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Prosper.com Has a New Look and a New Business Model

by Peter Renton on December 20, 2010

The changes at Prosper.com that I mentioned last week came to pass yesterday. They now have a new look, not radically different but an improvement nonetheless. More importantly they have moved away from the auction process to a new fixed rate model for borrowers where Prosper decides the borrower’s interest rate.

These changes come at an important time for Prosper. They are lagging behind Lending Club dramatically in loan originations but they are showing some positive momentum. In their press release today, Prosper announced their November loan numbers and they looked good. With loans of over $2.5million for the month, it was their best month since they emerged from their quiet period in 2009. Although it is still dwarfed by Lending Club with $11.6million in new loans for November, so Prosper still has plenty of work to do.Prosper Needed to Make a Change

Here is my take on all this. Prosper needed to do something. If you look at Prosper’s monthly loan chart from Eric’s Credit Community you can see that loan volume has been somewhat stagnant this year, whereas Lending Club has increased their monthly loan numbers steadily throughout the year. Prosper may have concluded that one of the things holding them back was the auction model. From my perspective, as an investor with both Prosper and Lending Club, I found Lending Club’s system easier to use and navigate. With the new fixed rate model I think Lending Club will lose some of that advantage.

I am sure Prosper did not make this change lightly. In an email sent to lenders this morning, CEO Chris Larsen explains their reasoning behind the change:

While many lenders enjoyed the auction system conceptually, we heard consistent feedback that in practice, auctions made the deployment of funds more time consuming with little gain in lender returns. The change to pre-set pricing means that listings will close faster and that you can’t be outbid – so your investments will start earning great returns more quickly!

No doubt, many old time investors and borrowers will be disappointed with the move away from the auction p2p lending model, but the focus now is on speed and ease of use. The bottom line is really the bottom line. As long as investors remain happy with their returns few people will complain.

The Big Risk

There is no doubt that it was a big risk for Prosper to make these changes now. So the next quarter will be critical. They will need to show that this has all been worth it and new loan numbers need to show steady improvements. The risk is that the numbers remain stagnant and borrowers go elsewhere for their money. Only time will tell how this all pans out but I hope there is a steady PR and social media campaign going forward to get the word out. I, for one, will be watching very closely to see if the new Prosper does in fact prosper.

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Dan B December 21, 2010 at 9:23 pm

A quick look at the Prosper site & there are a number of things that jump out at you starting with the tiny number of listings (under 100) & the very low average amount that is being borrowed ( I’m guessing $5k). Then there are the huge interest rate numbers. I saw a few 30%+ during my quick tour. Comically the reasoning given by the borrowers for these particular loan requests were………………..yes, you guessed it, credit consolidation or payoff! And we thought we paid high interest rates on our credit cards, right? Well, you can smell that from a distance.
It appears that default rates even within 1 yr old or younger loans are very high. I’m guessing that they’re going to get some new money in the door, then slowly lower the interest rates to get increasing number of borrowers interested.
I for one have better uses for money than tossing it in the air & hoping.

peter December 22, 2010 at 11:24 am

Dan, Thanks as always for your comment. It is true that Prosper has more work to do and they certainly could use more loans, particularly those at more reasonable rates. But I wouldn’t rush to judgment yet. They are transitioning to a new model, let’s see what it looks like in a a few weeks. I will be keeping an eye on them and reporting back on their progress.

Billy Ray December 22, 2010 at 3:06 pm

I’ve been using Prosper as a lender for about 8 months not with good success. I cannot find a loan worth considering since the changes. Outrages rates, 12+ days to run, etc.

I personally thought bidding down the rates was one of the most interesting parts of the site.

Peter December 24, 2010 at 12:30 pm

I’ve been both a lender and borrower on Prosper.com since 2007. My view on the new model changes initially is bad for the community Prosper.com had built. I see loan listings fallen dramatically from over 170 to a low of 47 today due to the model changes, with many of borrowers with fair to poor credit. I liked the auction-bidding down interest rate model because it created a free market where people, not banks, set the interest rates. I also see more defaults, people withdrawing listings and money. I don’t like the changes and very negative comments from people on the web site.

Aaron December 24, 2010 at 12:35 pm

I am greatly troubled by these changes to the prosper site. By getting rid of the auction model, they have pretty much destroyed any chance of us investors with $25-$5,000 invested to get any decent notes. Lenders that have $100,000 balances have never flinched in throwing down $1000-$3000 on a single listing. By having the loans fixed, and funded immediately as soon as the pool is full, all the decent listings that more investors want to own are gone almost immdiately after they are listed. Prosper is going to have to dramatically increase volume for this to work. I logged on this morning and found only 2 A listings and NO AA, B or C listings. This is a joke.

If anything, I believe this could be the doom of prosper when many of the smaller investers flee to lending club where there is more volume and company experience.

peter December 24, 2010 at 1:11 pm

Thanks for the comments everyone.

@Billy Ray – If you read the comments of @Aaron, you will see the problem. As soon as good borrowers appear on the site they are being immediately funded by the larger investors with automated plans.

@Peter – I am impressed you are still around if you started investing in 2007. I don’t think is panning out the way Prosper management expected. They will lose investors like yourself unless they can increase the volume of loans to good borrowers dramatically.

@Aaron – I take your point. Prosper needs to do something for the smaller borrowers quickly. We can all move over to Lending Club and that would have to impact them. Personally, I want them to survive not just because I am an investor but because I don’t want LC to have a monopoly here. The next few days will be very interesting.

Just checked Prosper, and as of right now (12/24 12:10 MST), there are 46 listings with only ONE rated higher than D. Slim pickings indeed.

Billy Ray December 29, 2010 at 8:51 am

Agree with all on the negative result of these changes. There is just nothing to bid on as a smaller invester with <$5000 on the site. I don't go in for more then $250 on any signel note.

I've been trying to hold out but in another week I will need to pull my money to get it working in another investment. (12/29) 1 note with a C or higher rating with only a 7%.

Dan B December 29, 2010 at 10:56 am

Peter, I think you should offer a contest where each participant has to guess how many loan listings Prosper has on offer at midnight December 31st.

I’ll go first & say 12.

Aaron December 30, 2010 at 3:02 pm

12:00 AM / CST on Dec 31st.

My prediction: 21 notes

6 Es, 14 Ds, 1 B. For the Trifecta. : )

Moe April 2, 2011 at 1:19 am

I invested on both sites and saw great returns from both (20-25%) the reason I left Prosper is because of the bid process (which no longer applies) and also because they do not allow selling late notes on the secondary market.

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