People to People Lending with Prosper


MALE SPEAKER: OK, if I can have
everyone’s attention. So today we have guests Karen
Appleton and Andrew Martinez-Fonts from prosper.com
to talk about the Prosper Lending Marketplace. And, I will ask– this is being videotaped,
so please keep any Google-confidential questions
to yourself until after the videotaping has ceased. KAREN APPLETON: Hi everybody. How’s everybody doing today? MALE SPEAKER: Good. KAREN APPLETON: Good. Excellent. Has anybody heard
of Prosper yet? Oh, excellent. OK that’s fantastic. Oh, I’m so glad to hear that. OK. So then you know the basics. We can spend some time on
the more fun stuff. But I’ll go through
the presentation. Please feel free to ask
questions as we go along. Although if we get a whole
lot, we can save them until the end. But feel free if you have a
clarifying point you’d like to make in the beginning,
we can go for that. Prosper, as you know, is
an online marketplace. It’s like an eBay for money,
bringing together people who want to borrow money, with
people who have money to lend in a safe and trusted
marketplace. We handle the administration
and all of the processing, including payments, collections,
verification and validation of individuals,
and do all credit and anti-fraud checks. It’s a positively disruptive
technology and it’s dis-intermediating the banks
so it’s pretty fun. Pretty fun marketplace. Prosper brings a sense of
community to lending by leveraging the power of groups
to improve borrower repayment under the key premise that
people act more responsibly when their actions have
group consequences. The benefit is higher than
average repayment of loans due to lower defaults, and
better return on investment for lenders. Prosper represents the first
time that people can participate directly in the
lucrative lending markets and empowers individuals who are
looking for alternatives in personal finance. You can earn higher returns than
in money markets and CDs, and create a highly diversified
portfolio. And there’s also the benefit of
this great lender community that has emerged that’s really
enriches the whole process. Just to touch on the history
of the credit markets. Through centuries and
generations, there’s been community-based lending in
villages and towns, between friends and family. And more recently, the
community-based lending model has evolved into credit unions,
and savings and loans. And in these models, we see
strong borrower loyalty and low acquisition cost, but
there’s a very low lender diversification. Today, credit cards and banks
are the key sources of credit. And while they experience
excellent diversification, there is little loyalty and very
high acquisition costs. So in the Prosper community,
we see excellent lender diversification due to the
one-to-many approach. AUDIENCE: [INAUDIBLE]
acquisition cost– [INAUDIBLE] KAREN APPLETON: The cost that it
takes a credit card company to actually convert you to
be a client, you get the mailings, and the advertising
and everything else, that’s an acquisition cost. So we see an excellent lender
diversification here, due to the one-to-many approach that
lenders take when bidding on loans, low default rates from
borrowers due to the strong sense of community that is
established, and the low acquisition cost, because
we’re using groups as a leverage point to drive
borrowers to the Prosper site. The loan listings, when they
come onto the site they’re catalogued. And it’s a pretty eBay-like
approach to listing items. And we have the borrowers as the
items or the objects for sale, or basically the borrowers that
are requesting credit. And they’re shown in
a summary format. And in addition, it’s a very
searchable database, where you can look for a variety of
characteristics that you might be specifically searching for. And you can look by credit
grade and by other characteristics, and pull those
borrowers’ requests that most match the strategy that
you’re going to put together as a lender. We show the scale of credit
grade and corresponding score. When a borrower comes onto our
site, we take a lot of data from them to verify and validate
that they are who they say they are. In addition, we pull an Experian
Scorex PLUS credit check, which we then assign that
score, which is much like a FICO score, to a credit grade,
which is how lenders can then evaluate the borrowers who come to the site. This is an example of
a borrower listing. And we’ve had every type
of listing so far that you can imagine. Everything from breast
enhancements, to breast reductions, and plastic
surgery, and credit consolidation, and start-up
businesses. And this one is an example
for a documentary film, State of the Union. You can see that we provide a
lot of summary data so that the lender can make
an evaluation. This particular borrower is
looking for $10,000 and what he does when he comes on– Yes? AUDIENCE: Do you map
their credit ratings to default rates? KAREN APPLETON: Do
we map credit ratings to default rates? We provide both data points
for you to evaluate. So you’ll see that, I believe,
in the next screen you’ll see how that appears. So the borrower will state the
max interest rate that they’re willing to pay on the loan. So the borrower is coming and
saying, hey, I’d like to borrow $10,000 and the
max I’m willing to pay for that is 13.75%. In addition, we show some of
the other core metrics. They’re timed listings, so you
can come on and you can create listings that will go from
a range of 3 to 10 days. Or you can request an
automatically-funding loan, which means that as soon as it’s
funded, you’re closed and you’re good to go. On the right-hand side where
you see the borrower information, this is
the borrower’s user ID on the site. This particular borrower is
a member of the group. And I’m going to talk about
the group again, but the groups are what drive a sense
of community on the site. And some other key
data points. We’ve got the credit grade. This person is an
A-rated score. And if you looked on the last
one, you can see an A has like a 720 to 759. So you get a good sense of that
person’s both ability to repay and desire to repay. Because you measure both
from the key metrics. This person’s not
been delinquent. You can gauge this person’s
credibility by some of the metrics that we provide. In addition, we allow the
borrower to state, with as much or as little detail
as they’d like, the purpose of this loan. So the lender then has almost
everything that they would need to know about this
particular borrower to determine if this is an
investment that they would like to make. You can see a rate of 13.75% is
a pretty darn good return on your investment. OK? So we’re living on the spread
that the credit card companies have always taken. So you put your money
in the bank, you’re making two percent. The banks are lending it out
to the credit card users at 19%, 29%, something like that. And they’ve got that spread,
which is how they fund the acquisition costs of getting
all their clients. But we’re kind of taking that
out of the equation. The spreads are now given back
to both the borrowers and the lenders on return. Once you decide that you want to
make a bid on a particular loan request, there are
two ways to bid. This is an example of a manual
bidding process. And what we show you is that
summary data again– what you’re bidding on– and then the bid details. You can bid in increments
of $50. One thing that we strongly
recommend to all lenders is that you create a very
diversified portfolio. It’s very rarely recommended,
unless it’s perhaps a friend of friend situation, that you
bid large increments of money. Like you would never come and
bid that whole $10,000 on that documentary unless maybe you
knew the guy and you thought it was a great idea. But typically you come in with
increments of as little as $50, so that you create
