Ron Suber is President of Prosper, one of America’s first and largest peer-to-peer lenders.
Who is the typical user of Prosper?
Prosper is an online marketplace for credit that offers access to consumer loans. We focus on three types of borrowers. The first is the person who wants to consolidate high-interest debt with a loan that offers a competitively priced fixed-rate and a fixed-term. The second type of borrower is someone who needs money for a large purchase. This could include things like a medical procedure, a home improvement project, purchasing a car, or funding a special occasion or travel. We also have people who are entrepreneurs who want to borrow on their personal credit for the purpose of their business. For all of these borrowers, Prosper offers access to fixed-rate, fixed term loans that have no pre-payment penalty. On the other side, there are the investors – both individual and institutional – who want to help fund loan requests. We connect these three types of borrowers with these two types of investors.
I believe you are far more focused upon connecting institutional investors to borrowers, rather than being a pure peer-to-peer lender?
We are one of only two platforms in the US that offer individual investors access to marketplace lending. This group of investors has always been a core part of the Prosper platform, and we’re looking for new ways to expand access and distribution. The UK has been a leader in this area, and we’ve learned from what has happened in that market. Many institutions buy loans from Prosper and then make them available to retail people in exchange traded closed-end funds and in pool vehicles and in securitizations. We’re very focused on expanding access to retail investors in the U.S. with similar types of opportunities.
Are we seeing a fundamental change to the model of credit, or are we just seeing an evolution to an alternative model of credit?
I think we’re seeing a multi-generational change in the way that Gen X and Gen Y are doing everything from the way they book travel and listen to music, to the way they pay for things and move money, to the way they do banking, wealth management, borrow and invest. This creates a wave of opportunity that is far bigger than people think. A lot of times people just think these marketplaces are only doing debt consolidation, but that is just part of the total addressable market – it is much bigger than anyone believed. That’s really evident in the numbers. Just take a look at Prosper for a moment. In the first quarter of 2015, Prosper facilitated $595 million dollars in loans through its platform, and in the second quarter we did $912 million.
And that’s loans and margin lost to the traditional banking industry.
It’s important people understand that Prosper works very closely with banks. The cash from our investors is held at our bank partners, there are banks that are equity investors in the company, there are banks buying loans, there are also banks securitizing loans through Prosper, and all loans on the platform are issued by banks. It’s not accurate to say that Prosper doesn’t work with banks. We are very complementary in many ways.
There’s a view that the US model has forced new lenders to work with the banking community or have you actively sought out the banking community to work with?
It’s somewhere in between. There is a collision happening between Wall Street, Silicon Valley and the banks. We’re telling our story about the benefits to investors and the benefits to borrowers, and how the rating agencies will now rate the loans. As a result, banks are now interested in working with us in various ways, including the big banks who are buying loans from Prosper and securitizing them with a single A rating from the credit rating agencies, as we saw with the Citigroup securitization that included $377 million in loans originated through Prosper in July 2015.
How do you see the lending marketplace structuring itself over time? Is there a model you can envisage as to how you see everything working?
We’re connecting people who want to invest their money, and get their money back with a return. That’s debt crowdfunding. This is very different to equity crowdfunding, which is investing in projects or companies rather than lending. In debt crowdfunding, long term, I’d see a day when there is a portal where people in the UK and Europe, South and Latin America, Asia, North America and all over the world, could all go onto a site and invest money. I also see this portal where borrowers and investors from around the world can go and meet. This is the beginning of innovation in these markets, and there is big growth in front of us. I’m more excited to be in this industry today than I’ve ever been.
So you see a few global peer- to-peer funding platforms in the future?
I really do. As data becomes more readily available and funding and capabilities of the leading platforms can process that data and create access to terms and loans for different people in different areas, it is possible. I also think investors around the world are all looking for the same thing. For example, I just got back from travels around the world including China and Italy, telling the Prosper story. There is no place in the world that investors aren’t looking for yields of short duration that reports interest daily and pays monthly, and that’s exactly what we’re doing here. There are also many benefits to the borrower around speed and convenience. People who apply for a loan through Prosper can be at home 24 hours a day and have a great experience. They don’t have to put on a suit and walk out to the bank and hope that a loan officer would give him a loan, like my father did. Online marketplaces for credit are far more efficient for investors and borrowers, to meet and do business together.
