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The three legs of marketplace lending business

By The Asian Banker Live

Rons Suber, founder and President of Prosper Marketplace, discusses the evolution of the online marketplace, how it is converging with the banking industry and explains why players are moving away from the original peer-to-peer ideals, at the Future of Finance Summit 2017 in Singapore

 

Here is the transcript: 

Ron: What I’m going to try to do together today is to tie together with Ning Tang and what Barney Frank talked about yesterday, and complement what my good friend Soul is gonna also talk about right after my presentation. And what’s clear to me from my travels around the world, from San Francisco to Sydney, from Tel Aviv to New York and Paris, all the way here to Asia, many times a year, is that we are in an innovation super cycle, that what this next generation, these young people here today and around the world, will not and are not doing anything the way we did in our older previous generations, from the way they get their music, to transportation, to movies, to saving and moving money, and investing and borrowing and lending, it’s all different. And I want to share with you some of my observations from around the world of why and how, and what this ecosystem and infrastructure looks like today. We’ll take a quick look back, and we’ll take a really god look forward about the key things for online lending to survive, and grow, and thrive around the world going forward.

I’m here in Asia so much that I have two Chinese names. And for those of you who can read Chinese, you see I am your old, wise uncle. And I’m just here to share my experiences with you. As I said, this is the agenda, but this is really what’s starting in our lives, that we are now in this opportunity to meet each other across everything we do in online marketplaces, whether we’re buying something, paying, or traveling. The largest transportation company on this planet doesn’t own one car. And the largest lodging place, marketplace, doesn’t own one place to stay. And that’s totally applicable to money with borrowing and lending.

What all of these marketplaces are trying to do, what Soul is trying to do, and what Prosper is trying to do is this. This is our mission. We’re trying make people’s lives better. We’re trying to bring them something that they couldn’t get before, with a better experience, a better price and speed. They’ll tell their friends. But it’s really about advancing their wellbeing, and often, their financial wellbeing.

If we take a quick look back, Prosper started ten years ago. It was like eBay online, where the investors would meet and negotiate against each other to set the price for the borrowers, and the borrowers would put their pictures and their story up online. And then it was all peer-to-peer. There were no institutions involved. It was really just people borrowing and lending with other people. It was the early days, ten years ago, of democratizing credit for the very first time. It all changed in 2013 when I entered the business, and we saw this big new focus on pricing, credit, risk, and underwriting. And we pushed on this concept we call E, A, and U, which is the education, awareness, and understanding of what we’re doing, so that this new generation would know we’re here.

The next slide is the picture to focus on. This is the three-legged stool that I introduced years ago. Every single marketplace has three legs of the stool. For us, it’s our product. It’s the super prime and prime U.S. consumer. We’re trying to show them it’s easier to borrow from us for debt consolidation or for large purchase and considered purchase. And we’re showing them new products and showing them that they can come back to us over the lifetime. The left leg is the capital side. It’s the money side. It’s the liability side. And we’re finding people, peer-to-peer, and institutions, and sovereign wealth funds, and family offices from around the world who want to own our loans.

And the middle leg is what we do every day. It’s the people. It’s the pricing, credit, risk, and underwriting. It’s the technology, accounting. It’s marketing. It’s what we do to become efficient online lenders and marketplaces for credit. And it happens in the U.S. for super prime, prime, near prime, and subprime consumers for small business, for student loans, for mortgages, for real estate, and soon, insurance. And this is all about balance. And when you hear about marketplace lending struggling, or a marketplace lender having a problem, it’s because one of the legs is longer than the other, or bent, or crooked. And this is about balance and equilibrium for our business.

You know this because sometimes when you go to Uber, there’s surge pricing, where there’s too many people and not enough drivers. And that happens in our industry as well. In 2014, we hit something called escape velocity. We went from $10 million a month to $400 million a month because people started to understand. We became automated and efficient. We got scale and really grew globally. And then these institutions, and listed funds, and mutual funds from London, and Israel, and Europe, South Korea, and Asia, all came to us to want to buy and own the product, the short duration credit, that we produce and manufacture.

