Entries in social lending (19)


An Interview with People Capital: P2P Lending for Education Finance

The limitations of the current credit risk modeling approach – the FICO score – are manifold, but nowhere are they more glaring than the complete inability of FICO to evaluate young people. A system based entirely on prior payment history discriminates against youth who are just entering the financial world. For students seeking to continue their education, and needing loans to get there, the consequences are severe – automatically labeling as a credit risk may shut them out of the private loan market and prevent them from attaining higher degrees, regardless of their potential.

Around this striking weakness of the current education finance market is where People Capital, a p2p student loan platform, is seeking to innovate.

Click to read more ...


Beyond traditional bank loans, specifically for small business

For small businesses with cash flow challenges, the current loan environment is difficult and sometimes non-existent. Because many proprieters start out putting business expenses on credit cards, their credit score suffers and that alone is enough to disqualify them from traditional bank loans. On Deck Capital, however, believes "that a small business with a healthy cash flow should be supported." They facilitate loans exclusively to small businesses and open up credit to many companies that were previously shut out because, "by reviewing business performance in addition to credit history, we extend loans to companies that we believe in, but may have been considered too risky by traditional lenders."

Their model offers several distinctions and innovations:

  • Loan approval based upon business performance (cash flow, credit card revenue, and payment behavior) in addition to credit score
  • Daily Direct Debit payments. On Deck Capital processes direct deposits to repay the loan rather than sending monthly notices. This approach is "proven to prevent the snowball effect often caused by missing larger monthly payments"
  • Short loan terms of either 6 or 12 months

Unlike p2p lending companies like Lending Club, On Deck Capital doesn't promise rates that beat the bank's. They acknowledge that traditional bank loans are generally the most favorable option, but also recognize that the credit score required makes such loans often inaccessible to small businesses. On Deck Capital's rates are in the "ballpark" of banks' but are priced higher to reflect that small business is risky and many small business owners have less-than-excellent credit. Still, they are clearly a better option (they claim 50% better) than putting business expenses on credit cards or turning to cash advances.

I'm intrigued by On Deck Capital's narrow focus on small business loans. Alternative financing options clearly are clearly needed for the small businesses that drive much of our country's growth, but I've been skeptical of the ability of p2p lending companies to fill that gap. In my personal experience as a lender on Lending Club, I steer clear of the small business loans because 1) they seem to be an excessively risky proposition, and 2) they are nominally "personal" loans that the borrower should be able to repay regardless of the success of the business, but that case is not made convincingly. I don't feel particularly comfortable judging small business loans and prefer to stick with the personal loans with attributes I know how to evaluate (debt to income ratio, credit score, etc). 

On Deck Capital is managed by people who know small business risks and can make the right evaluations based on a composite of attributes that form their patent-pending algorithm. With 223,000 transactions completed, totalling $45M in loans, they seem to be one of the few firms that is constructively helping small businesses cope with the credit crunch.


Web capitalism doesn't need a bailout

Slightly self-promotional, yes, and the title is a bit inflammatory, but my Ignite DC talk was just posted to blip.tv. It is a rapid-fire 5 minute coverage of some of my favorite topics: p2p e-commerce (e.g., Etsy), crowdsourcing, social lending, and prediction markets, all powerful technology-driven platforms that advance free markets.


P2P microfinance for education, entrepreneurship, or work?

Internet platforms are springing up to connect western lenders directly to developing world borrowers in the name of ending poverty, embracing different philosophies on how to achieve the same end. We've covered (here, here, here and here) Kiva and Microplace, who each embrace micro-entrepreneurship; Samasource who challenges you to "give work"; and Acumen Fund, who invests patient capital. The latest is Vittana Foundation, a non-profit startup specializing in education microfinance.

Vittana is seeking to bring change to the developing world by expanding access to student loans. On the site, you can lend to students though microfinance institutions (MFIs), helping them attend school and ostensibly opening up additional opportunities for social mobility:

Your student goes to school. He graduates and then gets a real, stable, salaried job. Congratulations! Your student has taken the first step towards a thriving, successful life. Real change has begun.

