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

INTRODUCTION TO P2P LENDING

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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:

P2P LENDER PROFILES

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• Prosper

• Lending Club

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

VS.

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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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KEY TAKEAWAYS

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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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Insurance Monitor firms this year and offers a few Facebook marketing tips for insurers.

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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

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DOUG MILLER

Director of Research Banking, Brokerage and Credit [email protected].

JOSHUA GRANDY

Director of Public Relations

646-876-7526

[email protected]

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.

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