Don’t really want to talk about 2016. It was a pretty stressful time for the industry. Lots of turbulence. Couple of platforms went into the gutter for a while. There was some skepticism not only of the press, but maybe ourselves as an industry. But we got together and reestablished trust, and transparency, and performance, and communicated around the world as an industry to make sure that we were here to stay, that we were built to last. And the leaders emerged, and the pack separated to now, where we have this thriving global industry. And Soul will talk a lot about this in Asia, where he’s one of the leaders in how we’re working with the banks, and we’re efficient and profitable companies. The loans aren’t just great, but the companies are now generating cash and earnings.

And we’ve secured long-term capital. We’ve learned the lessons of the left leg. We must have long-term committed capital to make sure that we grow and stay in equilibrium as an industry. To me, this is the state of the industry around the world. Prosper just did a $495 million securitization two weeks ago. 30 institutions, including here from Asia, came to us to buy our securitization of the loans that we produce. I think you’ll start seeing more of this around the world, where institutions want our product, but they want it in a format that looks like a beautiful, solid, liquid securitization.

We work very closely with the regulators around the world. We’ve met with the PBOC, the SEC, the states, all of the regulators to make sure that they understand who we are and who we aren’t; and what we’re doing; and how everybody wins; and how we’re helping provide liquidity, and transparency, and trust between borrowers and investors around the world. And innovation is really combined with agility. Everybody says, what makes you all so unique? Why are you so different than the banks and others? I think it’s because we are agile. We don’t have these big mainframes. We don’t have these green screens. We don’t have four companies that we bought and tried to put together. We are on efficient company, lacking technical debt, with agility and innovation.

And we’re expanding, which is why we’re here in Asia talking to investors and other companies about ways to use alternative data and other ways to make our businesses even bigger, and introducing our asset class to the loads of capital in Asia looking for the products we produce.

People ask me about this picture all the time. What does the whole industry’s ecosystem look like? You heard Barney Frank talk yesterday at length about derivatives and synthetics. And we’re really not allowing that to happen in this industry. So, let’s start from the primary market. That’s where you as people or institutions come to us, to Diunwong, to others, to buy our loans, to hold our loans. We service them. We do the marketing. We do the verification. And they own our loans and enjoy. We do the collections and handle everything.

The secondary market is starting to evolve around the world, where, for example, you buy loans and you want to buy loans. You two can now meet to buy and sell with each other, this over-the-counter secondary market. I think this is something that the industry’s tried to do now for a couple years. You’ll see it accelerate here towards the end of the year and next year, where we have this liquid secondary market that the primary market owners of our loans can now sell to others. And the buyers and sellers will come to us, tell us the price, and we will exchange the servicing contracts. Again, securitization. We did the first one. We actually started in 2014 with Black Rock and Citigroup and others to do this new structure.

And it is the financial engineers of Wall Street and around the world who are trying to create this derivative synthetic market that can be good, but can always be very dangerous. And we have to make sure that people can’t make bets on the good work that we do without owning the product. And so, I give a lot of caution to this last piece, as did Barney Frank. I think we’ve got something very special here, a trillion-dollar industry, as long as we focus on this picture – that we maintain trust and transparency, solid primary markets, liquid secondary markets, and excellent securitizations, with transparency and liquidity, and skin in the game.

Look how big this industry is. This is from 2015, the estimated number of aggregate originations. The opportunity is ten times this, 20 times this. It’s early. In baseball, there’s nine innings. I think we’re at the top of the third inning, and the game may go into overtime and extra innings. This can be much bigger the next time we meet at this conference.