In terms of access to data, that’s what is being addressed by companies like Klarna, who assess risk based on your zip code. However, in a lot of the emerging markets you don’t have access to that form of data enrichment.
What Klarna is doing is awesome. There’s a lot of data out there, and they’re leading the market. What’s most important is what do the platforms do with the data once they get it. In Asia, there’s the “BATS,” Which includes Baidu, Alibaba, Tencent and some of the alternative lending sites there. There’s so much data they have that the marketplace in Asia can utilize now to help them do credit. So it’s not just getting all this traditional and alternative data, but what we can do with machine learning and some of the other big data analytic systems and new developments out there. This is really just the beginning.
How do you see Prosper changing over the coming years?
There will be economic change, employment change, interest rate change and more. There will also be an explosion of new platforms for finance, and each of these platforms is going to have to adjust and integrate over time. That’s something that is going to tell a lot about the strengths of the different marketplaces: how are adjustments in rates, terms and credit made as the economy changes?
What will other P2P lenders be doing as you gear up for these changes?
I think we will end up like all industries, where there will be two or three leaders. If you look at drinks you have Coke and Pepsi; with cards you have MasterCard or Visa; or, in the USA, you have AT&T and Verizon in the cellular business. In each industry, you have two or three leaders and then you have a mid-group and a smaller group, and I think that’s what’s ahead for us in marketplace lending. The leaders are being established now and the leaders will pull away from the pack. You’ll see tremendous growth of Prosper Marketplace and Lending Club here in the USA, and then you’ll see leaders converge on each other on the different continents.
And then each of the players starts to merge and acquire?
Sure. It will start with mergers and acquisitions within the continents and then across the continents. Funding Circle is an example where they started in the UK and then came to the US with an acquisition. You will see more of that over time. Some of the firms in Asia may be forced to look to acquire in other parts of the world, but that will take time as they have a market that is much larger. For example, 500 million people of the 1.4 billion people of China are truly underbanked or poorly banked, given they don’t have the equivalent of credit unions and regional banks. So the population of China loves what peer-to-peer offers, giving them a place to borrow and invest.
So in five to ten years we have a global peer-to-peer credit marketplace that’s taken the consumer credit and small business market away from the banking community. Will the banking community then be primarily a source of the funding marketplaces for these peer-to-peer marketplaces?
You’re going to see banks and online marketplaces partner to give consumers access to the type of personal loans that Prosper offers access to. The bank introduces the customer to the product and then the marketplace does what it does best: assisting banks with underwriting, credit scores, customer service. Then the banks fund that loan. Banks often outsource key things, whether that’s credit cards or ATM networks, and this may be another thing that banks learn to deal with as an outsourced function.
Do the banks understand this?
Some do, but we have a lot of work to do. I spend a lot of my time doing what we call E, A & U, which is Education, Awareness and Understanding. I’ve visited many banks in this country and they are starting to become more aware of what we are doing. They are seeing the volume of loans we’re facilitating, the great customer service we’re providing and the accurate evaluations that we’re able to provide, as a financial technology company.
And I guess Lending Club’s IPO helped (Lending Club went public in December with an $8 billion IPO)?
Lending Club’s IPO was great for branding and awareness. I am a huge fan of what they’re doing, I think they’re great operators and they’re great leaders of this industry. We are definitely a one-two in the marketplace here and that gap is closing very rapidly.
I saw PayPal recently came out with an announcement of lending to merchants based on digital footprints of volume and value processed through the PayPal network. Do you see many new models coming out like this, using data analytics to offer alternative ways of doing things to your own model?
It’s even bigger than that. I think you’re going to see many of the large tech companies get interested in fintech. They are all able to take their networks and their large user base, and connect parties for anything from payments to loans. It’s just a matter of time.