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TRANSCRIPT
P2P Lending
Product Code: VR0858MR
Published Date: October 2012
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TABLE OF CONTENTS
1 Executive Summary .............................................................................................................................. 6 2 Introduction ............................................................................................................................................ 8
2.1 Overview of the Report ............................................................................................................................ 8
2.2 Understanding P2P Lending .................................................................................................................... 9
2.3 Summary ............................................................................................................................................... 11
3 Players in Operation ............................................................................................................................ 12
3.1 Zopa UK ................................................................................................................................................. 12
3.2 Prosper – USA ....................................................................................................................................... 15
3.3 Lending Club – USA .............................................................................................................................. 17
3.4 Kiva – USA ............................................................................................................................................ 20
3.5 MicroPlace – USA.................................................................................................................................. 23
3.6 Duck9 – USA ......................................................................................................................................... 25
3.7 IOU Central – Canada ........................................................................................................................... 27
3.8 Smava – Germany ................................................................................................................................. 28
3.9 MYC4 – Denmark .................................................................................................................................. 30
3.10 TrustBuddy ............................................................................................................................................ 31
3.11 Kokos - Poland ...................................................................................................................................... 32
3.12 iGrin – Australia ..................................................................................................................................... 32
3.13 PPDai – China ....................................................................................................................................... 34
3.14 Fynanz – USA ........................................................................................................................................ 35
3.15 GlobeFunder – USA, India .................................................................................................................... 36
3.16 CommunityLend – Canada .................................................................................................................... 37
3.17 Lending Hub – Australia ........................................................................................................................ 38
3.18 Nexx – New Zealand ............................................................................................................................. 39
3.19 MoneyAuction ........................................................................................................................................ 41
3.20 Popfunding ............................................................................................................................................. 42
3.21 Auxmoney .............................................................................................................................................. 43
4 Pre-Launch or Inactive Players .......................................................................................................... 44
4.1 Zopa USA .............................................................................................................................................. 44
4.2 Zopa Italy ............................................................................................................................................... 45
4.3 Virgin Money USA ................................................................................................................................. 47
4.4 Boober Netherlands ............................................................................................................................... 48
4.5 Fairrates – Denmark .............................................................................................................................. 49
4.6 Frooble – Netherlands ........................................................................................................................... 50
4.7 Loanio – USA ......................................................................................................................................... 51
5 P2P Lending as a Disruptive Innovation ........................................................................................... 52
5.1 Summary ............................................................................................................................................... 53
6 Eliminating the Middleman and Promising Better Rates ................................................................ 54
6.1 The Marketing Challenge for P2P Lending ........................................................................................... 56
6.2 How Competitive are P2P Lending Rates? ........................................................................................... 58
7 Offering a More Satisfying Customer Experience ............................................................................ 68
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7.1 Disillusionment with Banks as a Driver of P2P Lending ........................................................................ 68
7.2 Social Interaction and the ‘Fun Factor’ as Drivers of P2P Lending ....................................................... 70
7.3 Philanthropy and Ethical Investing as Drivers of P2P Lending ............................................................. 78
8 Serving to the Consumer Loan Market ............................................................................................. 81
8.1 Customized Products ............................................................................................................................ 82
8.2 Flexible Loan Amounts .......................................................................................................................... 82
8.3 Flexible Interest Rates ........................................................................................................................... 82
8.4 Floating Rates ........................................................................................................................................ 82
8.5 Revolving Credit .................................................................................................................................... 82
8.6 Variable Loan Terms ............................................................................................................................. 83
8.7 Flexible Repayment Schedule ............................................................................................................... 83
8.8 Multiple Payment Options ...................................................................................................................... 83
8.9 Secured Loans....................................................................................................................................... 83
8.10 Co-signers/Guarantors .......................................................................................................................... 83
