Peer-to-Peer Lending: Examining the Industry and the Borrower Experience
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Transcript of Peer-to-Peer Lending: Examining the Industry and the Borrower Experience
COPYRIGHT 2013 CORPORATE INSIGHT, INC.
PEER-TO-PEER LENDING
EXAMINING THE INDUSTRY AND THE BORROWER EXPERIENCEAUTHOR: JOHN GREENOUGH
PUBLISHED: OCTOBER 2013
TABLE OF CONTENTS
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Introduction to P2P Lending
P2P Lender Profiles
o Prosper
o Lending Club
Prosper vs. Lending Club
Five Key Takeaways
Corporate Insight Thought Leadership
About Corporate Insight
About the Author
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P2P LENDING INDUSTRY OVERVIEW
Online peer-to-peer (P2P) lending websites, often referred to as “Shadow Lenders”, have gained significant traction since the credit crunch resulting from the 2008 financial crisis. The purpose of these rapidly-growing websites is to facilitate loans of under $35,000 between borrowers and investors. The result is a transparent loan platform where individual investors can determine a borrower’s credit worthiness and partially or fully fund a loan at an attractive interest rate.
Investors and borrowers alike have found significant value in these online platforms, as they allow them to bypass banks when conducting business. Top P2P lending platforms have been valued at over $1 billion and continue to grow.* Collectively, the top two firms originated $871 million in loans last year.
Let’s take a closer look at the borrower experience, by examining the enrollment and loan processes.
Source: Dugan, Ianthe. "Consumers Find Investors Eager to Make 'Peer-to-Peer' Loans - WSJ.com." The Wall Street Journal - Breaking News, Business, Financial and Economic News, World News & Video - Wall Street Journal - Wsj.com. N.p., n.d. Web. 6 Aug. 2013. <http://online.wsj.com/article/SB100014241278873237408045786017737
BORROWER ENROLLMENT PROCESS
Borrower signs up for the service by providing basic information
P2P lending platform runs credit check to ensure borrower meets basic borrowing requirements
Borrower is granted access to create a loan profile on P2P website
Website verifies borrower’s identity by requesting the borrower to mail copies of Social Security card, W-2 form,
and other forms of identification
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The borrower enrollment experience on a P2P lending site is straightforward but firms perform their due diligence:
BORROWER LOAN PROCESS
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Borrower’s loan profile is published on the website for investors to crowdfund, often in small increments
Once fully funded, a third party bank issues the loan to the borrower and creates sliced securities for each
investor to collect returns from the borrower
Borrower makes payments back to P2P lending platform, which re-issues funds to security holders
Once enrolled, borrowers may publish a loan to the firms’ online platforms:
PROSPER COMPANY PROFILE AND KEY STATISTICS
Prosper:
Founded in 2006 as First P2P Lending Platform
$ Amount Funded to Date $500,000,000*
# of Members 1.9 million*
APR** 6.73%-35.36%
Average ROI 9.09%
Loan Amount Minimum $2,000
Loan Amount Maximum $35,000
Loan Term 3-5 Years
Average Default Rate 5.8%
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*As of September 2013**APR is determined by Prosper based on credit worthiness. Please see a full list of APR’s based Prosper Rating and average default rates of each rating on next slide.
Prosper Default Rates Based on Prosper Rating**
RATES AND FEES
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Borrower Rate and APR Based on Prosper Rating
Prosper assigns applicants an APR based on credit worthiness and informs them of their Prosper Rating.
A closing fee for the loan is determined by the individual’s Prosper Rating.
The firm charges lenders a 1% annual loan servicing fee.
ENROLLMENT
Prosper’s enrollment process is similar to applying for a credit card online:
o Applicant initially enters: amount of the loan, how they will use the loan and their current credit quality.
o Application requires basic personal information: name, date of birth, mailing address, employment information, etc.
o Prosper runs a credit check and instantly approves or rejects applicants.
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Step 1 of Loan Application Step 2 of Loan Application
LOAN PROFILES
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Provides detailed information about borrowers credit
history and current employment
Description of loan shows personal
statement of what the loan will be used for and why borrower
considers themselves to be a good
candidateLoan Profile as Posted on Prosper Loan Board
If loan is 70% funded, borrower can choose to partially fund the
loan at the end of the listing period
The borrower fills out a loan profile which is posted to a loan board for investors to examine and potentially fund:
Highlights of the main features and terms of
the loan
States primary borrower information; Purpose of Loan, Rate,
Monthly Payment
ONLINE TOOLS
The Prosper Borrowing page allows users to view/edit their current loan listing, make a payment, complete the Prosper verification process to receive the loan, and create a new loan listing.
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Borrower Rate and APR Based on Prosper Rating
LENDING CLUB COMPANY PROFILE
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Lending Club
Founded in 2007
$ Amount Funded to Date $2,595,182,275
APR* 6.03%-28.69%
Average ROI 5.57%-9.16%
Loan Amount Minimum $1,000
Loan Amount Maximum $35,000
Loan Term 3-5 Years
Average Default Rate 4%
Most Common Reasons for Loan**
*As of August 2013**Credit Card Refinance/Debt Consolidation accounts for 80.67% as reason for loan
RATES AND FEES
Total loans issued by Lending Club has skyrocketed since 2011 and continues to grow.
1%-5% origination fee is charged based on borrowers loan grade/term.
1% servicing fee is charged to the investor.
