Entries in p2p (9)

Wednesday
Dec082010

The Transcapitalist swan song: a summary of two years exploring the technology & free markets intersection

After 177 posts spanning nearly two years, Transcapitalist is going into hibernation. I have loved writing here, most of all for the opportunities to meet other people who think like me (and those who didn’t and told me why). Highlights of the experience were co-hosting Tap the Collective with Inkling Markets, participating in Ignite DC and Ignite Baltimore with my talk Web Capitalism Doesn’t Need a Bailout (a summary of the Transcapitalist philosophy), and having the opportunity to interview people at many of the companies that I most admire.

When I got started, there were three emerging constructs that really excited me: social lending, peer-to-peer e-commerce, and prediction markets.  As this was late 2008 at the height of anti-market fervor in DC, what struck me about these platforms was that they were essentially distributed marketplaces, largely self-policing, transparent, efficient, community-driven, and enabled by the internet. At a time when much of the political rhetoric focused on how the market had failed, these seemed to be constructs that offered a purer and non-exploitative example of how market capitalism could and should work. Transcapitalist began with this idea – to explore the intersection of technology and free markets – with the presumption that the former had the potential to transform the latter and for the better.

My viewpoint evolved through the course of writing here and discussions with others, but I still think that web capitalism has a lot to offer our traditional view of market dynamics. I’ve summarized my thinking on these topics below, linking heavily to previous posts with more detailed coverage.

In the face of tightened financial conditions, new investing and borrowing mechanisms are emerging ranging from the “personal IPO” to crowdfunding. Peer-to-peer lending remains a viable alternative to banks for both borrowing and lending at small scales with better rates for both sides of the transaction.

Largely in response to the credit crunch and the restrictions of the current financial marketplace, interesting financial innovations emerged over the past few years. We were particularly intrigued by the new concept of selling a percentage of your future income in exchange for a cash investment up front, which I referred to alternatively as the Personal IPO, or “taking yourself public” or “selling your personal equity”.

Another emerging construct which holds promise is crowdfunding. We came out early with enthusiasm for Kickstarter, a platform to match creators and artists with funding through, and we’ve been thrilled to see it take off ever since. The first real example at scale was set by Trampoline which sough to crowdsource its Series B funding. We loved the trend for mobile payments like Square for merchants and Venmo for repaying friends. More troubling financial innovation is on display at eToro which aims to create a “Zynga for real men” in the world of foreign exchange trading.

However the most prominent innovation is in p2p lending which experienced great change over the past two years as they sought to create an entirely new financial product and asset class. The original innovators Lending Club and Prosper Marketplace made it successfully through the SEC process (which at the time was far from certain as Prosper alternatively opened and closed), while promising privacy-focused hybrid upstart Pertuity Direct folded.  What began as a platform to browse individual profiles prone to adverse selection is now a more scalable steamlined dashboard experience to select target characteristics from vetted borrowers in order to create a custom portfolio. Since opening my Lending Club account, my discussions with their team and continuing healthy returns (~10%) encouraged me to expand my portfolio, and I plan to keep up my investments there for some time to come. The appeal of p2p lending is that it is simple and commonsense: by cutting out the middleman of the bank and lending directly, investors earn better returns and borrowers pay lower rates. Why give that spread to the bank? However, even with high interest rates and the credit crunch, p2p lending has not gone mainstream. Uncrunch America was an effort by a coalition of non-traditional finance platforms to encourage people to look beyond the bank, but it’s not clear that the message was heard.

More niche markets also emerged to mixed results. Yadyap (“payday” spelled backwards), which aims to provide an alternative to the payday lending market, has yet to get off the ground.  On the other hand, People Capital has secured significant financing and during my interview with them, they impressed me greatly with their concept of a Human Capital Index to replace the FICO as the credit evaluation metric for young people. Unithrive seeks to connect Harvard students with alumni who can provide interest-free loans. Vittana targets helping students in the developing world.

Internationally, internet-enabled market-based practices are introducing new concepts to traditional international development approaches.

Muhammed Yunus, godfather of the microfinance movement, pointed out that Grameen Bank’s microfinance investments performed steadily through the financial downturn where other lending arrangements failed and could be a means to “return the economy to health”. I keep a small amount of money with MicroPlace, interest-bearing investments in microfinance institutions in Nicaragua and Uzbekistan, which each send me $0.50 or so every month.