8.11 Early Repayment Penalties ................................................................................................................... 83
8.12 Interest-Only Loans ............................................................................................................................... 83
8.13 Customizing Credit Approval Criteria .................................................................................................... 84
9 Scaling Relationship Lending by Creating Community .................................................................. 87
9.1 Creation of a Borrower-Lender Community ........................................................................................... 87
9.2 Prosper Case Study: The Challenges of Managing an Online Community .......................................... 88
9.3 Personalized Loan Listings .................................................................................................................... 91
9.4 Lending Club’s LendingMatch Technology ........................................................................................... 96
9.5 The Potential of Online Reputation Scoring .......................................................................................... 96
10 The Trend Towards Transactional Lending .................................................................................... 100
10.1 Growth Requirements and Current Growth Trends ............................................................................. 100
10.2 Summary ............................................................................................................................................. 104
11 Hybrid Models – Blending P2P and Traditional Lending............................................................... 105
11.1 The Field Partner Approach ................................................................................................................ 105
11.2 The Friends and Family Approach ...................................................................................................... 108
11.3 Partnering with Financial Institutions ................................................................................................... 109
12 The Business Case for Banks .......................................................................................................... 111 13 Competing with P2P Lending ........................................................................................................... 113 14 Appendix ............................................................................................................................................ 114
14.1 Methodology ........................................................................................................................................ 114
14.2 Contact Us ........................................................................................................................................... 114
14.3 About Timetric ...................................................................................................................................... 114
14.4 Disclaimer ............................................................................................................................................ 115
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LIST OF FIGURES
Figure 1: Screenshot of the Zopa UK Homepage .................................................................................................................................. 12 Figure 2: Screenshot of Zopa UK’s Listings Page................................................................................................................................. 14 Figure 3: Screenshot of the Prosper Homepage ................................................................................................................................... 15 Figure 4: Screenshot of the Lending Club Homepage .......................................................................................................................... 17 Figure 5: Screenshot of Lending Club’s LendingMatch Process ......................................................................................................... 18 Figure 6: Screenshot of the Kiva Homepage ......................................................................................................................................... 20 Figure 7: Screenshot of the Kiva Work Process .................................................................................................................................... 21 Figure 8: Screenshot of Kiva’s Field Partner Profile ............................................................................................................................. 22 Figure 9: Screenshot of the MicroPlace Homepage .............................................................................................................................. 23 Figure 10: Screenshot of “How it Works” .............................................................................................................................................. 24 Figure 11: Screenshot of the Duck9 Homepage .................................................................................................................................... 25 Figure 12: Screenshot of the IOU Central Homepage ........................................................................................................................... 27 Figure 13: Screenshot of the Smava Homepage ................................................................................................................................... 28 Figure 14: Smava’s Loan Terms ............................................................................................................................................................. 29 Figure 15: Screenshot of the MYC4 Homepage ..................................................................................................................................... 30 Figure 16: Screenshot of the TrustBuddy Homepage ........................................................................................................................... 31 Figure 17: Screenshot of the Kokos Homepage .................................................................................................................................... 32 Figure 18: Screenshot of the iGrin Homepage ...................................................................................................................................... 33 Figure 19: Screenshot of the PPDai Homepage .................................................................................................................................... 34 Figure 20: Screenshot of the Fynanz Homepage .................................................................................................................................. 35 Figure 21: Screenshot of the GlobeFunder Homepage ......................................................................................................................... 36 Figure 22: Screenshot of the CommunityLend Homepage(Consumer Lending) ................................................................................. 37 Figure 23: Screenshot of the Lending Hub Homepage ......................................................................................................................... 38 Figure 24: Screenshot of the Nexx Homepage ...................................................................................................................................... 39 Figure 25: Screenshot of the MoneyAuction Homepage ...................................................................................................................... 41 Figure 26: Screenshot of Popfunding Homepage ................................................................................................................................. 42 Figure 27: Screenshot of the Auxmoney Homepage ............................................................................................................................. 43 Figure 28: Screenshot of Zopa’s Old US Homepage ............................................................................................................................. 44 Figure 29: Screenshot of the Zopa Italy Homepage .............................................................................................................................. 