May 6, 2009, 5:00 am

Prosper Strikes Banks… I mean Back!

by: The Financial Blogger    Category: Social Lending,Uncategorized
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theempirestrikesbackAbout 2 years ago, there was a lot of writing done on community lending or social lending and companies such as Prosper. Funny enough, my MBA Strategy exam was on the impact of social lenders on banks (no wonder I got an awesome grade in this class ;-) ).

Social lending was meant to great success during the economic boom. However, we all wondered how it would go during an economic crisis while people default on their loan. Would they be able to find people that will still lend money to Sexygirl69 so she can start a new hair salon? The truth is that Prosper went pretty quiet for the past 6 months, trying to find a solution to this huge problem: the lack of liquidity in the credit business.

Instead of injecting money into the credit market, banks are taking the money from US and Canadian government to re capitalize them. Banks that survive the credit crunch of 2008, survived what they call an economic shock. While running their economic stress simulation, they all realized that while they were strong enough to get through the first shock, they are not capitalized enough to face another crisis. Therefore, they keep the money for themselves and do not pass it on to the population looking for credit.



So where is Prosper after the credit crisis?

Well it seems that Prosper is coming back from the dead stronger than ever ;-) They actually want to benefit from the credit shrink created by banks. While people don’t have any other places to get credit, chances are that they will turn around and create an online borrower profile and start requesting money through the social lending sites.

The Government of California authorized Prosper to resume its activities and add a whole new feature: Open Market. They will grant loan companies to participate in Prosper’s model and sell loans on the market. I guess they would probably do it the other way around and request money from investors to lend to more people as well. Social lending may come as a great help for banks too!

Through this initiative, Prosper hopes to increase their share of the credit market while providing access to credit to a lot of people in California with their social lending platform. Getting money from banks seem to be quite a challenge these days and Prosper saw the breech in the banks brick wall.

The evolution of this new business model will be quite interesting as the improvement of our economy (a part of it) could result from action of people lending money to others through social lending and restart the wheel of credit. I’m not saying that everybody should borrow money for the sake of the economy, far from it. However, if you need money from a project and banks don’t want to loosen up their wallet, you rather get it elsewhere!

I’ve made a recent search for social lender in Canada and I didn’t find any active one. There is Community Lend and IOU (I Owe You) but both of them are not open yet. I just can’t wait to be able to lend to people ;-).

image: dreamagic.com

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Comments

by: Traciatim | May 6th, 2009 (6:46 am)

I’ve been eagerly awaiting Community Lend since early last year, so far they are vapour-ware. IOU as far as I recall started processing loans but then stopped due to a regulatory problem. I figured they were going to go under.

by: Traciatim | May 6th, 2009 (6:47 am)

P.S. You link goes to communitidylend.com and not communitylend.com . . .

by: The Financial Blogger | May 6th, 2009 (6:50 am)

thx !

I just edited the post :-D

It will be interesting to see how fast Prosper can bounce back. It was the leader and has even less direct competition now, though in much different environment. Lending Club is doing ok, but didn’t exactly bust out of the gate after it’s quiet period ended…and they are operating in about forty states versus one for Prosper right now.

Larry Mitchell
Social Lending Network
http://www.sociallending.net

People need to stop thinking of P2P lending as a social endeavor. Prosper’s new flavor is all about doing good and helping others and the economy. In reality, it seems it will only help the institutions that will offload their loans on to regular people. Prosper’s performance before was aweful, and I’m not quite convinced this will change that. On the other hand, Lending Club’s performance is much better. Lending there is more “objective” and it’s all about returns. But it takes time to invest because their selection of borrowers is so strict

Of the over forty loads I made at Prosper,Over half failed and many thousands of dollars never got payed.

Their “quiet period” has already been going on for 7.5 months… I don’t know what the hold-up is, but they obviously have been having some trouble somewhere.

I have made 20 loans through Prosper in the past… 2 went bankrupt, and 4 are currently “late”.

If your loans have failed, that generally means you were loaning to people with poor credit history (while you were probably trying to make a bunch of money on high interest rates to them). Since you chose the people that you loaned to, and since you have access to their credit information, you can’t really blame Prosper.