In China, p2p lending is a nascent movement, as  CreditEase offers a p2p lending platform to institutionalize informal lending practices, and Qifang employs clever cultural pressures for repayment, including posting the pictures of family members to shame defaulting customers.

I greatly admire Acumen Fund’s approach to international development, which seeks to invest in targeted local ventures, providing an example of a free market solution providing social good. And one of the top startups of the past couple of years is socially responsible outsourcing nonprofit Samasource which encourages you to “give work” through paying the poor to do online tasks.

New e-commerce platforms have the potential to cut out the middleman to directly connect small-scale sellers and buyers, but many remain in the realm of gimmick.

Etsy remains one of the most amazing and promising sites on the web. A destination for handmade goods which defied the odds to become the fastest growing e-commerce site, I covered it a full 20 times. It’s a prime example of an open marketplace, from its open API to the Community Council that brings the buyer and seller community together to talk about the future of Etsy, and it serves the artisan community well. Its blog encouraged me to join the outcry against the Consumer Product Safety Improvement Act, and I argued that the community-enforced handmade standards of the Etsy community were an approach to support, not smother with regulation.

I was an early fan of Groupon with absolutely no idea of how huge it would become just a year and half later, but my opinion now is considerably tempered. Also out there with innovative selling platforms are  the cleverness of Gilt Groupe and the fast purchase decisions made through online sample sales, the scam-like approach of Swoopo, and gaming travel deals on Off and Away.

Crowdsourcing is opening up problems sets previously thought as being too complex for non-“professionals” resulting in more efficient and open approaches.

Netflix set the model for challenge competitions as it successfully crowdsourced the improvement of its recommendation algorithm, setting off a trend within government to procure technology and approaches through contests, saving taxpayer dollars.  Other crowdsourcing projects we enjoyed included:

However, when I was ambivalent about its application in crowdsourced design sites such as 99 Designs, I received an unexpected outpouring of support from the design community and a simultaneous beatingon HackerNews by those who believed that this was simply a more efficient marketplace. I was less sympathetic to the artists’ cause when they rallied against the Australian government’s decision to seek citizen photos for its website rather than professionals’.

I was generally unimpressed with crowdsourced Q&A sites like Yahoo Answers, Mahalo, and Aardvark; however, Quora seems to be on to something.

Crowdsourcing was also applied in dumb, troubling, or useless ways, including:

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And finally, the two posts that didn’t fit into any clear bucket, but which were the two most read and commented upon posts on Transcapitalist …

After the first release of classified documents, I came out strongly against Wikileaks with “How Wikileaks threatens transparency”, arguing that its actions threatened transparency where it really mattered: between government agencies. All commenters both on my site and on HackerNews disagreed strongly, but I still stand fully behind my original opinion: with the latest release, we see exactly the closing down of information channels that I feared.

Markets at Burning Man” explored my personal experience of the gift economy on the playa and the contrast of the commercialism that is in the outside world before and after the event. The post started a fascinating thread on HackerNews by fellow Burners and Burning Man novices alike.

Thanks for reading and keep in touch.

Melody & Anita

 

Monday
Apr192010

New peer-to-peer market opens in long-haul "volcano taxis" in Europe

Crazy / entrepreneurial types are trying to cash in on the volcanic ash-induced flight shutdown in Europe. At VolcanoTaxi, you can bid (starting at 500 Euros rising to 4,000+) for a car ride anywhere across the continent.  The site does all the pairing on the backend, rather than opening it like Craigslist, which maybe adds a touch of legitimacy.  Of course, if people are willing to rent bedrooms from strangers on airbnb, why not bid for a ride especially if multiple passengers are grouped together? For single rides, as in single night's stay, cutting out the middleman should always make things cheaper.