45 Figure 30: Screenshot of the Smartika Homepage ................................................................................................................................ 46 Figure 31: Screenshot of the Virgin Money USA Homepage (2010) ..................................................................................................... 47 Figure 32: Screenshot of Boober Netherlands Homepage ................................................................................................................... 48 Figure 33: Screenshot of Fairrates Homepage ...................................................................................................................................... 49 Figure 34: Screenshot of the Frooble Homepage .................................................................................................................................. 50 Figure 35: Screenshot of the Loanio Homepage ................................................................................................................................... 51 Figure 36: Screenshot of Slogans from the Zopa UK Homepage ......................................................................................................... 71 Figure 37: Screenshot of Listings Links from the Zopa UK Homepage ............................................................................................... 71 Figure 38: Screenshot of the Zopa UK Community Page ..................................................................................................................... 72 Figure 39: Screenshot of the Zopa Facebook Page .............................................................................................................................. 73 Figure 40: Screenshot of Prosper Days Advertisement ........................................................................................................................ 74 Figure 41: Screenshot of Slogan from the Lending Club Homepage ................................................................................................... 74 Figure 42: Featured Borrowers and Top Lender Listings from the Lending Club Homepage ............................................................ 75 Figure 43: Featured ‘Happy Member’ from the Lending Club Homepage ............................................................................................ 75 Figure 44: Map of Member Distribution from the Lending Club Homepage ........................................................................................ 76 Figure 45: Screenshot of Prosper Loan Listing ..................................................................................................................................... 91 Figure 46: Screenshot of Prosper’s Group Page ................................................................................................................................... 93 Figure 47: Lending Club Loan Originations by Monthly Lending ....................................................................................................... 101 Figure 48: Prosper Loan Growth (Since February 2006) ..................................................................................................................... 101 Figure 49: Total Lending Between Zopa Members Since launch ....................................................................................................... 102
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LIST OF TABLES
Table 1: Typical APR for Zopa UK 36-Month Loans of £1,000 and £15,000, by Credit Grade ............................................................. 60 Table 2: Typical APR for UK Top 10 Personal Loan Rates for ‘Excellent’ or ‘Good’ Credit ................................................................ 60 Table 3: Typical APR for Selected UK Leading Low Standard-Rate Credit Cards ............................................................................... 60 Table 4: Return on top 10 UK Savings Products ................................................................................................................................... 61 Table 5: Prosper 60-Day Average APR Ranges for Different Credit Grades, DTIs and Loan Amounts ............................................. 61 Table 6: Lending Club Rate Ranges by Credit Grade ............................................................................................................................ 61 Table 7: Selected US Banks’ Best Personal Loan Rates, APR ............................................................................................................. 62 Table 8: Selected Leading US Bank Credit Cards APRs ....................................................................................................................... 62 Table 9: Selected Leading US Bank 30k HELOCs Rates ....................................................................................................................... 62 Table 10: Selected Leading US Credit Union 30k HELOCs Rates ........................................................................................................ 62 Table 11: Prosper Estimated Average ROI for Selected Portfolio ........................................................................................................ 63 Table 12: Prosper Estimated Average ROI, All Loans ........................................................................................................................... 63 Table 13: Select Leading US Bank Three-Year CDs .............................................................................................................................. 63 Table 14: Select Leading US Bank One-Year CDs ................................................................................................................................. 63 Table 15: Smava Average APRs by Credit Grade .................................................................................................................................. 64 Table 16: Leading 36-Month Online Personal Loan Rates from National Providers, Germany .......................................................... 64 Table 17: Selected Leading 36-Month CDs, Germany ........................................................................................................................... 65 Table 18: Boober Average Interest Rates (Before Fees and Defaults) ................................................................................................. 65 Table 19: Selected Leading Bank Personal Loan Rates, Netherlands ................................................................................................. 65 Table 20: Top 10 Term Deposits – Netherlands, % APR ....................................................................................................................... 66 Table 21: Product features for Prosper, Zopa UK and Lending Club Loans ........................................................................................ 82 Table 22: Estimated size of the US Credit Underserved Market ........................................................................................................... 84
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1 Executive Summary
The concept of P2P lending started in around 2005, but growth was initially very slow and it took time for
people to understand the deliverables and advantages of social lending. The P2P lending market experienced
a remarkable boom in 2007, when a range of websites came into the picture and lifted the community lending
business. While it was a big challenge for marketing personnel to convince people about the new financing
service, especially when they were running with no major brand in their hand, they managed it successfully
with an innovative lending mechanism and attractive interest rates.
The idea behind this unique personal lending was disintermediation and trust in social networks. P2P lending
also has disruptive potential, as it provides a more satisfying banking experience for customers. It offers
transparency and disclosure, gives consumers more control over how their funds are invested, and makes
borrowing and lending a social experience. According to major P2P operators, the best P2P lending returns
yield from carefully selected subprime loans. Even if overall defaults are high in the sector, there is still a
segment of subprime borrowers who will repay their loans and this represents a large and lucrative market.