for yourself this very broad-based, diversified
portfolio of loans. But we’re showing you
here the Experian historical default rates. So on all the As that we have
in this massive Experian database, and As likely
default at 0.9%. AUDIENCE: Do you show Prosper’s
default rate? [INAUDIBLE] the default rate at
Prosper’s market? KAREN APPLETON: So the question
is do we show Prosper’s default rates? At the moment, we’re creating
that data right now. We’ve been live since February
13 of this year. So our data is not yet as rich
as the Experian data is. But as we build our files, and
we develop that information, we will make it published
on our site. We intend to have a completely
transparent site so you will be able to know what were they
Experian default rates and what have the Prosper
default rates been. So yes, you’ll be able
to see that. AUDIENCE: This doesn’t
mention a term. Is this a 10-year loan? A 2-year loan? KAREN APPLETON: All of our
loans are 36 month terms, fully amortized, no prepayment
penalty. OK, so that’s the one package
we have right now. But over time, of course, you’ll
see the expansion of the set of products. AUDIENCE: Are the all
unsecured loan? KAREN APPLETON: Yes. All of our loans are currently
unsecured. OK? And then we have
a $25,000 max. So basically– all states are different. We currently operate under
individual state charters. So currently, we have to adhere
here to whatever the state requirements are. And typically, in general terms,
there’s a minimum of a $1,000 and a max of $25,000
right now on those loans and they’re all unsecured. AUDIENCE: You mentioned having
a transparent site. [INAUDIBLE] API so that the borrowers
[INAUDIBLE] KAREN APPLETON: Yes. The question is do we intend
to have an API. Our API is set for launch at
the end of the summer. AUDIENCE: Can we be
beta testers? KAREN APPLETON: Can you
be beta testers? That’s up to Andrew
Andrew can– ANDREW MARTINEZ-FONTS: Yeah. I’ll take your business
credit. You can have mine. Either way. KAREN APPLETON: OK, so again
here, at the moment we have the Experian historical
default rates. You can see there’s a 0.9%. So as you bid, you want
to keep that in mind. Because if you’ve got this
diversified portfolio, and for the sake of easy math, if you’ve
got 100 loans in your portfolio and they’re all in the
same bucket as this, you can expect to have a
0.9% default rate. If you’re making 13.75%, Prosper
charges 0.5% servicing fee, and there’s a point 0.9%
chance of default you can get to the point of understanding
what your returns are going to be. And I don’t know whether
anybody’s got a stock portfolio right now that’s
returning at 13.75%, but if you do, then you’re doing
the right thing. And if you don’t, you should
be on Prosper. Yes? AUDIENCE: I take it the default
rates are annual? KAREN APPLETON: Yeah. The historical default
rate is based on two years of Experian data. ANDREW MARTINEZ-FONTS: But
it’s an annualized rate. KAREN APPLETON: But it’s
an annualized rate. AUDIENCE: [INAUDIBLE] unbelievable KAREN APPLETON: It’s
so unbelievable. Yes. AUDIENCE: [INAUDIBLE] KAREN APPLETON: The default rate
this is not the return. The amount at which you’re
lending is 13.75% and the expected default on
that is 0.9%. So you take the 13.75% minus
the 0.9% minus the 0.5% servicing fee. So you’re left in the
neighborhood of twelve-ish. So your return would
be about 12%. AUDIENCE: [INAUDIBLE] you said it was an annualized
rate, so over a 3-year term, 0.6% [INAUDIBLE] default ANDREW MARTINEZ-FONTS:
Well, OK. They’re two-year loans. You’re right that it’s
not an absolute– [INTERPOSING VOICES] KAREN APPLETON: The math
is not perfect on– ANDREW MARTINEZ-FONTS:
–comparison, but it’s fairly close because of the
amortization schedule of the loan, if the loan defaults in
the 34th month, you’re losing a lot less than you would
in the middle of the second year, so– AUDIENCE: [INAUDIBLE] KAREN APPLETON: Right. So your question has to do with
balance on how do you balance the number of borrowers
on the site with the number of lenders on the site. AUDIENCE: [INAUDIBLE] KAREN APPLETON: Well, yes. That’s what our whole purpose is
to build this marketplace. And again, we draw a lot of
comparisons to eBay because they have the same situation. Is it the products that drive
the business, or is it the buyers that drive
the business? And in our case, of course, the
borrowers are the product and the lenders are
the buyers. And we have to manage that
equation very carefully. And yes, we are working on
a lot of initiatives and programs that seek to balance
that equation. AUDIENCE: [INAUDIBLE] KAREN APPLETON: I don’t
think either are hard to get, really. It’s been surprising. I think it’s a matter of keeping
everything moving forward at the same pace,
as opposed to getting one or the other. It’s a pacing issue. AUDIENCE: How many lenders
and how many borrowers do you have currently? KAREN APPLETON: How
many lenders and how many borrowers. Since we’re a private company
and we’re only about six months old, we don’t release
data like that. But I can tell you that it’s
been in balance so far. That, relatively speaking,
I think as much as we can expect so far. And the growth has
been incredible. Driven a lot right
now by the press. We were just in Business Week
last week in the IT 100. And we’ve been in the Wall
Street Journal three times. We’ve been in The Economist,
Smart Money and many, many TV shows, including ABC
World News Tonight. And that has driven a
lot of the initial business to the site. And then it’s our responsibility
to make conversion. AUDIENCE: Could you tell me
[INAUDIBLE] on the site now, how many loans I might
be choosing from? KAREN APPLETON: Yes. Currently on site, we’ve
got anywhere from say 900 to 1,200 listings. And since they fluctuate, they
are flowing in and out at any given time. Some are closing and
rolling off. Others go unfunded. In a sense of the true
marketplace, we do not qualify the borrowers, in terms of what
they’re requesting and whether or not it makes sense. We allow the marketplace
to make that final buying decision. So you could have a borrower
who comes on the site and says, I’m a high-risk borrower,
and I want you to lend me $25,000 at 5%. Well, the market’s not
going to bid on that. So that type of a loan will
just expire unfunded. But we don’t want to step in and
say, hey, you might want to change this or that, or. We just don’t want to
micromanage the process. We want to let the marketplace
drive the flow. Yes? AUDIENCE: So what happens
according to the terms and all that if Prosper itself
goes out of business? KAREN APPLETON: What happens if Prosper goes out of business? We have initiatives in place
that people would step in and take over the loans. These loans actually become
assets to you. So you actually, technically,
are not a lender on the site. We technically are
the lenders. What happens is, and the
regulatory environment requires that, when that loan
closes and originates, we technically own it for a
nanosecond before we then -divide it and technically
resell it to you. It becomes an asset to you. So it’s yours and it would
then be just a matter of servicing it, if something
should happen to us. But we’re not going anywhere. Yes? AUDIENCE: One of the reasons
[INAUDIBLE] well is that [INAUDIBLE] KAREN APPLETON: Right. AUDIENCE: So are you planning on
disclosing more information [INAUDIBLE] KAREN APPLETON: Well, I think
that you’ve lots of questions within that question. I think you’re asking a question
about safety, trust, and verification. And our responsibility to
validate whether the information that a person puts
in their listing is actually true or not. And how we will then provide
that information so the lenders make as a sound decision
as they can, right? That’s about the gist of it? Those three points? OK. So with respect to providing