Monday
Sep282009

Continuing the lobbying for micro, or bringing sense to the Consumer Product Safety Improvement Act

Micro businesses, like micro-lending and micro-finance, offer vitality and depth to our economy. Regulation, allegedly to protect the consumer, has dogged all of these industries. I wrote a while back about the threat of regulation to, of all things, small batch children's toys makers : the Consumer Product Safety Improvement Act (CPSIA) was passed hastily in response to the lead-in-Chinese-toys fiasco, mandating stringent testing procedures to prevent such a reoccurence. Savvy analysts noted that the most immediate result would be that small toy producers unable to afford such commercial testing would be forced out of business, leaving behind only the mega-toy companies (ironically, in China) to compete.

Etsy has been a vocal and important advocate for the handmade toy community. Small crafting community organizations have scored minor wins, such as exempting fabric from the law, as well as losses, such as failing to convince the commision to exempt rhinestones. A guest Etsy post from the Handmade Toy Alliance spells out well the challenges of this piecemeal approach. Artists are now fighting for their livelihood rather than focusing on creating the original and valuable pieces that so many consumers love and prefer.

This is what Umair Haque terms unconstructive capitalism -- government regulations are squashing vitality and p2p connections that people love, instead favoring the big toy companies or the big banks that can meet the requirements. I would trust a handmade toy from Etsy over a Chinese manufactured toy from Mattell any day: the engaged Etsy community is a stronger enforcement mechanism than the threat of government recall.

Flickr credit: Merwing

Monday
Sep212009

As Credit Card Rates Increase so does the Potential for P2P Lending 

A recent article in the Washington Post sheds insightful evidence that P2P lending may rapidly scale in the coming years.  What drives its potential for growth?  High rates on credit card debt. 

The article highlights several interesting facts:

  • Industry experts predict a twenty-fold increase in the amount of money lent via peer-to-peer lending sites from close to $282 million in 2006, to possibly $5.8 billion by 2010.
  • P2P officials state that increased traffic is due to increased credit card rates; about 50 percent of Prosper's loans goes to borrowers trying to consolidate credit card debt.
  • Credit card companies are increasing rates more aggressively now in part because of a new law that is expected to take effect in February, after which it will be difficult to increase rates.  
  • Credit card debt today can have interest of up to 20 percent and take more than 20 years to pay off.  Meanwhile, peer-to-peer loans generally have half the rates and are generally required to be paid off in three years.
  • Investors are also gaining—the rate of return is 12-13 percent and the average amount invested is $6,000 (diversified across many borrowers).

We have yet to see what will happen when 2010 comes and most P2P borrowers reach the end of their three-year loan term (most began borrowing in 2006).  Nevertheless, the numbers in this article speak to the fact that peer-to-peer lending is filling a growing demand and it appears that it may soon cross the chasm from a model for a minority niche to one that serves a more general population.  If it is able to do so, peer to peer lending could permanently establish itself as a genuine competitor to traditional banks and credit card companies. 

Monday
Jun152009

Social lending for education financing

Harvard students already have the best deal in the country when it comes to higher education financing--the university absorbs all tuition costs for families making less than $60,000 per year--but now they have another exclusive option. UniThrive connects Harvard students with Harvard alumni for interest-free loans up to $2,000.

The Harvard location is a good test bed. The university's massive endowment is proof of its dedicated (and successful) alumni who want to feel a continuing connection to their alma mater. Harvard students are also likely pretty good bets for reliability.

The site integrates the peer-to-peer connection by allowing lenders to browse student profiles to find the prospective borrower they most relate to. The student is then required to write his/her lender a couple times a year with updates.

The site is an important step forward in the education financing debate. PeopleCapital also focuses on the student lending market, as we've profiled, but this direct college link may be an important differentiating factor for Unithrive. Only individuals with .harvard.edu e-mail addresses can access the site, creating an Ivy League in-club of trust and transparency. $2,000 is a tiny amount, however, and it will be interesting to see if the site evolves to allow lenders to earn interest. After all, if Harvard students are a good bet for reliability, why not make some money on investing in college students' futures?

Saturday
May092009

The comeback party is over. Prosper shuts down again.

Today Prosper announced to the community that it is "voluntarily" shutting down again after less than 2 weeks open to California lenders. We profiled earlier from both a positive and negative perspective, the innovative Open Market Initiative that Prosper's debuted at its re-launch. Personally, I was skeptical about this new strategic direction, and with this decision, I'm really doubting Prosper's model.

