

Government involvement in a sphere that was a demonstration of nearly pure capitalism is both regrettable and necessary.  The consensus that regulatory and policy failure contributed towards the current financial crisis and allowed the likes of Bernard Madoff to flourish required the SEC to explore hidden markets and register all sellers of securities. Recent tainted milk and leaded toy scandals in China naturally lead the government to require higher product standards for children’s products and cosmetics. 


Unfortunately for Prosper and other p2p lenders, the SEC’s actions have the most profound and immediate impact upon them, as they need to shut down (Lending Club is still open) while they spend hundreds of thousands of dollars to go through the bureaucratic process of licensing with the SEC (this is a lot of work for an organization whose average loan in 2008 was $6,047).

For small sellers of cosmetics and other homemade items, January may prove to be their last month in business as they are the forced to prove the safety of their items as dictated by the Consumer Product Safety Improvement Act (CPSIA) and the FDA Globalization Act of 2008. Due to immoral practices of Chinese manufacturers, small businesses will now need to spend thousands of dollars a year in paperwork in order to prove that their $2 homemade soaps do not contain high lead concentrations. Paradoxically, the large toy corporations who practice the outsoucing that is so feared by some American consumers will be most able to comply with the new regulations while the small crafters who make items at home using organic wool will be out of luck. The reaction by the Etsy community makes clear that many crafters will simply be forced to close down shop.

It was probably only a matter of time from the beginning for Tradesports. Their entire business model was based upon skirting gambling laws through technical operation out of Ireland, although the majority of their trades knowingly took place in the U.S. It will be interesting to see whether its non-sports affiliated site Intrade (the more innovative and interesting market I would argue) will last.

As many of the best entrepreneurial teams pushed ahead over the past several years with their alternative, and often quite persuasive, ideas, many free market enthusiasts (like myself) found it hard not to get swept up in the excitement and see these as the undenaiable future. Expectations are now revised down from their initial irrational exuberance. These upstarts have a number of hoops yet to pass through, but their promise is still bright.