The challenge for lenders is in screening subprime borrowers to identify the creditworthy ones.
Many operators emerged and did well, but few are expected to survive
Since 2005, when P2P lending came into existence, many operators developed different business models and
lending mechanisms. However, very few continued for long or are still active in the lending marketplace. For
instance, Zopa which is successful in the UK, failed when it tried the same business in the US and Italy.
Boober, launched in 2007, was doing very well in the Netherlands but was closed down by Dutch regulators.
In the US many P2P operators such as Virgin Money and Loanio emerged, and had to withdraw in less than a
couple of years. Very few operators continued and managed challenges such as customer acquisition, the
financial crisis, and government regulations.
Delivering better interest rates with enhanced customer services
P2P lending is often said to be more economically efficient because it eliminates the middleman, and passes
the cost savings on to its end users: borrowers and lenders. As intermediaries between borrowers and lenders
(depositors), financial institutions take a spread between the interest they pay on deposits and the interest
they receive on loans. This spread is used to cover overhead costs, absorb loan losses and deliver returns to
shareholders. P2P marketplaces allow lenders and borrowers to transact directly. Without the intervention of a
middleman, the two parties can agree on a midway point and share the spread between them. The borrower
pays a lower rate and the lender earns a higher rate.
Attracting banks’ disappointed customers
A commonly held view is that a key driver of the P2P lending market is consumer disillusionment with the
banks’ perceived lack of customer advocacy, and hidden or unfair charges. Investors also find banks to be
very rigid with their credit criteria, lack the sense of individual treatment. The P2P mechanism, however,
allows borrowers and lenders the freedom to set credit criteria according to their own preferences and
provides greater flexibility than a bank in catering to non-standard borrowers. This is the reason why a person
may be rejected by banks but is approved by P2P companies.
Catering to the ‘long tail’ of the consumer loan market
By offering the freedom to create customized loans, P2P lending can actually cater to the long-tail market of
consumer lending. Banks have traditionally viewed their customers as a single mass market, and have taken
a one-size-fits-all approach to product design. Like the traditional bookstore, banks do not stock all of the loan
or investment products that a consumer might want, but stock an inventory of standard products matched to
those segments likely to yield the best return. P2P lending could cater to the long-tail market of consumer
lending by letting its users create loans according to their own specifications.
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Using social networking tools to scale relationship lending
The major pressure in the business of lending is to create a sense of trust between lenders and borrowers,
and the recovery of the lent amount. This is easier if the borrower and lender are already known to each other.
The social connections between users have the potential to capture the benefits of relationship lending. Being
socially connected to each other, lenders are better able to ascertain the creditworthiness of borrowers in a
better way, monitor their ongoing financial situation, provide forbearance in time of distress, and use social
pressure to enforce repayment. P2P lending utilizes a number of approaches to foster these social
connections and capitalize on them to improve loan performance. It works like traditional peer lending circles,
wherein communities of borrowers and lenders pool their savings and provide loans to one another.
Discovering new hybrid models to provide healthier customized service
In quest to achieve growth, P2P operators develop new lending models for the new generation. Lenders have
formed distribution partnerships with financial institutions, are blending individuals’ funds with bank funds in
hybrid P2P loans, and are forming two-way customer referral partnerships with banks. New operators are
more inclined towards these approaches as they look for ways to overcome the challenges of competing with
the incumbents on volume. Many P2P operators blend online person-to-person lending with offline
relationship lending, through cooperation with ‘field partners’ such as micro finance institutions that screen
and monitor borrowers and enforce repayments on behalf of lenders. In the meanwhile, lenders still select the
borrowers they wish to fund and assume the credit risk on the loan. The field partner model takes advantage
of the close relationship and special information that a loan officer has on borrowers by enabling loan officers
to endorse borrowers to lenders. The endorsement from a loan officer is a powerful one; an endorsement from
a friend of the lender will carry more weight than one from someone they do not know.
