Rob Suber, founder of Prosper Marketplace, discusses the evolution of the online marketplace lending business, how it is converging with the banking industry and explains why players are moving away from the original peer-to-peer ideals.
Here is the transcript of the video.
Emmanuel Daniel (ED): I’m very pleased to be able to speak to Ron Suber, the founder of Prosper Marketplace, the world’s first peer-to-peer lending and marketplace lending site. How big are you today? When did it start? What are the phases of the industry that you created?
Prosper’s journey as an online marketplace lending site
Ron Suber (RS): Thank you very much. It’s a pleasure to be here this morning. Prosper is now ten years old. When Prosper started in 2006, kind of like eBay, people were able to meet other people online. A borrower would tell their story and many investors would negotiate against each other to determine the interest rate and the dollars and the terms lent to the borrower. Then in Phase 2 of peer-to-peer, the credit model was established, so that the online marketplace, the peer-to-peer marketplace, determined the price and then people and people could connect. In the third phase, institutions joined so that people could lend to people, but institutions could now access people to lend directly for the very first time.
That was part of the access economy – where we shifted from the sharing economy to the access economy. We are now in the fourth phase of online lending, where people can lend and borrow to each other, peer-to-peer, and institutions can lend to people. And now securitisations happen, where asset managers are now lending to people, leveraging those loans – rating, securitising, and distributing those loans from people to pensions and foundations, endowments, annuation funds, and sovereign wealth funds. It is an exciting time. The evolution has been very fast.
ED: Your own background was in the securities industry. At which point did you get an epiphany, maybe to see that there was a prospect in this business? Was the entry easy for you? Or did it come through an opportunity? The reason I ask the question is I want to know how much of what P2P has become, actually puts its hand into something in the history of banking and pulls out from what banks were not doing correctly.
RS: Absolutely. In 2011, I was investing personally in loans at Lending Club and Prosper and then allocating money to hedge funds who were buying loans from online lenders.
ED: What was Prosper then at the time?
RS: Prosper was a 70-person, $5 million a month provider of online super-prime and prime consumers. As an investor investing $25.00 at that time, I really loved the benefits to the investor and to the borrower. I liked it so much, my partners and I went to Sequoia Capital and told them about this idea. Sequoia gave us $10 million and we put up the rest and we purchased control of Prosper.
My partners and I then took Prosper from January of 2013, from $9 million to $425 million a month, to 600 people, to this $2 billion entity in value because we were helping so many people. It has been an exciting opportunity, not just in consumer credit, but in student loans, mortgages, business loans and real estate loans. It is a very big opportunity.
ED: When we see what the peer-to-peer lending business has become today, they use all kinds of nomenclature. They say “marketplace lending.” They call themselves fintech. In China, they’re going off onto payments, wealth and new areas as a result. How much of the mechanics of the industry today is really technology? Is there a lot more work to be done on the technology front? How much of what actually happens is manual, behind the scenes, under the table and how much of it actually gets originated because there is an online marketplace?
RS: That is a great question and something we talk about a lot in the industry. I think that the online lending, the marketplace lending, and the peer-to-peer lending is a collision of the banking industry, Wall Street, and Silicon Valley. It is “fin” and “tech”. The “fin” side is the money side, the capital market side, the liability side of finding the people and the institutions to fund the loans – very important. Then there is the marketing side of finding the borrowers. Then there is the pricing credit risk and underwriting of determining the dollars, the term, and the interest rates for the money. It is really that combination of capital markets, marketing, technology, and credit. It’s a really interesting…
ED: My question is, how much work is there to be done on the technology side that could give this industry the fillip for being really much bigger that what it is today?
RS: It’s a great question again. I think that the technology is critical. So we can’t move from –
ED: Where is it today?
RS: We have moved just in the last two years to mobile. There’s so much technology to do in the automation of the process, in the use of big data machine learnings in the credit, and in the verification and validation of fraud to the borrowers and the investors. There is a lot of work to do in technology and that really brings us to what is happening in Asia and how it is growing, improving and changing with the technology that we are seeing from the Asian communities right now.
ED: In the U.S., it appears that partially because consumer credit is a highly developed industry, to succeed in peer-to-peer, you really need to keep looking for high-risk, sub-prime almost quality assets or borrowers. I do notice that even Prosper is going into automobile lending and second-hand cars and stuff like that. Is that a necessary phase because that is where the profitability of the business model is?
