Friday, February 29, 2008

The Group Phenomenon


One of the central ideas behind Prosper is groups. Whoever heard of a borrowing group? Or a lending group? Especially a group of middle-Americans, not high-flying Wall Street investors?

The initial idea was, as I understand it, to encourage the formation of groups of borrowers and lenders that would support each other. A borrower who belongs to a group could gain some additional credibility from that group as well as assistance in requesting a loan. Groups can be formed on just about any basis - people who ride bicycles, for example.

In addition to the groups, Prosper created open forums. Members can ask questions, offer advice to others, get to know other members here.

Both of these elements contribute to the "web 2.0" slant of the company.

Now that Prosper has been around an amazing two years, it's possible to find out how the group thing is working. It turns out that the larger groups offer no real benefit to members while the smaller groups offer significant advantages. It makes sense intuitively. It also turns out that many people do not join groups, being perhaps of an obstinate loner nature like me. Some aspects of groups have changed along the way, including the provision of incentives for group leaders (group leaders have gotten tiny percentages from loans in the past but this incentive may not be retained).

One way that groups can be especially helpful to borrowers is in the provision of endorsements and particularly endorsements with bids. When group members provide endorsements of borrowers and also bid on their loans, they are showing confidence in that borrower. Of course a borrower can get endorsements from any other Prosper member, not just group members, but chances are probably better if the borrower is a member of a group.

My own experience with groups is small. I joined Prosper initially as a borrower. I requested a loan and the request failed (no bids. none.). During the time my listing was active and after it closed I received many messages from group leaders. They offered suggestions to improve my listing and invited me to join their groups. I didn't find a compelling reason to join so I didn't and therefore cannot comment on what it's like to be in one. I do believe, though, that this concept is unusual - unique, probably - in the lending industry. It will be interesting to track it over a longer time period.

Thursday, February 28, 2008

Term of the Days: Social Capital

If there was a theme to the Prosper Days conference, it was "social capital".

The opening page of the prosper website currently says "Get great rates and help fellow Americans". Prosper CEO Chris Larsen described different types of investors in his keynote address as "George Baileys" (from A Wonderful Life) and "Gordon Geckos" (from Wall Street). Bailey is the bleeding heart who wants to lend to deserving people while Gecko looks to line his pockets with the hard-earned money of those same deserving people ("Greed, for lack of a better word, is good"). Larsen, co-founder of Prosper, said Prosper tries to serve both types. When it comes down to it, it doesn't matter to Prosper what people's reasons are for investing. Nevertheless, the company has from the beginning promoted community involvement; people helping people. And some of the recent changes to Prosper have again brought "social capital" to the forefront.


Prosper CEO Chris Larsen

Portfolio plans.
Lenders can create portfolio plans that target specific types of loans - conservative or aggressive, with interest rates over a certain number, for example. Once the plan is created, the plan will automatically seek out loans that meet the lender's criteria, and bid on them. The lender doesn't even have to be there.

Larsen highlighted changes in the portfolio plan options. Lenders can now choose from several "social criteria" as well: whether the borrower has endorsements from friends; whether those friends are "verified" (proven to be separate people from the borrower), whether any of those endorsers have bid on the loan. Statistically, borrowers who obtain endorsements from verified Prosper members who then actually bid on the borrower's loan do stand a better chance of being funded - and those borrowers are more likely to honor their commitment to repay the loan than those in similar circumstances who do not have endorsements by bidders.


Group leader Marilyn Paguirigan

And then there was Marilyn. Marilyn Paguirigan spoke at at least four Prosper sessions. She is the leader of Malana Ohana, a Prosper borrower-and-lender group, based in Hawaii, that has unique characteristics. Primarily of interest is that its leader knows all of the members personally. It is essentially family-and-friends who support each other. Marilyn's group exemplifies the community aspect of Prosper and she spoke highly and often of the benefits of social capital. Her group has a high rating (four out of five stars), indicating its borrowers rarely default. The success of the group indicates that community support and associated social pressure has value.

The "people helping people" aspect of Prosper is attractive to a great many people. Many of us feel good when we can actually see (and sometimes even know) who is getting the money we lend, and we feel even better that we are keeping the loans out of the hands of the greedy lender industry. Prosper funds, however, are housed in Wells Fargo Bank, which tells us that the industry is still getting its cut.

Monday, February 25, 2008

Prosper People


Last Monday and Tuesday my daughter Elaine and I attended the Prosper Days conference. It was enlightening in a number of ways. One of the surprises for me was the people we met.

The conference was on the fourth floor of the Parc55 hotel in San Franciso, a rather ugly newer hotel that provides all the amenities for such conferences. Spread around the open area were circular tables and chairs, where we sat between sessions and when we ate breakfast and lunch. This arrangement encouraged the meeting of others, and Elaine and I did meet new people each time we sat at one of these tables. People came to the conference for different reasons and brought with them very different experiences and intentions.



We met Sam at the breakfast on Monday. Stan is a doctoral candidate at Carnegie-Mellon University in Pittsburgh. He is doing research on Prosper lender patterns - what types of loans lenders prefer, when they bid, a number of other quantifiable patterns. He asked me my preferences and how I went about lending on Prosper and my answers were very much in line with "typical" lenders. To do this research he and his advisors are using Prosper-provided data that is freely available on the Prosper website. Prosper provides open access to its programming and data (not including, of course, actual Prosper member identification by name), known as its API (application programming interface). One of Stan's advisors was on a panel on API usage, illustrating the academic purposes for which this resource can be used.



We met Stanley a number of times during our time there. He is a gregarious, friendly guy who is disenchanted with his retirement plan. He is looking to find other ways to invest that provide a better return. After attending the Prosper keynote session he realized another way he could use Prosper: to lend money to his sons. They can register as borrowers, asking a ridiculously low interest rate, and he could be the only bidder. Keeping it all in the family. This way there would be clear records of his loans to his sons and if they pay them back on time they will establish credit for themselves. Win-win all around.


The Scotts were also interested in finding better ways to invest their money. Michael already had an account with Prosper and was knowledgable about the company and the experiences of others. His wife came along for the ride, essentially, and is considering investing some money of her own but wants her capital to be more liquid. She doesn't want to wait for the loans to be paid off to be able to use the money again. At this conference she learned that the loans are paid back month by month and many people pay off their loans early so she is looking at it more seriously.

We met other couples similar to the Scotts, where one was already a member of Prosper who wanted to introduce the concept to the other. One man we met is actually in the lending business and has taken an interest in bringing it home. When I commented on the outrageous interest rates banks and credit card companies charge he was ominously quiet.

The friendly and open nature of the other conference attendees we met turned out to be indicative of the group as a whole and of the company as well. And no, I wasn't paid to say this - although I freely admit that my attendance at the conference was free, because I registered as a blogger.

Sunday, February 24, 2008

Off to Prosper Days

I am leaving for San Francisco this morning. I want to be in my hotel in the afternoon, able to scope out the route to Prosper Days by cable car or trolley.

So far my investments in Prosper borrowers have made over 16% interest. That's not the long-term average for loans, mainly because once in a while a borrower defaults, so I don't expect to maintain it. But by making small ($50 each) loans I have indeed diversified so if one defaults it isn't going to be a biggie. I also don't have a huge investment in Prosper overall, so I am not getting rich.

I will be reporting on what I learn here.