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2 Introduction
The P2P (person to person) lending business originated in the UK by Zopa in February 2005. The factors
behind the success of this particular lending mechanism are disintermediation, easy process and reliance on
existing social networks. There are many advantages that a P2P company can offer over banks, the most
attractive being more attractive rates than regular bank rates. Another benefit is saving processing time; the
process of the loan application and the transfer of funds take less time, and both borrower and lender can
access their money quicker. The comparatively simple and trouble-free nature of P2P lending is receiving
considerable media attention, and has featured in leading publications including The Economist, Wall Street
Journal, Forbes, and Smart Money, all of which agree that P2P lending has great potential and will be a key
financial trend in the coming decade.
2.1 Overview of the Report
This report includes a detailed study of P2P lending, case studies of running and inactive companies, its
potential impact on financial services, and the sector’s challenges, market operators, growth drivers and future
outlook. It critically analyses the disruptive potential of the service, in the context of both economic and
banking theory, and prevailing market realities. It discusses the business case for banks to enter the P2P
lending space and the ways in which banks can compete with specific threats posed by P2P lending without
engaging in the space directly.
The second part of this introduction defines P2P lending, and puts it in a historical and theoretical context. It
explains how P2P lending is essentially a bond market for individuals, and how for the first time gives
individual investors access to the consumer loan market, and individual borrowers access to private capital. It
further describes how P2P lending represents the coming together of the relationship and transactional
approaches to lending, and how it promises to use online social networking tools to make relationship lending
available on a mass scale for the first time.
Chapter 3: Gives a background of operators, including details of shareholders and funding, current
membership figures, and loan volumes. It outlines the operating model of each lender, including full details on
loan terms, as well as the business model and partnership opportunities for banks.
Chapter 4: Gives brief profiles of non-active and pre-launch operators.
Chapter 5: Talks about P2P lending as a disruptive innovation. P2P lending poses a direct challenge to the
established position of banks and financial institutions, as the primary intermediary between investors and
borrowers in this market. Indeed many P2P operators have built their business models and marketing
messages around the disintermediation of banks.
Chapter 6: Looks at the claim that P2P lending can deliver better rates through greater economic efficiency. It
looks at the operating costs of P2P operators relative to banks, discusses the challenges and costs involved
in marketing P2P lending to mainstream consumers, and then compares P2P lending rates with those
currently offered by financial institutions.
Chapter 7: Looks at the claim that P2P lending offers consumers a more satisfying customer experience than
that offered by mainstream banks. It discusses to what extent the use of P2P lending is driven by consumer
disillusionment with banks, consumer desire for more social interaction and ‘fun’ in their banking activities, and
consumer desire for more philanthropic and socially responsible investments.
Chapter 8: Analyses the extent to which P2P lending caters to the ‘long tail’ of consumer lending – those
niche markets not served by the offerings of mainstream banks. In this, it looks at how customizable and
flexible P2P lending’s product offerings and credit criteria are relative to banks.
Chapter 9: Which looks at the ways in which P2P lending capitalizes online social networking tools to scale
relationship lending beyond localized communities. It first discusses the creation of P2P borrower-lender
communities and features a case study on Prosper, highlighting the challenges of managing an online
community. It then discusses personalized loan listings, Prosper’s Groups system, Lending Club’s
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LendingMatch technology, Prosper’s endorsement system, and the potential of online reputation scoring, as
tools to enable relationship lending online.
Chapter 10: Looks at the trend towards transactional rather than relationship lending, and analyses the growth
in loan volume that will be needed to make this profitable. It highlights present growth trends and critically
analyses possible drivers of growth, including eBay-like network effects, the use of P2P lending in consumer
finance and eBay purchases, consumer demand for credit card consolidation, and the present credit crunch.
It also highlights the advantages that first movers enjoy in driving loan volume.
Chapter 11: Looks at hybrid approaches to P2P lending which blend online delivery with offline lending. These
include: the ‘field partner’ approach in which offline loan officers screen and monitor borrowers on behalf of
P2P lenders; the ‘friends and family’ approach in which the P2P operator simply formalizes an existing offline
lending relationship between people who already know one another; and the integration of P2P lending with
regular financial services through the blending of P2P loans with bank loans, referral of P2P lending
customers to additional mainstream financial products, the white-labeling of mainstream financial products for
P2P operators, and marketing and distribution partnerships between P2P operators and financial institutions.