But I wonder whether an education necessarily means opportunity in many of these countries. Are the jobs there to provide gainful employment to new graduates? I embrace increased access to education as a step towards reducing poverty, but how does Vittana fit into the increasingly dense international p2p lending space?

Is it targeting a different population than the micro-entrepreneurs on Kiva? Kiva co-founder Jessica Jackley is on Vittana's advisory committee, so clearly she sees it as providing an important additional service. Could it be a complement to the job training and work focus of Samasource?


Pertuity Direct closes, dealing a loss of diversity to the social lending space

Over the past two weeks, the Twitter-scape has seen a minor flurry of speculation regarding Pertuity Direct, a more recent entrant to the social lending space. As a PD lender, I was mildly worried about the status of my deposits and confused by the lack of formal notice on the platform's website. This past week, I had my full deposit (plus ~2% interest) returned unceremoniously to my bank account, confirming my suspicions that the site is closing its doors.

This is an unfortunate development for the social lending industry. I interviewed the PD CEO back in April and was impressed with the caliber of the team and also the different approach that the company was taking, as they sought to make social lending a more mainstream concept. Unlike the major players at the time, Prosper and Lending Club, PD eschewed the typical borrower profile pages, instead embracing the concept of a pool of anonymous super-prime borrower loans. This approach earned them some flak at the time for being more of a bank than a p2p lending destination, but I always appreciated the approach of targeting a more mainstream segment of the population with more traditional banking and investment products that were nonetheless informed by some of the goals of the social lending movement. This seemed like an important complement to the other players that were more community-based, holding interest auctions or creating borrower profiles.

At the time of their arrival on the scene, I thought that this model might have ended up being the more long-lasting, but it appears that is not the case. PD has offered no explanation as to the reason for their disappearance, but I would speculate that the hybrid approach just didn't catch on.  Like Lending Club, PD is SEC-registered, so legal woes were probably not their challenge (as in the case of Prosper), but there was still something non-traditional in their tactics that lacked the appeal of direct borrower-lender connection that many entrants expected from the space.

Yet, while Pertuity Direct closes, the broader social lending space is still going strong. Lending Club is thriving, fast approaching their 25,000th investor. They, too, are seeking to take the p2p lending concept mainstream, offering a great alternative investment product for lenders and loan conditions for borrowers, and currently offer the best hope for the nascent industry in the US.


Broadband enables access to employment through online markets

With $7.2 billion in stimulus money slated to go towards expanding broadband access and closing the "digital divide" in rural areas, debate is ongoing whether these increasing opportunities actually lead to job growth. Many commentators agree that access is not enough; adoption must be encouraged and training provided to take advantage of technology-driven jobs.

For large-scale growth, this is absolutely true, but access is an important first step. On a micro-level, broadband access can open up opportunities to create value in dignified and entrepreneurial ways. We are well beyond the home-based Ebay businesses. Here are a few sites where high speed internet access and only a little training enable individuals to be their own boss and generate income. No one will claim to become a millionaire this way, but micro steps in the right direction can be a powerful enabler, and online markets can connect labor to those who need it. How?

  • Sell your crafts on Etsy. The crafter marketplace has a whole section, "Quit Your Day Job", on success stories of artists who turned their online businesses through the site into a full time gig.
  • Expand your small business from a p2p loan. For small rural businesses, p2p loan marketplaces like Lending Club and Prosper can open up access to small loans that might make a big difference to their operations.
  • Perform Human Intelligence Tasks on Mechanical Turk. Mturk has thousands of opportunities to complete small tasks for money that often require little technical skill.

Nonprofits like Samasource show how providing marginalized people with basic technological training and internet access can open up diverse opportunities to earn a living wage. Rural communities in the United States with fewer traditional employment opportunities could benefit immensely from access to these online markets. What other online opportunities exist?


The Kiva community is still mixed on the move to welcome U.S. entrepreneurs

Kiva's recent poll of its members shows that there remains a sharp divide among lenders regarding Kiva's recent pilot program for American borrowers: 48% are in favor, 44% are opposed, and 9% are unsure.