So, a lot of talk yesterday about banks. Are we friends? Are we enemies? Are we frenemies? I’d like to go through the different ways that we are working with the banks. To many, this is the elephant in the room. It’s the elephant in the industry. How does it work? I think it works like this. So, today, we have many banks at Prosper who own our loans. They actually come to us. They understand what we do. How do we find the borrowers? How do we price the credit? How do we do verification and validation of identity and income and employment? How do we make sure that there’s isn’t a hacker, that there really is a borrower? How do we service the loans and do collections?

Once they get comfortable, they come back to us and say, we, the bank, would like to own these loans on the balance sheet of the bank, because what you’ve done is innovative. And you can find borrowers. We, the banks, have the lowest cost of capital and the most capital, and our profits as a bank go up by us holding consumer credit, student loan, mortgages, real estate, commercial, residential. So, we become, again, a source of assets, of performance for the banks. This is happening a lot. It’s happening in Asia, in Canada, in America, in the Middle East, in Europe, and now Latin America and South America. The banks have come to understand that the leaders can meet all of the requirements that the bank has and all of the requirements of the regulators of the banks. I think this will grow quite a bit from here.

LAAS. You will hear this over and over again. This is lending as a service, or a white label, where the banks come to us and say, yup, we’ve been buying your loans. We get it. What we now want to do is option two. We want to partner with you. The bank’s website will stay. The mobile app from the bank will stay. We, the online lender, will take our SDK, our software development kit, put it up inside their front page. When the bank customer comes to their website, it actually comes to us, where the bank will have told us their version of price and credit risk and underwriting, what their risk tolerance box is. And we will do that for the bank. We will then do the validation and verification of identity, income, employment, and show the bank the loan. The bank can fund the loan and hold it on its balance sheet, or pass and put some out into the marketplace, into the world of consumer credit online.

This is happening today. You’re going to see the big banks who’ve tried to build this, who don’t want to buy it, or not yet – want to do LAAS. A lot of conversations on option two. Option three, some banks come to us and say, we don’t want to own your loans, and we don’t want to do a white label LAAS solution. We just want to be your vendor. And that’s okay, too. They may want to just hold the cash that the investors, the retailer institutions, want to use tomorrow or the next day. They may want to leverage our loans. Many, many banks come to us, and say when an institution or a person has X amount of dollars of loans, send them to us and we will provide two or three or four times leverage. Some of them want to be trustee, and some of them want to securitize the loans. This is a great relationship also.

Option four is you will see some mergers and acquisitions. As we continue to grow and generate cash and earnings and EBITDA, you’ll see banks want to do mergers and acquisitions to get instant market share, instant brand, instant innovation, and the agility that perhaps they couldn’t do fast enough. You see companies doing option five. Goldman Sachs created Marcus. Spent years and hundreds of millions of dollars hiring hundreds of people to build their own. That’s cool. A lot of other banks are trying to do that today, and they’re realizing it’s a little harder than it looks. It takes a little longer, and it’s more expensive.

And then there’s this. Us, the online platforms, becoming banks. In the U.S., we talked a lot about the OCC fintech charter, where the regulators and the government in the U.S. are talking to us about us getting our own financial technology. I didn’t use the F-word – banks. Many of us rent charters in the U.S., and you see companies like SoFi in the U.S. and Zopa in the U.K. buying, building, raising capital to be banks, to buy banks, to start banks, to take deposits and do new things. So, this is really what’s happening in the banking world. There isn’t a bank that isn’t talking to us about one of these things. Many of them are just talking to themselves, and they’re sending people to talk to us. But this is a great opportunity.

For me, the keys to the future success are about loan performance. If the loans don’t perform, if our estimates of performance, our estimates of defaults, are wrong, it’s game over. As we set gross rates, expected returns, and net returns, we must be the canary in the coalmine. We must be the first ones to smell where there’s an unemployment issue, or a default issue, or an issue in the economy around the world. And we must change the gross coupon, change the expected defaults. To us, if loan performance isn’t there, the investors walk, and the securitizations breach, and nobody comes back. And so, we have to be really smart about maintaining equilibrium and maintaining loan performance – the gross coupon, the expected defaults, and the net returns through the cycle.