more information, yes. We’re continuously driving
through what is the right balance of information to both
protect the borrowers’ privacy, and allow the borrower
to reveal as much as they would like to reveal, but
also to be certain that we are giving as much data to the
lender as possible so that they can make a sound
decision themselves. So yes. We’re currently taking
a look at the next generation, as you remember. Maybe it’s been two months now
that we released the key metrics, those six data points
under the credit information. And that was really key. Because that then gave the
lender the ability to see, well what was delinquent? Has this person been
delinquent before? Because that’s going
to be a big driver. If their late every single
time, well, what’s the possibility they’re going
to be late again? Probably much higher. Whereas, this guy’s never
had a delinquency. Well, that’s a pretty good bet
that he’s going to be a solid re-payer, right? So some of that information
is going to be revealed. And just stay tuned
for some of that. We’re balancing that now. In respect to contacting
borrowers who don’t pay. Through this site, you can
technically do it. We don’t recommend it. We don’t recommend that
you get in touch. We’ve got state of the art
technology in place. We do in house follow-through
on our end if someone’s late on a payment. And then we got three of the
best credit agencies out there who operate just like a credit
card company does to go out. And we say let the professionals collect the money. Oh hang. So we had two other
points there. Did you want to touch
on anything else? ANDREW MARTINEZ-FONTS: Well, I
think the overarching answer your question is that we
approach the marketplace in the sense that we are truly a
marketplace and we want to give Lenders the ability to
see as much information as they need to make an informed
decision, while still protecting the borrowers’
privacy. So we don’t want a situation
where lenders are knocking on the doors of people who
owe them $25, right? Because they’ve gotten halfway
through a loan and they’re still out $25. At the same time, we recognize
that it’s important that we provide lenders with enough
data, such as credit information. Information that, for example,
this guy has had four recent listings. So you could look at those
past listings, and if he represented himself as a woman,
or talked about his surgery, and on this one he
hasn’t mentioned it at all, that can be part of your vetting
of this borrower. So that’s the overall approach
that we have, is we’ve got all this data. Let’s just present in a
way that makes sense. Let people search on that and
make their lending decisions based on that data. KAREN APPLETON: Yes? AUDIENCE: [INAUDIBLE] question about if you went
out of business. If I used it [INAUDIBLE] diversify So let’s say I have
200 loans outstanding and your company goes out of business. Do I then have to do the
paperwork on 200 different loans individually just to get
my money from these people? KAREN APPLETON: No. We’ll consolidate and aggregate
that for you. You won’t have to manage
200 loans. ANDREW MARTINEZ-FONTS: We have
an arrangement with a loan servicing company. And so we would basically
transfer servicing of all those loans to that loan
servicing company. But the loans are still held in
your name, so effectively you own that. Yeah. AUDIENCE: [INAUDIBLE] and are prepayments allowed
[INAUDIBLE] KAREN APPLETON: Yes. Prepayments are allowed. The question is are prepayments
allowed? Yes they are. Recovery rates? I don’t have data on recovery
rates at the moment. We’re just moving to that
stage of the game. I’ll be able to release that,
and that’ll be on the site when it’s available. AUDIENCE: It seems like they’re
two ways [INAUDIBLE] and the other way is
to sell [INAUDIBLE] so using what information
you told me [INAUDIBLE] KAREN APPLETON: OK. So the question is how do we
continue to make the market more and more efficient. One is API. Certainly, that’s going
to help a lot. The second you’re referring
to is a secondary market for loans. And that’s coming as well. We expect that to be available
Q1 of ’07. Where we’ll be able to take
packages of loans and auction them just like we do with the
individual borrower requests. So those are– AUDIENCE: [INAUDIBLE] like the bond KAREN APPLETON: It’ll be
like a bond market. This is a new asset class. It’s consumer bonds. It’s investing in people. ANDREW MARTINEZ-FONTS: Hey
Karen, you should also mention outstanding artist because
that’s effectively an automated site [INTERPOSING VOICES] KAREN APPLETON: Yeah. Let me go back to the
presentation for a minute. Because I think that when I
mentioned to you that the process that I just showed you
was how you make a manual bid. And this is what it looks
like when you have made a manual bid. You can bid of increments of a
minimum of $50 again, up to the top of the loan
if you’d like. And you’re making a bid at the
lowest rate that you’re willing to accept. So you may bid. While it may show up on the
screen is at 18%, you may actually have bid 15%. But you’ll hang in there until
that auction process kicks in when a loan is fully funded. This is what it looks like. So you can see as you
take a look to the far left, the bidders. There are lots, and lots, and
lots of bidders at varying amounts, at the rate that
they’re going to currently be available at. And then the amount that they
bid on an individual basis. The red Xs at the bottom
are the folks that have been outbid. And then the check mark
means that you’re so currently in it. Here’s the way to make
a custom portfolio. This is an automated process
for bidding. So you can either going in
and make a manual bid. Some folks absolutely love it,
because they’ve got the ability to read through and they
love the human contact that process gives them. In a custom portfolio, or
standing order, you’ve got the ability to state the
exact criteria that you want to match. And then we will automatically
go out through the borrower database and find those requests
that match exactly to your payment. And you can set almost
any type of criteria that you want. For example you could bid
specifically on certain groups that you like. So there might be a group of
schoolteachers that you think are a perfectly good investment
and you might select to have funds diverted
to any loans filled in groups like that. You might say I only want
to bid on loans that are currently 75% or more funded. You can set various minimum
credit grades that you’ll accept and minimum rates you’re
willing to accept within those credit grades. And then we will flush that out
into the overall database and match you up with
those requests. So I’ve touched on groups. And I think that groups are
really important to note. We believe that the groups are
the foundation of the Prosper marketplace. Groups can be any selected group
of people who share a common interest. It can be a
large group that can be huge. We’ve got a group that’s well
over 1,000 right now. And we’ve got other groups
that are five or six. And they come together based
on whatever their common interests may be. It may be investing, or boating,
or it may be an ethnic background, or it may
be just a core belief. They don’t have to know each
other, but they have to share a common belief or
value system. And borrowers join specific
groups to boost their reputations. So groups are joined together
so that there’s a sense of community around the borrowers
in those groups. Borrowers join certain groups to
boost their reputation, and to overall achieve
lower interest rates from those lenders. So individual lenders do exist.
You do not have to be part of a group to borrow
on Prosper. But we recommend to those
borrowers that they join a group so that they have the
benefit of the community and a sense of reputation. The group’s leader has a