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Loans Issued by Lending Club since Foundation
Lending Club Ratings and Associated APRs
ENROLLMENT
Enrollment is fast and easy:
o Borrower’s required to provide basic personal information
o Credit check is run on all applicants.
o If approved, Lending Club instantly shows the rate the borrower qualifies for
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Lending Club Application Approval Page
Lending Club Borrower Profile as Listed on Loan Board (Truncated)
LOAN PROFILE
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Credit profile provides detailed
credit information, almost identical to
Prosper
Q&A adds a unique feature, which Prosper lacks, for investors to ask borrowers about the purpose of the
loan and their financial history
Although aesthetically less pleasing than Prosper, the Lending Club profile provides more digestible information, as well as an added Q&A section for investors to ask borrowers questions.
Income is broken down by month and is
specific, giving the investor a
comprehensible view of if borrower will be able to pay off loan
monthly
Current funding is broken down into a dollar amount and lists the number of
investors so far
RATES AND FEES
Prosper and Lending Club offer nearly identical APR’s and servicing fees.
Prosper’s closing fee is advertised as being slightly higher than The Lending Club’s origination fee.
Advantage: The Lending Club
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Rates/Fees The Lending Club Prosper
APR 6.03%-28.69% 6.73%-35.36%
Origination/Closing Fee 1%-5% 2%-5%
Investor Fee 1% 1%
ONLINE USER EXPERIENCE
Lending Club provides more transparent information to both the borrower and lender about the loan process, borrower requirements and associated fees on its public site.
While Prosper’s site is more aesthetically pleasing, Lending Club provides a more detailed and digestible loan profile which may attract more investors, resulting in potentially better rates for borrowers.
Advantage: Lending Club
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Feature Lending Club Prosper
Profile Set Up ✔
Profile Management ✔
Loan Profile ✔
Public Site Information ✔
Navigation ✔
CORPORATE STRUCTURE
Lending Club is currently valued at $1.55 billion.
Prosper recently raised $25 million in a new round of investment with backers that included BlackRock.
Lending Club’s backers and Board of Directors include well-known individuals, such as Larry Summers, John Mack, and Google, which may entice users based on their leadership’s prior success in the financial markets.
Advantage: Lending Club
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FINAL VERDICT
Lending Club provides a slightly better user experience and lower rates/fees than Prosper. What really tips the scales in Lending Club’s favor is the firm’s strong corporate structure and growth prospects as they are expected to go public in the next year.
Leader: Lending Club
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FIVE KEY TAKEAWAYS
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1. Lending Club and Prosper offer a viable option for qualified borrowers to receive a personal loan away from the traditional brick-and-mortar institutions.
2. Shadow lending websites provide a one-stop-shop for borrowers to receive their loan, while providing the tools necessary to manage that loan.
3. From a borrower’s perspective, it’s very difficult to be approved to join either website. Lending Club, for example, only accepts roughly 10% of all applicants. While this is beneficial for investors and those who qualify for these loans, by no means will these websites replace ‘pay-day loan’ boutiques.
4. It seems unlikely for shadow lenders to move beyond loans over $35,000 without becoming heavily regulated. With an influx of investors joining because of the high ROI, P2P Lenders must ensure that borrower requirements do not dip to meet the demand.
5. As many critics cite, the growth of these websites will help to alleviate any predatory loan practices by offering fair rates and not imposing substantial fees.
CORPORATE INSIGHT THOUGHT LEADERSHIP
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investing. This study will focus on each idea, analyze compares them to what established financial
institutions offer and examine the potential impact on the industry. Download the study preview!
Alternative Investments: How Asset Management Firms Frame Their FundsThis whitepaper examines the online content leading firms are using to educate investors and
financial advisors about alternative investments and takes a look ahead to what's next for these
products.
Facebook Marketing Campaigns - Social Media Initiatives in the Insurance IndustryThis slide deck highlights some of the engaging Facebook marketing campaigns initiated by P&C
Insurance Monitor firms this year and offers a few Facebook marketing tips for insurers.
2013 Mobile Finance Trends and InnovationsThis slide deck includes commentary on mobile developments, key takeaways for financial services
firms and thoughts on what’s next for mobile finance.
ABOUT CORPORATE INSIGHT
Connect With Us
Corporate Insight provides competitive intelligence and user experience research to the nation’s leading
financial institutions. For over 20 years, the firm has tracked technological developments in the financial
services industry, identifying best practices in online banking and investing, online insurance, mobile
finance, active trading platforms, social media and other emerging areas. There are no assumptions in
Corporate Insight’s work – we use live accounts at all of the firms we research, providing our clients with
unparalleled, unbiased intelligence on the competition.
Corporate Insight welcomes the opportunity to speak with the media. If you are interested in citing our
research or would like to schedule an interview with one of our analysts, please Joshua Grandy, Director
of Public Relations, at 646-876-7524 or [email protected].
Media Inquiries
25
DOUG MILLER
Director of Research Banking, Brokerage and Credit [email protected].
JOSHUA GRANDY
Director of Public Relations
646-876-7526
ABOUT THE AUTHORA
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JOHN GREENOUGH
RESEARCH ASSOCIATEBANK MONITOR AND CREDIT CARD MONITOR
John Greenough is a Research Associate for Corporate Insight’s Bank Monitor and Credit Card Monitor research services. John focuses on tracking the online user experience, tools and products offered by leading banks and credit card issuers. This slide deck is the result of extensive research he performed into the P2P lending industry and the borrower experience leading firms in the space are offering online.
Bank Monitor & Credit Card Monitor are service marks of Corporate Insight, Inc.; all rights reserved. 26