We must have impeccable data, and we must be transparent with the data. We have to share it with the ecosystem so that there are independent groups who can look at the data across multiple platforms and do daily valuation and other kinds of independent reviews, kind of like the app store in the Apple system. This is our ecosystem. This is where the data lives. And again, we must learn, as online lenders, as platforms, to be profitable, to generate earnings. Prosper’s ten years old. This is the first quarter that Prosper’s been profitable. And I think these are lessons that the industry must have. We must find the scale and the efficiency, and the ability to generate money on our own – that the venture capitalists and private equity groups won’t always be there to invest in us.

Customer acquisition is probably the special sauce. How do we find these people to do consumer credit, or students, or mortgages, or SMEs, or real estate? The fix and flip community, or the commercial lenders? What’s the secret to get to them? It isn’t direct mail, or snail mail, or paper. Although it’s very effective, that’s not the answer. It’s Facebook. It’s emails. It’s partnerships with credit education sites and bloggers, and so many other things. PFMs, personal financial management apps. That ability on the right side to be online and have a relationship with this next generation, where they’ll tell their friends. Our brand isn’t what we say, it’s what these borrowers tell everybody else when we’re not in the room, when we’re not in the conversation. Customer acquisition? One of the keys to profitability. Efficiency of that middle leg of the three-legged stool – very key. Focus on customer acquisition and automation.

The days of paper, the days of phone calls, the days of people coming to see us to talk to us – these borrowers, this next generation, they don’t really want to come see us, and they don’t really want us to call them. They want this to be an automated relationship, one where they can be on their own. They can be on their mobile app, wherever they are, whatever time of day it is, and have an automated relationship, where we can validate and verify who they are to make sure that this is a seamless relationship.

Automation is so important because at Prosper, one of the things we do when the borrower comes to us, and we have validation of identity, income, and employment, and the investors come to us, and we make this connection online. We guarantee the investors that if the borrower beats us on identity fraud, we, Prosper, will pay back the loan to the investors. So, we must really, really have trust and faith in investments, in automation of identity verification. And you know in an online business, people are trying to break this system and commit fraud all the time. And so, for me, these are the five keys to future success.

The global opportunity? If we don’t understand each other; if we don’t understand the norms in Asia, in North America; if we don’t communicate and really learn to listen and hear what the other person is trying to say and make investments in each other – time, money, political investments, regulatory investments – and real cooperation. Sometimes we give, sometimes we take. There are winners and losers. We must learn to cooperate. We have to have access to each other, and today’s conference is a great example of us sharing and us having access to information and best practice. We have to be engaged with this business, with this industry, and we have to learn to distribute our products. We can’t just have all U.S. investors and all U.S. borrowers. And what Soul’s gonna talk about is the ability to distribute these assets to work across the globe in many, many ways.

And we must have respect – respect for this opportunity, respect for the people, respect for our place in history. Think about the people who, ten years ago, had an idea that music would be downloaded. There would be no more players of music, no more CD cases. They are now the leaders of this new way of music, and movies, and Uber, and Airbnb, and all of the transportation and lodging. We have to respect our place in history, that ten and 20 years from now, people will look back on our opportunity to make online lending as great as it can be, where we’ll never go back to the old way.

So, the one thing I know for sure is that everything we’re doing, everything we’re trying to do, whether it’s in Asia, or the U.S., or anywhere in this industry, there’s nothing more powerful than advancing the financial wellbeing, making people’s lives better, and committing to this one thing. I look forward to more conversation today, and thank you very much for the opportunity. Thank you.

 


Keywords: Marketplace, Lending, Technology, Fintech, Partnerships, Data Transparency, Lending, Capitalization, Digitization
Institution: Prosper Marketplace
Country: Asia Pacific
Region: Asia Pacific
Guest: Ron Suber, Emmanuel Daniel
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