As we profiled earlier, upon the announcement that Kiva would open its doors to borrowers not only in the poorest countries but to those in the U.S., many Kiva forums exploded with cries that this decision was counter to the Kiva mission to alleviate poverty. We never quite understood that rallying cry, since lenders, after all, retain full freedom to choose the recipients of their funding and there are plenty of Americans living in poverty. A more serious complaint, perhaps, is that such a move would divert money from the neediest borrowers, where the poverty is more extreme.

Kiva's study proves that this is not the case: lending is up across the board. June was a record month for the peer-to-peer microfinance lending site:

  • Excluding the U.S., more loans were made to the developing world than ever before -- $4,682,025
  • 4.6% of the loans were made to U.S. borrowers

Regardless of whether you agree with Kiva's policy, you have to admire how much they are engaging their community around the issue. This is one reason why social lending will continue to be the way of the future -- communities on both sides of the transactions have a say in how it is evolving.


Prosper, p2p lending online marketplace, is (really, we mean it?) back

It's been a long and arduous road (see here, here and here), but Prosper announced today that it is officially back, this time with the gold standard of proof: their statement with the SEC has been declared effective.
They are offering some innovative changes to the p2p landscape. From today's blog post by CEO Chris Larsen:

Trade Existing Notes
We’re also incredibly excited to introduce an Internet auction-priced trading platform for Prosper Notes. As many early Prosper lenders know, we’ve been working on this feature since we first launched in February 2006. We know that financial markets thrive on liquidity, which in P2P lending means lenders will have the opportunity to sell Prosper Notes any time regardless of the loan term. The note trading service is provided by Foliofn Investments, Inc., through their Folio Investing Note Trader platform.

Prosper Ratings
Other significant improvements include a new Prosper Rating system to make bidding easier and more rewarding. The new Prosper rating is built on Prosper’s huge database of approximately 28,000 loans. We have also introduced a minimum 640 credit score requirement for borrowers and a minimum bid floor for each Prosper rating to improve and optimize returns. Finally, to improve the ease of diversification, we’ve lowered the minimum bid amount to $25

Peer-to-peer lending may now be making its way to the mainstream. Federal Reserve Chairman Bernanke in a speech three weeks ago: “emerging technologies like peer-to-peer leading also show promise.”



Follow-up: Social lending decision tree

As reader comments from my last post made clear, people approach social lending for charity/microfinance quite differently than they approach it for investment reasons. So while the platforms may operate similarly, lenders/investors explore the sites seeking varying characteristics and values. With that in mind, this decision tree divides the social lending space into two different trees right at the beginning. The same key differentiators are highlighted, but perhaps this method of bundling investment and charity sites is more useful to aspiring lenders seeking the right platform for their needs and goals.

[Note: Click "full" on the bottom left of the widget for the best view]



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.

Kiva's opening to American entrepreneurs is not welcomed by all...

Apparently it's the worthiest endeavor to lend to those in dire poverty, and less so to lend to those who are only really poor. Or at least so says some of Kiva's most committed supporters who are disappointed by the microcredit p2p platform's move to allow US micro-entrepreneurs to compete for loans on the site.

As we profiled the day it was announced, Kiva began as a site to lend to the poor in Africa, but has been expanding to developing nations around the world, and earlier this week, announced that it would open to its first developed country: the United States. Americans have long dominated the lending side of the equation, and many Kiva supporters are worried that now that American borrowers can also list profiles on the site, that precious funds will be diverted from those who need it most.

What do you think? Kiva is advertising this poll to hear from their supporters: http://answers.polldaddy.com/poll/1720762/


Qifang: Does Hidden Potential Bubble Under the Surface of China's Copycat P2P Lenders?

China places special focus on educationBack in February we wrote about the increasing popularity of P2P lending in China. Today we are profiling another Chinese peer-to-peer lender called Qifang. Qifang is a new specialized lending platform that connects Chinese university students with lenders who can help fund their educational expenses. Lenders can be institutions such as banks, companies, NGOs, or individuals. Lenders can also be philanthropists that help finance educational expenses through donations. In this aspect, Qifang’s model builds on that of Kiva and Propser in the West.