responsibility as well. The group leader can accept or
reject members into the group. And they also are notified if
a borrower is delinquent on loans so that they can touch
bases with them and say, hey is everything OK? Is there anything
I do to help? They don’t carry any of the
burden or responsibility for the repayment. But they do drive that overall
sense of community and responsibility, and the shame
that is also associated with not paying back their loan. AUDIENCE: [INAUDIBLE] be
voted out of the group? KAREN APPLETON: Can you be
voted off the island? If you’re a borrower with a loan
in a group, you’re stuck in that group. There is a possibility for
a group leader to take members out, yes. Yes? AUDIENCE: What’s your feeling
about the groups are working so far and what would
[INAUDIBLE] KAREN APPLETON: Right, OK. So the question is
about groups. How do we think the group
model is working right now and what. I guess what I can tell you
right now is a lot of what we’ve been focused on in the
past couple months, in terms of our strategy has been focused
on the lenders– Making sure that the lender
experience is rich. And drive enough data to
keep moving forward. So we’ve been working
on several enhancements with the lenders. We are currently turning our
attention to the groups. And we are giving a lot of deep
thought to how the groups are working right now. What we want to see. What types of modifications
need to be made. So stay tuned for that. I don’t know whether Andrew
might want to say anything more about the groups
right now. But yes, we’ve got data now. And we can look and see
how things have moved. And now we can say, OK, what’s
our next step here? ANDREW MARTINEZ-FONTS: Let
me actually talk a second about groups. The idea behind groups really
providing reputation to the borrowers who are members
of those groups. And in the same sense that
the group provides a good reputation to the borrowers so
that lenders will have more confidence in them. Borrowers, by making repayments,
can also provide a reputation to the group that
this is a group that has borrowers who make repayments. What you’re seeing on the site
right now is really weak in that sense. All you can see is that this
group has 20 loans and they’re all current. Or there’s one late. Or there’s one that’s
two months late. But eventually we’ll
actually roll out a rating system for groups. And it’s based on the group’s
ability to improve expected default performance. So you remember the chart about,
A’s are expected to default at 0.9%. If a group drives a better
default rate for their A’s, they’ll get a five star rating,
which would be the highest rating. If their A’s are defaulting
at 1.2%, they’d probably be below average. Two star, one star group,
for example. That should give lenders a
better sense of what does it means to lend to this group? Like, I’m Vietnamese and I
really want to lend to this Vietnamese group. But they’re always late and
their rating as a result is zero stars or one star. Is that really a group that I
want to be involved with? And some lenders inevitably
will say, yes, I really believe in these people. I want to help. We haven’t quite gotten to the
point in Prosper where people are doing charity loans, but
I expect that if Hurricane Katrina had hit around this time
this year, or if it had hit this year, it’s possible
that people would have put up listings– I need some money to make my
rent in Houston, or whatever the situation was, where lenders
could actually help people, and maybe not
even expect– KAREN APPLETON: That’s
my next line. ANDREW MARTINEZ-FONTS:
There you go. I’ll let you [? get going. ?] KAREN APPLETON: Prosper and
socially responsible investing, which is, I’m sure
you’re all aware there’s been just huge buzz in this
marketplace of socially responsible investing, double
bottom line, micro-finance. And we believe that Prosper’s
a fantastic platform. And we had in fact talked with
many organizations on both sides of that equation. Organizations that want to lend
to others in need, and organizations who help those
in need who want to open up their borrowers to the
marketplace of lenders. So we think this is a
huge market for us. We also see that there’s
a need to have a double portfolio, perhaps, on Prosper
that allows you have one portfolio of loans that’s here
to help entrepreneurs or others in need, and one
portfolio that’s geared towards making a good return. So that’s kind of the balance
that we’re trying to hit on that side as well. Yes? AUDIENCE: Hurricane Katrina. We just learned that during
Katrina there was a lot of fraud. And if something like that
happens this hurricane season, you’ll probably have lots of
listings of people saying hey, I need [INAUDIBLE] give them money and people
will just vanish. How do you prevent that? KAREN APPLETON: Well, the
question has to do with fraud and fraud prevention. Here’s a slide we have on
security and risk management. I think that maybe what happened
in Katrina were that maybe documents weren’t required
or things like that but on Prosper marketplace, we
require that the borrowers provide us with all of their
key data points– Their driver’s license number,
their social security number. We access their credit
history. We ask them the questions
that only they would be able to answer. And we have a very stringent and
automated in-house system that is rigorous tracking and
management of the individual’s verification, validation, close
interaction with the credit bureaus. And an individual’s repayment
is then tied back to the credit bureau as well. I mean that is at the heart of
providing a safe marketplace. And that is one of the
commitments that we. Have. So not only do we have
the technology in place to help us with that. We also have people who are just
managing and monitoring the overall process. It’s a very safe system. AUDIENCE: Yeah. Specifically identity theft. Say I was able to get someone’s
social security number, driver’s licence
number or their credit report somehow. How would you prevent that? Have you actually had experience
[INAUDIBLE] KAREN APPLETON: We catch most of
the folks that come in and are trying to dupe the system
or something like that. But since we’re requesting bank
account verification, and we do the challenge deposits
like PayPal does, they have to then report back to us what
those deposits were. So they have to access to the
account, and in addition– AUDIENCE: need to do
is open an account. Open a new account in the name
of that person [INAUDIBLE] KAREN APPLETON: Right. So we also have other things
at play in that system, OK? So we’re checking that. Have you ever applied for credit
online and they ask you questions like during the
years 1995 to 2000 where did you live? What street did you live on? So we have systems like that in
place that are designed to, I mean nobody would know
the answer to that. Heck, I have a hard time
remembering where I was living in 1995. AUDIENCE: [INAUDIBLE] ANDREW MARTINEZ-FONTS:
Yeah, can I? [INAUDIBLE] KAREN APPLETON: Yeah.Sure. ANDREW MARTINEZ-FONTS: Yes. To answer your question
directly. We have had incidents of
identity thieves come to the site, set up a profile, set up
bank accounts, and attempt to transfer money. In all of those cases, we have
certain rules in place that effectively say, if you’re doing
this, this and this, we’re going to check you
out a little further. And although our technology
has a well-developed risk model and then we also have an
identity verification team who reviews documents. We actually request
faxed social security numbers, bills– KAREN APPLETON: We’ll
talk to them. ANDREW MARTINEZ-FONTS:
–from people. So there have been a few
incidents where people have tried this, and we’ve been
able to catch them in all those cases. AUDIENCE: [INAUDIBLE]
–delinquents. I mean you haven’t been around
long enough [INAUDIBLE] ANDREW MARTINEZ-FONTS: Well