Chapter 12: Presents the business case for banks to enter the P2P lending space. It looks at various
scenarios including banks establishing or acquiring their own P2P platforms, banks providing loans on existing
P2P platforms, banks referring borrowers and lenders to P2P lending sites, and banks forming marketing
relationships with P2P operators to boost their image and brands. The unique challenges and risks faced by
banks in this space are also discussed.
Chapter 13: Gives an overview of steps banks can take to counter the specific threats posed by P2P lending
without actually engaging in the space themselves.
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3 Players in Operation
3.1 Zopa UK
Website: www.uk.zopa.com
Zopa was launched in March 2005 by people with previous experience in the financial market, and is widely
regarded as the pioneer of online P2P lending. Zopa stands for Zone of Possible Agreement, a term from
business theory referring to the overlap between one person’s bottom line and another’s top line, which in
P2P lending refers to the maximum interest rate a borrower is willing to pay and the minimum rate at which a
lender is willing to loan.
Figure 1: Screenshot of the Zopa UK Homepage
Source: Zopa © VRL and Timetric
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4 Pre-Launch or Inactive Players
4.1 Zopa USA
Zopa launched its social lending site in December 2007, but it closed just XX months later. Zopa blamed the
US credit crisis for its failure in US market.
Figure 28: Screenshot of Zopa’s Old US Homepage
Source: Zopa © VRL and Timetric
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5 P2P Lending as a Disruptive Innovation
The term disruptive innovation was coined by Clayton Christensen (Harvard professor) to describe a new
business model or technology that unexpectedly displaces an established one. Commonly cited examples
include steam ships displacing sailing ships, mini steel mills displacing vertically integrated steel mills, and
Skype displacing long-distance telephone calls. When P2P lending first emerged in 2005–2006 there was a
lot of discussion as to whether it has the same disruptive potential.
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6 Eliminating the Middleman and Promising Better Rates
P2P lending is often said to be more economically efficient because it eliminates the middleman and passes
the cost savings on to its end users: borrowers and lenders. As intermediaries between borrowers and lenders
(depositors), financial institutions take a spread between the interest they pay on deposits and the interest
they receive on loans. This spread is used to cover overhead costs, absorb loan losses and deliver returns to
shareholders. P2P marketplaces allow lenders and borrowers to transact directly. Without the intervention of a
middleman, the two parties can agree on mutual terms and share the spread between them. The borrower
pays a lower rate and the lender earns a higher rate.
The UK:
Loans
Zopa’s rates for A* and A grade borrowers are similar to the best bank’s personal loan rates. Rates for all
grades are broadly similar to the best credit card standard rates.
Table 1: Typical APR for Zopa UK 36-Month Loans of £1,000 and £15,000, by Credit Grade
£1,000 £15,000
A* X.X X.X
A X.X X.X
B X.X X.X
C X.X X.X
Source: Zopa © VRL and Timetric
Table 2: Typical APR for UK Top 10 Personal Loan Rates for ‘Excellent’ or ‘Good’ Credit
Lender APR (%)
Lombard Direct Online loan X.X
Lloyds TSB personal loan X.X
Brittania Personal loan X.X
BarclayCard Personal Loan X.X
Direct Line Internet Loan X.X
Abbey Personal loan X.X
Bradford & Bingley Loan X.X
Smile Loan X.X
MINT Loan X.X
Source: www.moneysupermarket.com © VRL and Timetric
Table 3: Typical APR for Selected UK Leading Low Standard-Rate Credit Cards
Lender APR (%)
Barclay Card low rate special X.X
Capital One Platinum Exclusive X.X
Intelligent Finance Flat Rate Credit Card X.X
Capital One Platinum X.X
Cooperative bank clear X.X
Lloyds TSB Advance X.X
Goldfish X.X
Mint Credit Card X.X
PayPal Credit Card X.X
Source:www.moneysupermarket.com © VRL and Timetric
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7 Appendix
7.1 Methodology
Timetric’s dedicated research and analysis teams consist of experienced professionals with an
industry background in marketing, market research, consulting and advanced statistical expertise.
Timetric adheres to the Codes of Practice of the Market Research Society (www.mrs.org.uk) and
the Society of Competitive Intelligence Professionals (www.scip.org).
All Timetric databases are continuously updated and revised.
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