P2P Lending Evolution: Prosper.com Launches

Asaf Buchner | February 13, 2006, 08:37 AM

The launch of Prosper (formerly CircleOne) last week is an interesting development in the nascent P2P lending space. Prosper creates an e-bay-like loan marketplace, where borrowers post listings for loans of up to $25,000, and lenders bid on the interest rate for which they will fund these loans. It’s interesting to compare Prosper with Zopa, a similar UK site, especially since Zopa is expected launch in the US in Q2/2006. These are my initial observations:

Risk-grade and Diversification: Zopa takes a more protective approach with respect to lenders by only accepting borrowers with high credit quality and by forcing lenders to diversify their loans across at least 50 borrowers (Correction: this is the default setting, lenders can override that setting and lend as much or as little as they want to individual borrowers). Prosper’s approach is more of an open market. Prosper allows anyone to request a loan letting the market fix the rate. In addition, lenders can diversify, but are not forced to do so. With respect to the risk-grade, I find the Prosper model more appealing because I suspect there are interesting opportunities with high-risk borrowing market, which seems more inefficient. Prosper should, however, consider forcing some diversification to avoid horror stories of lenders losing significant sums of money.

Groups: Prosper created the concept of groups of borrowers, which can be based on affiliation to an institution, shared interest, or mere social ties. It is important to note that group members are each responsible to his/her loans and there is no mutual liability of any sort. These groups are created and moderated by community members, which become the group leaders. This concept is interesting for different reasons, including the effect of the group reputation on rates and confidence in the borrowers. However, I particularly like it because there is a built-in incentive mechanism, which rewards group leaders for each loan originated and each loan re-payment made by their group members. It can work as a powerful marketing tool: if Prosper is able to recruit highly connected and motivated individuals as group leaders, the task of signing up borrowers will be much easier. Zopa does not have a similar feature.

Overall, it will be interesting to watch this market evolve. I would be interested to receive your comments at abuchner, an at sign, jupiterkagan, a dot, com.