not that we know of. We think that by now we would
have known if there was someone who was trying to use
someone else’s bank account to get the money and transfer it
out and the problem is that there’s a huge paper trail
in this system. So if you’re really trying to
get us, you’ve had to give us a ton of information. And it’s not just your identity,
it’s your electronic paper trail, as it were also. AUDIENCE: [INAUDIBLE] KAREN APPLETON: So the question
has to do with, in addition to validating the
individual’s credit history, do we also validate the story? ANDREW MARTINEZ-FONTS: Yes. If you think about the Proper
system as a set of gates, there are a number of gates
that a borrower has to go through before they get
their money, right? They have to verify their
identity, they have to put their bank account on file. They have to get through
lenders, right? Lenders have to have the
confidence to bid on them, if they think that their
story is legitimate. So before we even get to the
point where we’re thinking about sending them money for a
loan, the community of lenders has to have decided that this
is someone who not only is credit worthy but also
seems to be a Katrina victim, for example. And that’s backed up not only by
their address information, their listing description,
potentially pictures that they might upload, their
group background. So you could see a group that
set itself up as the New Orleans Red Cross and actually
they verify that everyone in their group has shown them
documentation and proven that they live in New Orleans,
et cetera. So that’s another gate. And then when they get to the
point of us sending them money, we actually will
look through listings. And in a fairly cursory way for
some listings, where we have a high degree
of confidence, let them pass through. But for others, where we think
the stories don’t check out, and we have lenders report
those stories to us, too. Hey, can you check this out? This looks a little funky. They said this in this
listing, but that in this listing. And we actually will verify
that information. We’ve had people send the title
for their car purchase, and proof employment
at certain places, and things like that. So we do go beyond basic
identity verification when we suspect that there might
be something going on. KAREN APPLETON: And the lender
community has emerged as just a very, very strong force. So you can get into Yahoo groups
and things like that, that the communication between
lenders, they’ll vet these borrowers down to the detail. And you’ll see somebody say I
called so and so and asked them to fax me their full
credit report, and their employment history, and I
verified their email address was where they said they worked,
and they’ll go through this whole process. So there’s additional off-site
vetting that goes on. It’s pretty interesting
to see what emerges. But then you’ll see
everybody jump on. You’ll see like a whole bunch of
lenders, they all agree, OK this is a good one. And you’ll go
boom-boom-boom-boom-boom, and that loan will just fill up. AUDIENCE: [INAUDIBLE] have any access to the
information of that borrower. KAREN APPLETON: You can
communicate on the site anonymously. If you’re a borrower and I’m
a lender, I can send you an email on the site saying,
hey, here’s my offline email address. I would like to get some
more information before I bid on your loan. Can you contact me? So we allow that to occur. AUDIENCE: What about
[INAUDIBLE] I’ve noticed a secondary
market [INAUDIBLE] the other thing I’ve noticed,
too, is there’s some lenders that are actually borrowing
money [INAUDIBLE] KAREN APPLETON: To lend. Arbitrage. AUDIENCE: Right. And they keep building it up. They lend out all their money
and then they ask for $25,000 more then they go out and
bid on more loans. It seems more like a pyramid
scheme because if they start defaulting then that whole
thing could come crashing down, is there anything– KAREN APPLETON: Right. OK. So we’re talking about borrowers
who borrow to lend on the site. You can only have
one at a time. So you can’t have 10
loans right now. In effect, that would
limit the ability. So they have to pay back loan
number one before they would get loan number two. And if their borrowing to lend
on the site, their whole strategy is to say I want to
make enough back in one month to cover what my loan payment
is going to be. Because they’re getting
paid back. They get paid back on every
loan every month, right? So that’s the strategy. Do we have anything in place to
prevent someone who, what? Might over expose themselves
or something like that? No. Not really. But the borrower does,
of course, have that responsibility of repayment, and
is responsible for their own credit, and that’s
what it’s tied to. That’s why only individuals
can borrow, too. AUDIENCE: Don’t you want
people to do that? [INAUDIBLE] KAREN APPLETON: I want people
to use the platform for what serves their purposes the best,
as long as it’s not doing anybody harm or causing
anything unsafe to happen. So yeah, I think it’s great. AUDIENCE: [INAUDIBLE] Do you intend to be open about
that process [INAUDIBLE] KAREN APPLETON: I
think we have a combination of both in place. And Andrew might want to speak
to this a little bit more or maybe not. I know that we have some
technology in place for security and fraud protection
that we don’t talk about. It’s our IP. It’s how we do it. It’s our secret sauce. It keeps you safe. That’s just kind of
the way it is. If we revealed it,
then who knows. Maybe somebody would gain it
and we just don’t want to take that risk. AUDIENCE: [INAUDIBLE] KAREN APPLETON: Yeah. We may reveal that. We have not specifically
discussed that. But in terms of a transparent
marketplace, it may be something we just reveal. Just not right now. AUDIENCE: Yeah, I just wanted
to comment about [INAUDIBLE] KAREN APPLETON: Yes. I agree. So in terms of arbitrage,
secondary markets would help. Because someone who has built up
this great portfolio, they can turn around and put that
back out onto the site. Yes. I think that’s a good
use for it. Yes? AUDIENCE: [INAUDIBLE] KAREN APPLETON: Excuse me? AUDIENCE: [INAUDIBLE] KAREN APPLETON: The
minimum is $1,000. Yes. AUDIENCE: [INAUDIBLE] KAREN APPLETON: Yeah. However that would amortize out
because we take it from the monthly payment. AUDIENCE: [INAUDIBLE] KAREN APPLETON: Yes. The other source of our income
comes from borrower’s side. So the borrower pays a 1%
origination fee at the time their loan closes. So we’ve got 1% on the
borrower’s side. 1/2% on the lender side. Yes? Yes? AUDIENCE: So when you release
the API, you’re hoping you can [INAUDIBLE] ANDREW MARTINEZ-FONTS: I
personally don’t think there’s any problem with people using
the site through an API where they’re not actually
participating in a qualitative way on the site. Because there’s going to be
plenty of community as it is. There’s plenty of people who
use eBay through an API and never go to the website. And they pump billions
of dollars of business through eBay. And eBay doesn’t really have
a problem with that. And they have plenty of
community going on with all those people who sell $10 and
$20 items every month. But they really maintain that
ethos that eBay loves, so, KAREN APPLETON: Yes? Yes? Oh my gosh. You want to go– I’m sorry. AUDIENCE: [INAUDIBLE] So there’s going to be some
lenders who are better able to predict looking at all these
different metrics, like delinquencies and the
description of the lender, are there going to be some lenders
who are better able to predict who’s not in default and so
actually what I sometimes do is [INAUDIBLE] visually and whatever he bids
on or she bids on I bid on because it seems like we tend
to look at the same thing [INTERPOSING VOICES] KAREN APPLETON: Right. So you’re looking for a follow
the leader sort of a– AUDIENCE: –which lenders are
