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As peer-to-peer lending sites try to broaden their appeal, they have learned that marketing themselves takes a delicate balancing act.
February 13
Prosper Marketplace Inc. has decided it no longer wants to be the eBay of lending.
The pioneer peer-to-peer lending company said Monday that it is abandoning the auction-style model it has used to establish interest rates for its loans since it was founded in 2006. Rather than ask investors to bid on portions of a proposed loan to determine its rate, the San Francisco company will now set the pricing for borrowers who seek loans on its site.
"As we evolved over the years, what we found was that what our borrowers wanted was more of a buy-it-now experience," said Chris Larsen, a Prosper co-founder and its chief executive. "The auction kind of gets in the way of that, actually."
The new model strongly resembles one that Prosper's main rival, Lending Club Corp., has employed since its inception in 2007.
Prosper's revamping of its service to attract new users is sign that competition in the peer-to-peer space has intensified.
Being the first to market with the peer-to-peer concept four years ago, Prosper was held up as "the example, the leader," said Mark Schwanhausser, a senior analyst at Javelin Strategy and Research in Pleasanton, Calif.
Now, the company is "nearly in a dead heat with Lending Club … so that would suggest why Prosper is making a move to a different type of model," he said. "It suggests to me that the old one was not working the way it had been hoped to."
Larsen admitted that its original model was good in theory, but not so much in practice.
"A lot more people wanted the certainty and the quick delivery of 'What rate can I get?' " Larsen said. "And over time, what our lenders told us was they wanted quick returns and risk-weighting those loans as accurately as we could.
"That was the consistent feedback we got," he continued. "What you'll have now is a simpler process on both sides."
Interest rates now start at 7.59% for the most creditworthy borrowers, and go as high as 35.86%.
The annual percentage rate on three-year loans from Lending Club, meanwhile, currently ranges from 6.78% to 24.95%.
The companies' loan volumes indicate that Lending Club has been gaining market share.
In November, Lending Club's investors funded more than $13 million in loans through its site, compared with just $2.6 million funded on Prosper.com.
Lending Club's investors funded $195.2 million in loans since 2007, closing in on the more than $213 million in loans funded through Prosper's site since 2006.
Lending Club says being able to set the interest rates helps it maintain an even number of borrowers and lenders.
If there are too many borrowers, for example, and not enough lenders, Lending Club can jack up the rates to attract additional investors in search of a better return. On the other hand, the company will reduce rates to entice more borrowers if there is a shortage of loan requests.
"Setting interest rates is really useful," said Renaud Laplanche, Lending Club's CEO. "It simplifies the experience for investors and helps set expectations for borrowers. And a subbenefit is … it helps regulate supply and demand on the platform so that we and both parties benefit from a smoother allocation of a capital."
But Larsen criticized the use of interest rates to manage the flow of capital on a peer-to-peer site. Instead, Prosper offers cash incentives for both borrowers and investors.
"You can't have your marketing needs trump your risk management needs," he said. "Acquisition channels need to be first evaluated through a risk lens, otherwise I think you get into this slippery slope … of driving volume by loosening up credit metrics."
Larsen predicted, however, that in assuming control of the loan rates Prosper would receive more business.
"The simpler the process is on both sides, the higher your conversion rates," he said. "That is where the market told us where it wanted to go, so I think those are the right moves."
Phil Philliou, a partner with the consulting firm Philliou Selwanes Partners LLC in New York, said simplifying the lending process is a step in the right direction for Prosper.
"It sounds like a classic opportunity for operational hardening, where they need to really take a hard look at the operations related to their business and look to bake in some of the disciplines that mainstream lending utilizes every day," he said.
