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Here is our Mercury News story today (free registration) about Prosper, the online loan marketplace that seems almost too good to be true.
People can borrow money at lower rates than they can at the bank. And lenders can get higher rates than they can get elsewhere too. It works because it cuts out the middlemen, or the banks that have until now claimed a big percentage cut of the loan.
We’ve provided a few examples. We think the ELoan founder Chris Larsen, who now runs Prosper, is on to something. We mention several real examples of how it works, and it seems to be working so far.
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We mention, too, that Zopa, a competitor is following a similar model. However, Zopa is different in that it doesn’t let borrowers form theme-based group on their own. And lenders can’t surf through profiles and choose particular individuals they’d like to support, as we mentioned before.
However, Zopa does see to be more rigorous in its background check on borrowers.
Prosper is pretty streamlined: It requests only your social security number, your bank account, your income level and your drivers license, checks your credit score and then lets the group peer-pressure process do the rest.
Zopa, though, really drills down on your background. In addition to what Prosper does, Zopa will look into how a borrower’s business is performing. It might check the borrower’s eBay rating, their car registration number, and do a “psychographic analysis,” asking borrowers about their attitudes toward money, and the psychology around the loan they are taking out. They might even follow with a phone call to check an employer reference. It’s all part of making lenders feel more secure, says Zopa chief executive, Richard Duvall. “We take great care with their money.” As a result, he boasts a 0.05 bad debt rate — or those loans where borrowers aren’t repaying their loans on time and are in some sort of foreclosure process.
Prosper is still too young to judge; we don’t know what its bad debt rate is. Proof will be in the pudding. Both companies will be interesting to watch. What we can say: After looking over their models, we find the examples compelling enough to consider lending our money through both of these companies.
5 Comments
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Tom F said:
Both of these sites have huge flaws which no one seems to be talking about.
By requiring users to enter “social security number, your bank account, your income level and your drivers license” there are huge privacy, security and compliance issues.
First, I hope few people are brave enough to hand over all that sensitive information. Some immediate questions: how secure are their systems, do their employee receive rigorous ongoing background checks? The risk of identity theft is huge here. With SSN and account numbers it really isn’t difficult for a criminal of middling intelligence to drain your bank account.
Second, by providing financial services, these new companies should fall under the Gramm-Leach-Bliley Act, which requires rigorous compliance and high levels of privacy, reporting and security. I wonder if they are complying or not. I hope any investors in these companies are thinking about these issues. They are the highest risk facing these startups.
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pwb said:
I suspect these two companies are very sensitive to privacy and regulatory issues so let’s move on and discuss the business potential.
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Julie Meyer said:
I am based in London, England, and ZOPA is a phenomenon over here. My understand is that Prosper has just launched so they’ll go through their first year’s “teething” issues. Meanwhile, ZOPA is a maturing service which has significantly iterated and refined the value proposition to lenders and borrowers. They are phenomenally well funded by Bessemer and Benchmark, and Richard Duvall, the founder of Egg, is the leading consumer financial services entrepreneur in the world.
Julie Meyer, CEO of Ariadne Capital and Founder of First Tuesday
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Alison Chaiken said:
What no one has commented is the similarity of Prosper and Zopa to the microfinance pioneered by the Grameen Bank in Bangladesh. See http://www.grameen-info.org/bank/WhatisMicrocredit.htm
to read more about how Grameen works. Grameen founder Mohammed Yunus’ principal insight was in the importance of peer pressure and groups for loan repayment. He also saw the importance of loans for tiny amounts and the need of non-traditional buyers. Prosper at least appears to be inspired in part by Grameen. That the founders of these start-ups have taken an idea from a desi NGO as an inspiration for their profit-making companies is fascinating. -
Anshu Sharma said:
From my perspective, Prosper is a true blue “Web 2.0 Business”. There are many Web 2.0 sites and utilities being built today in the valley and elsewhere. However, there are very few new business models being tried out. Web 1.0 had Ebay, Amazon and other innovative businesses. So far, Prosper is a lead candidate for the Business 2.0. You can read more about this on my blog by clicking on my name.
One Trackback
2:49 pm
Decisive Flow said:
UK People to People Lending with Zopa
Anyone from the UK who was as excited as we were about people to people lending with Prosper, will love Zopa. While Prosper is still in it's initial 'Teething stages', Zopa has been around a wee while, and from the sounds, has quite a followin