better able to predict who’s not in default and maybe then
allow vendors to form communities where they share
that information [INAUDIBLE] KAREN APPLETON: Right. These are great ideas. Yes. We are likely to release
a follow the leader approach to bidding. Where you might say, hey, I love
the way that Cellar Door does this and I want
to follow him. And we would of course allow
Cellar Door to say, yes, it’s OK for me if people follow,
or no it’s not. And then they can reveal their
standing order, so to speak, for how they bid
on the system. Lender groups, that’s another
item up on the table. The other idea is, should
lenders have the ability to be anonymous. If you’re going to allow people
to follow lenders should you also allow them
to be anonymous? These are some of the– AUDIENCE: They’re giving
out for free basically. The fact that they
bid on something. KAREN APPLETON: Right. But yet on these on these
smaller closed communities of discussion, they all tag
together anyway. So these are all ideas that
are on the table. Yes? AUDIENCE: [INAUDIBLE] –other than the
things buy now. How do you think [INAUDIBLE] KAREN APPLETON: You know, fraud
is just one of those things I think you always have
to stay one step in front of. There’s always going
to be new ideas. There’s always going
to be people trying to game the system. And if your technology is always
just one step ahead and you’re on top of the system, you
have a much better chance. But as we saw with PayPal,
it’s an ongoing struggle. Do you want to address
that any further? Yeah. Unfortunately, it’s part of
the world we live in. ANDREW MARTINEZ-FONTS: I really
look forward to the day when we get to Paypal scale
and we don’t have to worry about fraud at that point. KAREN APPLETON: Yes? AUDIENCE: [INAUDIBLE] account. [INAUDIBLE] so the money’s sitting
there awhile. What interest am I earning
on that money? KAREN APPLETON: Currently,
you do not earn interest on the site. That’s another area that we’re
seeking to come up with the best resolution for. We’re registered as a lending
institution, not a bank. Banks can pay interest, lending
institutions cannot. We’re working through what the
best case scenario is. And again, it’s what PayPal
had to determine for themselves, is what was
the best model. So that’s something that we
expect to have an announcement by, I would say conservatively,
by the end of the year on. But right now you don’t. But you can transfer funds
on a regular basis. And I think, relatively soon,
we’re going to have the an automated ability, too. So on the site, you might say,
I want to transfer $500 week or $1,000 a week or a month onto
the platform, so that you would have the ability to
leave the money into an interest-bearing account, having
it transferred in as you want to put it
to good use. AUDIENCE: What I would want is a
thing where I didn’t have to make sure that the money was
going in at the same rate it was going out. So that I could just maybe
have it on demand like a standing order up to $5,000
and as the funds get taken out, you call my bank and pull
the money out so that I don’t ever have to have the money
sitting around at no interest because [INAUDIBLE] more important than that
is just not having to deal with it myself. KAREN APPLETON: Right. No, I hear you. That’s a– ANDREW MARTINEZ-FONTS: We’re
actually almost there. I mean, at this point, we’re
about to build recurring transfers, like monthly
transfer, weekly transfer. But standing orders already
work, in the sense that you could say, I only have $20,000
in the system, but this standing order has a $100,000
worth of capacity. So that when any transfer hit my
account, it’s automatically going to get lent out through
that standing order. And whenever enough funds are
available from repayment, they will also get bid out
into new bids. So the system is already
fully automated and– AUDIENCE: You can have a
standing order that’s not actually fully-funded and it
just won’t get activated? ANDREW MARTINEZ-FONTS: Well,
it won’t starting bidding until there’s money there
to place a bid. KAREN APPLETON: But it will stay
in place, ready to fire. Yes? AUDIENCE: [INAUDIBLE] I think the motivation
is right. I can see them working in
micro-lending in East Asian countries where it’s
been tried already because you know people. You’ve grown up with
them [INAUDIBLE] your screen name people
I’ve never met. And so I’m wondering why you
think I would feel some sort of responsibility to people who
might be in it just to get [INAUDIBLE] membership
as well. And it’s not [INAUDIBLE] seller group. A seller would be very keen
on part [INAUDIBLE] because that’s that seller’s
bread and butter. [INAUDIBLE] seller’s screwed. But here [INAUDIBLE] 25 grand [INAUDIBLE] reputation’s gone to hell
but I don’t care. ANDREW MARTINEZ-FONTS: And the
same way that on eBay the incentive is set up for
the seller to perform. On our site it’s that
the group leader is incented to perform. It’s not necessarily
the borrowers. Because the idea is that the
group leader brings borrowers into their group that they
feel a high level of confidence for. That they will improve the
reputation of their group. There are a lot of group leaders
who admittedly are just trying to– KAREN APPLETON: Just grow? Just for the sake of growing? ANDREW MARTINEZ-FONTS:
–slash and burn. Like they’re just grabbing all
those borrowers out there who don’t have groups. And they’re saying hey, come
on in, the water’s fine. And ultimately what will happen
to those groups is that they’ll have really
poor reputations. Lenders won’t lend to them. and
those groups will leave the system. It’s a chicken and
egg problem. There’s not enough time. There’s not enough reputation
available yet. But ultimately that’s– AUDIENCE: What are
the incentives to the group leaders? KAREN APPLETON: There’s
a match reward fee. So when a group leader brings in
a borrower of a particular grade, they’re paid
a match fee. And then they’re paid a
percentage of the repayments over the life of the loan. So the group leader is incented
on the return. So that drives it as well. And another thing is, I mean,
this is an example of an email that went up on the site
saying, hey, thanks. If you’ve got a borrower who
literally didn’t have other options that were nearly as
good, they’re really grateful. I mean they really, are truly
like, wow, this is a lifesaver to me. I couldn’t have gotten this,
or I consolidated, I was paying 29%. And I was not making a dent
in the principal. I was paying just interest
every month. And now all of a sudden I’ve got
a different opportunity. I’m not saying that that’s 100%
of the population, but there’s a significant
percentage. And when there someone who feels
so grateful, you can bet that if it’s a difference
between paying their Chase bill or their Prosper bill,
they’re going to pay us. AUDIENCE: I think what you need
is a network sort of a Linkedin-type network-type thing
so that I can say, here are my references. And this is my ability to borrow
from other people. More like a microfinance type
thing where the lender knows somebody else, someone
knows somebody else. KAREN APPLETON: So somebody
vouching for someone else. AUDIENCE: Yes. Exactly. KAREN APPLETON: Yeah. That’s a good idea. AUDIENCE: Mutual fund, right? Some people are very good at
betting so they [INAUDIBLE] that lender group and they
say, okay, [INAUDIBLE] KAREN APPLETON: I love it. I love that. Yes? AUDIENCE: So, what do you
think banks have missed opportunities to give loans
to people like this? KAREN APPLETON: That’s
a big question. Why are banks not doing
this right now? I think that it’s so far and
away from what they’ve done in the past, that it just
slips outside. And they’ve got such stringent
barriers on the types of loans that they make, they don’t
look to the person. And this, for the first time, is