Some official clearly found the state-by-state approach without full SEC blessing to be unacceptable. For social lending platforms, I would stick to Pertuity Direct and Lending Club, both SEC-approved, for now.

Here is the text on Prosper's website:

Prosper is Currently in a Quiet Period

We have been overwhelmed by the outcry from potential investors around the country who want to participate in peer-to-peer lending. Thank you for your support and your letters to us.

After much consideration we have decided to voluntarily shut down our operation in order to complete our SEC approval for a nationwide peer-to-peer lending platform. As a result, due to regulatory concerns, and in the interest of working toward getting our registration statement effective as soon as possible, we are discontinuing our California intrastate offering at this time.

If you're an existing lender, your current lender agreements will be unaffected; your existing loans will continue to be serviced; you'll be able to track and monitor your loans; and you'll be able to withdraw funds from your Prosper account.

If you are a borrower with an existing loan, you will continue with your current borrower agreement and be unaffected by the registration process.

We want to assure you that Prosper is looking forward to being able to offer a transparent, durable and participatory lending institution very soon.

As a result of this decision, we will not be accepting new lender or borrower registrations or loans, or new commitments from existing lenders effective immediately. Until this process is complete, we are required to be in a quiet period and will be unable to respond to press, blogger or other inquiries related to our SEC registration process, even though we would like to.

We sincerely apologize to the Prosper community members for this inconvenience or disappointment our decision may have caused. We want to thank those of you who demonstrated your support through your active participation whether by investing with us again or referring friends to our site.

Thank you in advance for your understanding, support and patience once more. We look forward to serving the needs of the community in the hopefully not too distant future.

Monday
May042009

Counterpoint: Prosper is Backā€¦But is this innovation wise?

As we profiled yesterday, Prosper, the former industry leader of the p2p lending industry, continued to innovate and evolve during its forced “quiet period” in anticipation of its re-launch. In addition to offering traditional p2p loans, Prosper has now introduced its Open Market Initiative, which will allow other financial institutions to place their already funded loans on our site for auction. In his blog post, CEO Chris Larsen makes the argument that more opening up these loans to greater competition will lead to better rates.

That may be so, but I have a number of concerns about this model. First, I’m concerned about these lenders unloading their bad loans on the site. Prosper suffered some early challenges regarding poor repayment rates and I’m surprised to see them immediately target a less-than-prime space right at re-launch. Additionally, are retail investors really prepared to evaluate these loans effectively? Many of Prosper’s early lenders struggled to effectively diversify their p2p loan portfolio, explaining some of the initial losses reported. I see no reason to believe that they will be able to price more complicated small business, car, and consumer loans.

Finally, Prosper seems to be encouraging lenders to make financial decisions from the heart. From Mr. Larsen:

“...auto loans listed on the Open Market will show in which auto plant and city the car was made. That way fellow Americans who put a value on American jobs might make loans to cars made in Ohio, for example, at a better rate than loans to cars made in Germany.”

This structure introduces a level of transparency that we have not seen in loans before and it sounds great from a social entrepreneurship perspective. But is it wise from a personal financial decision-making perspective? Just as it may be dangerous to fund borrowers based on how they look (recall the recent study on how Prosper lenders gave more money to faces that looked “trustworthy”), it is risky to fund companies based on values. If your primary motive is gaining a healthy return, then whether you “like” the individuals or companies’ practices should be a non-factor. If your motive is to provide social value, then perhaps you would be better off funding a loan through Kiva.

I do agree with the sentiments of Mr. Larsen, however, that “the crisis is painful but is also a once in a lifetime opportunity to rewire finance in a way that is fundamentally more transparent, more participatory and more durable.” I’m glad to see Prosper back online and running. I’m really glad that it’s been able to start passing the onerous regulatory hurdles. Best of luck to the site in its second incarnation.

Friday
Apr242009

My favorite online p2p marketplace--Etsy

Happy #Etsyday!!

Today the online marketplace for all things handmade is celebrating a special day for sellers to unite for "guerrilla marketing". So far, it's a success: #1 hashtag on Twitter according to Twazzup.