However, upon closer observation we realize that Quifang’s model does not simply build on that of other P2P lenders; it outright mimics them. Upon submitting an acceptance notice or student ID, Qifang borrowers create a profile that has striking similarities to borrower profiles on Prosper, including a link to “endorsements from friends” (Prosper's special tool for leveraging social networks). Even more original is that borrowers set their own interest rates and terms allowing lenders to bid on borrowers based on the interest rates they set. 

And while I am looking through Qifang’s website I keep trying to put my finger on something else that is giving me déjà vu but what could it be? Ah, yes, the site’s design and colors are near mirror images of Zopa’s warm, orange stripe beneath a thinner black stripe. The recent Economist article on Qifang was right to reference the “shameless” copycat startegies of Chinese Dotcoms which have come to be known as “copy to China.”

Shameless it may be, but Qifang might also be brilliant. Education is stressed in Chinese society and the demand for education loans exists. As the Economist article explains, education loans have generally been provided by community groups, thus Qifang is simply taking something that already exists organically (real, on-the-ground P2P lending) and making it more transparent, efficient and scalable.

Additionally, Qifang may have replicated the model and design of Western P2P lenders but it has also learned from their mistakes. Taking into account unique aspects of Chinese culture, Qifang has built into its model tools that provide social collateral, reduce risk, and leverage the strong community ties found in Chinese societies. Social collateral comes in the form of required submission of certain family details which discourage borrowers from defaulting for fear of publically shaming their family. Similarly, by sending all loan payments straight to the school, Qifang decreases risk to lenders that may come about as a result of misused moneys. Last, Qifang encourages teachers, parents, and community lenders to become involved with loans as a way to increase both financial education and the social incentive to repay.

At about six months old, Qifang is too young for us to predict how well it will operate. However, looking at the profile of one young Chinese girl who has titled her loan as “I cannot witness my mother working hard for me every day, I have to rely on myself and be strong” and reading about the “honor” that she feels to be able to borrow from Qifang lenders, I can’t help but feel that powerful cultural forces beyond my understanding are at play. And this makes me wonder if P2P models are better suited for cultures where traditional (and sometimes seemingly constraining) social norms and bonds remain strong and undisputed?

Flicker credit: cleverCl@i®ê


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.


Counterpoint: Prosper is Back…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.


Prosper is Back...with an Innovative Vengeance! 

Earlier this week, the sleeping beauty of P2P lending – Prosper – was brought back to life by the California state government. After the SEC asked Prosper to pause its lending operations for six months, California’s Department of Corporations decided on April 28th to allow the P2P lender to resume lending for all lenders located in California and borrowers throughout the nation.


And Prosper is coming back on the scene with a new model to add to it P2P lending platform.  The Open Market Initiative is an attempt to create a secondary markets for loans by allowing institutional lenders to sell their existing loans, such as car, consumer, and small-business loans to Prosper member-lenders in California.


The idea here is that this secondary market provides liquidity for the institutional investors as well as a diverse and patriotic investment option for local Prosper lenders. In his Welcome Back letter, founder Chris Larsen, explains how the social focus and dedication to transparency that serve as Prosper’s cornerstones have been applied to the Open Market Initiative.


"In addition, Open Market brings the same social lending possibilities to securitization that we have always seen in the Prosper Loans Marketplace. For example, 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 could never be done with traditional securitizations because investors never had that level of transparency."


While Prosper’s secondary market is not the first in P2P lending, (LendingClub gives members the option to trade notes amongst each other) it is certainly one of the most creative and extensive. However, as Mr. Larsen himself points out, “creative financing” does not carry a positive connotation nor a sense of patriotic pride these days.


An additional problem brought up in a recent Economist article is that the difficulty today with selling institutional investor’s loans is the pricing and not the liquidity. Thus, the extent to which Prosper’s creative secondary-market model is able to truly align incentives and truly scale remains to be seen.