allowing lenders to look at the people and say, it’s OK you
were delinquent on one. I believe you. I believe that that medical
history problem, or the inability to pay the bill
because your father died, or whatever it is. I believe in that and I’m going
to lend you the money. A bank is not going
to do that. So it’s hard for a bank
to go from this model of, here’s the framework. Don’t deviate. And sorry, that’s what the book
says we have to do here. To this model, I just don’t
think they’re ready to– they may get there,
but not today. But this is the right
way to go. Yes? AUDIENCE: So [INAUDIBLE] is one thing that you said
initially is that you acquisition cost would be
very low [INAUDIBLE] talking about the groups giving
all these benefits by basically giving their
reputation to their borrowers. There seem to be a very weird
double role that you intend for the groups. What’s the deal here? KAREN APPLETON: In terms of it’s
going to be too expensive to acquire borrowers through the
group leader’s efforts or what’s the– ANDREW MARTINEZ-FONTS: It is
that the borrowers actually pay the group leader for their
reputation so that payment– AUDIENCE: In the beginning in
the first or second slide you said that it would be for
Prosper to acquire the borrowers [INAUDIBLE] group leaders finding and
bringing in new borrowers. Whereas now you’re talking about
that the point of the group is to validate and confer
their reputation onto the borrowers. And for me that seems like
a strange double mode. What’s the deal? ANDREW MARTINEZ-FONTS: Well,
the idea is that the group leader is earning money
by bringing people on a platform, right? That money is actually being
paid by the people who come onto the platform. So it’s effectively as if
you were a group leader. And I came to you as a borrower
and I said, I’m willing to pay 2% of my loan
if you will provide me the reputation of your Google
employee group. And you say, OK. You’re a Google employee, and
I trust you and here we go. So I create a listing every time
I make a re-payment you get 2% of my interest
rate, right? AUDIENCE: But that’s a little
bit different than what you had initially. Initially, I think what the
[? slide said ?] was, you said that the acquisition cost for
each borrower would be very low at Prosper– KAREN APPLETON: Yes. It’s still low compared
to what the bankers– ANDREW MARTINEZ-FONTS:
Prosper’s cost is acquiring leaders. Not certainly borrowers. AUDIENCE: But your example was
that the borrowers come in to the leaders instead of
the other way around. Because this acquisition cost,
for example, was [INAUDIBLE] KAREN APPLETON: Wait. When I was talking about
acquisition cost, I’m talking about compared to what the banks
pay to acquire their– and this is far less than that. So. Yes? AUDIENCE: So, I want to say
a little more about well [INAUDIBLE] KAREN APPLETON: Yes. It’s reported back to
the credit bureaus. So not only is it a good
way for us to drive the responsibility side of it, but
it’s also a really good way for borrowers with either very
thin credit files, or newly out of school, or new
to the country or something like that. They can build a credit
file here as well. Yes. AUDIENCE: So a lot of what
they could work now is assigned credit rating. But of course you
guys [INAUDIBLE] about micro credit and helping
really poor people of course there are a lot more of those
in the developing world. So what are your really–
they’re really sort of long-term. But what are your really
long-term visions for international expansion and how
to deal with the fact that there aren’t these established
credit ratings out there? KAREN APPLETON: Yes. Most countries don’t have
credit ratings. So I think we’re on the
leading edge of that. [INTERPOSING VOICES] AUDIENCE: –micro-finance
[INAUDIBLE] lot more [INAUDIBLE] KAREN APPLETON: No,
I hear you. When we go international,
there’s going to be all kinds of issues to address on
all of those fronts. How do we detail the credit in
the same way we do here. Well, it won’t be done
in the same way. It’s going to have to be a model
that fits the cultural dynamics of that country. And the group dynamics, the
group side of that equation is going to have to also
be modified. So I don’t know the answers
to that right now. But we know we want it. We’d love to go global. AUDIENCE: Do you have any
plans to actually punish people, the individual
reputations of the group [INAUDIBLE] KAREN APPLETON: We just haven’t
even gone there yet. OK. AUDIENCE: Yeah, I just
wanted to [INAUDIBLE] KAREN APPLETON: And we’ll
provide those as we get them. Because again, our key belief
is that in communities that have a sense of responsibility
and the corresponding sense of shame, that the repayments are
going to be higher and the defaults are going
to be lower. But that will be proven
out when we’re able to reveal the rate. ANDREW MARTINEZ-FONTS: Just to
be totally upfront about it, we haven’t had any defaults
yet, because defaults are defined as– KAREN APPLETON: 120 days. ANDREW MARTINEZ-FONTS: It would
be on the first due date of the loan plus one month of
lateness plus three months of collection so we’re not going
to start seeing defaults, if we have any, until mid-July. And so at this point,
publishing zero would be not helpful. We will start publishing
soon as there’s delinquencies, right? Because late payment
is a problem. And that is an indicator
to default. KAREN APPLETON: Yes? Oh. ANDREW MARTINEZ-FONTS:
I’m sorry? AUDIENCE: [INAUDIBLE] ANDREW MARTINEZ-FONTS: Yeah. AUDIENCE: And in this rate,
what grades are getting more interest? [INTERPOSING VOICES] ANDREW MARTINEZ-FONTS:
–be showing that. AUDIENCE: OK. KAREN APPLETON: Do you
have a question? AUDIENCE: Yeah. [INAUDIBLE] an early winter [INAUDIBLE] KAREN APPLETON: Right. AUDIENCE: [INAUDIBLE] KAREN APPLETON: Well, it’s
truly not gambling. Because you are hopefully basing
it on the data that’s provided in making a– AUDIENCE: [INAUDIBLE] default
rates [INAUDIBLE] KAREN APPLETON: Well we have
the Experian default rates, which are– my expectation? My full expectation is that our
default rates are going to be a lot lower than. And that’s just my
expectation. I don’t have any proof of
that at the moment. AUDIENCE: [INAUDIBLE] any
other [INAUDIBLE] KAREN APPLETON: But any
other incentives to– I mean, I think that the best
part of being an early adopter here is that you’re growing
with the community. The rates are fantastic
right now. And I keep going back to where
else can a private investor get rates like this, at the same
time they’re part of a brand new industry, cutting
edge, new asset class, and have the ability to be part of
the community and grow the whole thing? And at the same time be earning
this kind of money? And some people have strategies where they go all high-risk. That’s all they want. And their portfolio looks like
100 loans at 28% return. But we know that the historical
data says, well, it’s going to be between 15%
and 29% default rate on a hundred loans. So you could easily say, well,
why don’t you just go all AA’s at 8% and just call it a day? But the fun for them, the
enjoyment of the whole process, is that they’re
betting. And they’re going through the
process, and they’re walking through and they’re taking
a big hand in what their outcome is. My personal strategy is
to spread it around. I like a diversified strategy
that’s got bits and pieces in every bucket that will,
overall, provide– I have about 320 loans in my
portfolio earning about 13% return now. I like it. It’s all mixed up. I think it’s pretty safe. It feels good, so. But everybody comes up with
what works best for them. AUDIENCE: [INAUDIBLE] what fraction of those
people [INAUDIBLE] ANDREW MARTINEZ-FONTS: We can. But it’s actually pretty even. The overwhelming majority of
listings are in the lower credit scores. But the actual loans that are
made are pretty even across, distributed across–