This event also reminded me to check out Etsy's recently relased March statistics. The numbers prove it; Etsy is an incredibly vibrant marketplace:

In March 2009:

  • $12 million in goods sold (up 18% from Februrary)
  • 788,235 items sold
  • 157,000 new members
  • 502,705,157 page views
Monday
Apr062009

Pertuity Direct takes social lending mainstream

CEO Kim Muhota explains that Pertuity Direct operates “at the intersection of traditional banking, social networking and capital markets.” In an interview with Transcapitalist last Thursday, the Pertuity Direct team sought to make the case for why their model enables them to go after the mass market and eliminate the frictions that exist in the p2p market.

First a few basics about the PD model:

For borrowers:

  • The current sole loan product is a three year installment loan. The average interest rate is around 13%.
  • The minimum FICO score is 660. PD is very selective in the borrowers that they approve.
  • Borrowers retain full privacy. No credit information is made public. Pertuity Direct handles all of the underwriting and approvals, then sells the loans to NRF.
  • Loans are either funded in their entirety or rejected. Within 3 days you will have full certainty over whether your loan will be approved.
  • Borrower closing fees total 1-2%

For lenders:

  • Focused exclusively on the prime to super-prime sector of the marketplace. Borrowers have an average FICO score of 740.
  • Lenders participate through the National Retail Fund, a mutual fund registered with the SEC. There is no auctioning of interest rates or browsing profiles to choose who to fund.
  • The fund is valued daily. The penalty fee for early withdrawals is a fixed 2%, but it only applies for the first 12 months. After that, the full investment amount can be withdrawn for free. Earnings can be redeemed on a quarterly basis.
  • There is no net worth requirement to invest. The minimum investment is $250.
  • Lender fees total 1.63%

From these facts, a simple question arises: what makes Pertuity Direct a social lending platform? Without interest rate auctions, borrower profiles, or direct borrower-lender relationships, it seems that the defining p2p market characteristics are missing. Lisa Lough, SVP of Marketing explains that the community aspect is still present. Borrowers can choose to make their story public in the community section if they wish and lenders can participate in the Pertuity Bucks program to help pay down the principal of borrowers whose stories they find to be particularly compelling.

Still, Mr. Muhota explains that their model is significantly different from the competitors. Studies indicate that one reason people have not been interested in p2p is because it seemed alien to them; lenders often do not have the expertise to make credit decisions and borrowers are faced with too much uncertainty over whether their loans will be funded and at what rate. Consequently, the PD opinion is that auction-based, labor-intensive approach is not the way of the future for social lending. For the broader population, the competitive set is traditional banking and investment products and PD seeks to offer an alternative to those.

As social lending evolves, PD believes that they are well positioned to step into a “huge gap in the marketplace.” Their model is equally well suited to those borrowers and investors who love the community aspect of p2p lending as to borrowers who would rather remain anonymous and lenders who are simply looking to invest in a strong asset class.

First, they have sought to make the account opening process “as simple as possible.” Indeed, as I described in my experience opening an account with them, a lender can have an account running within 5 minutes. They also seek to “aggressively manage risk” so that lenders don’t have to. From a borrower perspective, they highly value privacy, an important element of reaching the prime marketplace. Prime borrowers with a variety of opportunities are going to walk away from a deal where they have to make their personal credit information public. By protecting the privacy of their borrowers, PD avoids the adverse selection problem confronted by the p2p players.

By integrating these best practices of traditional banks but offering a different loan product, PD seeks to take the banks and credit card companies head on. Mr. Muhota made clear that PD is not just striving to be the main social lender, but rather sees the traditional banking and credit establishment as competitors, because “until you look broadly to the market, you remain a niche player.” Consumers are looking to put their money to work in a safe asset class and PD can provide that service. Unlike the Lending Club platform (the only other social lender registered with the SEC) where each dollar lent needs to be assigned by the lender to a given borrower, which can be a time-consuming process and totally unwieldy if you are working with several thousands of dollars, the PD model allows lenders to deploy their capital efficiently and at any sum to a diversified pool.

Social lending has clearly evolved from the model of browsing individual stories and choosing to fund borrowers one-by-one. Pertuity Direct offers an intuitive and mainstream approach to social lending that makes it attractive to the broad market and may well be the best model for the emerging industry as it moves forward.