Peer-Lend™

Prosper.com’s latest site update announcement (August 14, 2008 - details on their blog) included the following very brief note which signals a major shift in market dynamics - and, potentially, depending upon details which were not released (and are not apparent - and, note to Prosper, therefore not transparent), has implications even to the overall platform concept:

Faster Listings for Qualified Borrowers
In an effort to get higher-quality borrowers through the Prosper loan application process more quickly, we’re testing a streamlined listing process where some borrowers post listings without adding a title, picture, or description. You’ll start seeing these listings on the marketplace, with titles like “My personal loan for [category]“.

While there were no further details about the exact criteria for this new “streamlined” process, depending upon how Prosper has structured this process on the backend, the following cases (or a blend/mixture of these cases) are quite likely to qualify for this new “credit details only” listing type:

• Loans which have a near certainty of funding (based upon a comparison of the exact loan characteristics with the available pool of lender “portfolio plan” dollars which are waiting to be automatically bid on exactly such loans.)
• Loans which have a high probability of funding (based upon the funding of past loans of similar characteristics.)
• Loans which have a high credit quality and are therefore more subject to competition from traditional credit outlets (lowering the barrier to entry for prime/near-prime borrowers who are accustomed to instant approval)

A number of lenders have mentioned to me, in private, that they feel this change robs them of the contextual information, contained in the usual “Why do you want a loan?” narrative, written by borrowers, which they believe is necessary to make an informed decision about whether or not to lend to a particular borrower. I understand, and, having done most of my bidding on Prosper manually (without the use of standing orders or portfolio plans - and only after reading the listings), share this concern (and certainly hope that making a “traditional” listing will always be an option for all borrowers, regardless of credit grade - given that a compelling listing always has great potential to attract more bidders and lower a borrower’s final rate) — but — and this is a very important “but” - I do see the efficiency gain inherent in this change, both for lenders who wish to deploy capital more quickly and for borrowers who place a premium on their time - and for a platform which desires to increase originations, especially if those originations are to prime-ish borrowers plucked straight out of the mouth of VISA or MasterCard.

At the same time, though, and, specifically, to address, head on, the major complaint which has arisen (and which will, no doubt, become more plaintive as more of this type of listing populate the marketplace - and more lenders realize there’s been a subtle, but potentially dramatic, shift), I do not see how this change in any way alters Prosper’s positioning as a “Peer to Peer” lending and loan platform. The loans are still funded, in an open auction process, by a mixture of individual lenders - and the loans are still taken out by individual borrowers. And that still sounds like Peer to Peer Lending to me.

While the change certainly will make some percentage of listings less “personal”, and may, therefore, make interaction with the platform somewhat less “social” (or, at least, somewhat less “voyeuristic”), I fail to see how the absence of a kitty picture (and a legally non-binding paragraph about what kind of cabinets the borrower intends to install in their kitchen - to hold their estimated budget’s X dollars of food per month for which they don’t, in reality, actually budget) somehow means that the loans, or the platform, are no longer “peer to peer”.

That said, there is a certain, almost Old World, charm to the idea of “Social Lending” - a very different, if tangentially related, concept - wherein lenders select borrowers to fund based upon some affinity or connection that they might mutually share - and which connection, on Prosper anyway, can only be established through the perusal of a borrower narrative, in the traditional listing format. The days of Social Lending, at least on Prosper, and at least for many prime borrowers, may now be on their way to an end - which is a shame, given that even prime borrowers often benefit, rate-wise, from bids placed by the non-marginal percentage of lenders who enjoy the fun of clicking through listings, looking for that special one that clicks - and upon which they feel comfortable - or even good about! - clicking “Bid Now!”.

(The other side of this coin is that it’s very often possible to exclude borrowers - and therefore not bid on bad loans that may fit your credit screens or fall into your portfolio plans - based upon reading narratives that might make a highschool math or english teacher cry - or make an honest street hustler blush at the sheer brazenness. No longer being able to avoid loans - even many prime/near-prime loans - that clearly make zero sense is a tangible and real loss of informational edge.)

I’ll have more to say on these topics in the coming days - but hope, in the meantime, that Prosper will clarify its position, specifically regarding whether borrowers who qualify for this new streamlined process will retain the option to create a traditional listing, how such an option will be presented to those borrowers (who may not understand that they will be, informationally, “pricing themselves out” of receiving many bids from “social lenders” should they opt for the “streamlined” listings), and, if Prosper is feeling up to it, giving some guidance re: the vision for the marketplace as a whole - and where it may be headed - especially given the (seemingly) contradictory, Hydra-like, directionality of late: the scaling back of listing details - to which many lenders have become accustomed to rely on - for some unknown subset of loans, coupled with, at the same time, enhanced emphasis on “social” features (such as Family & Friend Lending).

Are we on the way to a more granular marketplace - a more “streamlined” prime-ish market and a more “social” sub-prime-ish market - or are we just… confused? Pending some sort of vision statement, we’re left to speculate. And that’s not a comfortable position for anyone.