8 comments on “People to People Lending with Prosper”

  1. lhsbandnurd says:

    I feel obligated to point out that Karen no longer works for Prosper Marketplace, Inc. and hasn't since early in 2007.

  2. lhsbandnurd says:

    Also, and more importantly, Prosper has recently replaced the Experian data with its own, searchable, default/late data.

  3. lutzie200 says:

    Shouldn't it be "I feel 'obliged' to point out…" 'Obligated' carries a legal meaning that is different from obliged.

  4. lhsbandnurd says:

    You are correct, obliged is a more accurate descriptor. I do not work for Prosper, and as such would never be 'obligated' to tell anyone anything about them.

  5. Lamont Mcdermott says:

    sounds good to me. Im in.

  6. NorEaster07 says:

    I've used prosper and I must admit, its a great platform. I borrowed money which I'm still paying off and I helped lend money to someone in need.

    It's a great concept and maybe we'll one day get rid of those bully big banks. 🙂

    Great way to invest your money too.

  7. Zealous Mystique says:

    Hurry up and get Texas investors the ability to loan. I just tried registering and this is the message i get "State of residence: we're sorry, but prsper is not available to lenders in Texas" grrrrrr

  8. Online Payday Loans Reviews says:

    Prosper offers peer-to-peer lending for individuals looking for a loan outside of a typical lending

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