RS: Not necessarily. In the U.S., there’s $1 trillion of credit card debt and $1 trillion of revolving, large purchase, considered purchase. It is broken up by the super-prime, prime, near-prime and sub-prime. At Prosper, 640 on the FICO scale is the lowest we go. But you see other online lenders doing the 580 to 640 or 500 to 580 FICO score. So for Prosper, it’s still just the top, the super-prime and prime. Others are going all the way down.
ED: Actually, your problem is more on the mismatch between the interests that you have on the lender side, which you can’t find enough borrowers, right? Because more interest in people wanting to lend into the site, rather than you can find borrowers.
RS: It changes. In a marketplace like Uber, sometimes you have surge pricing because there’s too many people and not enough cars.
ED: Have you seen that?
RS: We absolutely have. Each day, each month it changes. Sometimes we have more money than borrowers and other times we have more borrowers than money. That’s the beauty of the marketplace model because you can adjust and make it an equilibrium so that the right side equals the left side.
Working with regulators
ED: So tell me a little bit about the conversations that you have with regulators. Because when regulators see this in banking, they think liquidity. Yes, the excuse is that these platforms don’t sit on the assets, but still if you look at what the regulators did to the securities industry, like they started to make exchanges look like institutions themselves by forcing them to take on capital and stuff. So what’s your conversation with regulators?
RS: We’re very proactive with the regulators. Prosper, for example, is SEC registered and files prospectuses every single day and Prosper is registered in all the states where we do borrowing and investing lending. We work with all the states. Then we have banks who buy our loans, so we work with their regulators – Federal Trade Commission (FTC), Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corp. (FDIC), and the Consumer Financial Protection Bureau (CFPB). We have a very open and proactive conversation.
ED: What’s on your mind at the moment? What are they most concerned with, given where the industry is today?
RS: They want to make sure that we’re helping the borrower; That we are not doing predatory lending; That we’re not doing sub-prime lending if we say we’re doing super-prime lending. They want to make sure that we’re being open and trustworthy and transparent in the fees and if there’s any pre-penalty fees, which there is not at Prosper. They want to know if we’re cross-selling other products to these people. We’ve been able to have a very good dialogue with the regulators.
ED: At the same time, there are specific regulators in different states who treat Prosper or any platform almost like they treat Uber or Airbnb. You’re here, you’re taking away customers from traditional banks; you are predatory. They tend to be more proactive in prescribing what you can do in those states.
RS: You’re absolutely right. There are some states that don’t want online lending for their residents. We talk to those regulators.
ED: What do you see as why those states behave that way? What’s the mindset behind it?
RS: I think they’re really concerned that the benefits to the residents of the state aren’t there. So, now we have the majority of the states and all the big states candidly allowing Prosper and the online lending peer-to-peer community to come. But in some states, they still don’t want us to be there. But I think it’s really just a matter of time where it will be everywhere. It will be ubiquitous. Think about the ETF industry. People pooh-poohed that as a fad and not a good thing and just a theme. But now it’s everywhere. And Uber is everywhere and Airbnb is everywhere. It is really just a matter of time. It’s still very early in the business.
The future of online lending
ED: Once peer-to-peer to everywhere and there’s like 100 peer-to-peer, what will the value proposition of Prosper be? Do you see yourself as an infrastructure play eventually? How do you think the marketplace will evolve, given your own personal way in which you are mapping the industry out in your own mind?
RS: We have something very unique – our ability to find the borrowers online with no branches and our ability to find the money and then our ability to do the credit and underwriting and servicing and verification. Banks are coming to us and asking us to work with them in different ways. Sometimes banks just want to buy loans from us. Sometimes banks want us to do a lending as a service (LAAS), where we make them have the ability to do online lending, where they maintain the brand and they can fund the loans and keep that relationship with the customers.
I think you’ll see a lot more banks and tech companies working with companies like Prosper, where we can power them like an Intel chip powers a computer.
ED: Actually, as that evolves, the way I see your own mind mapping this whole thing, you seem to take on an open platform where the incumbents can figure out where they want to play in it – securitisation, custodian, payments, all the other elements. You don’t seem to be like Uber and Airbnb. There’s no pushback in terms of how you think this industry should evolve and maybe recreate finance. In some ways, you’re actually thinking into a course where you might actually end up bringing it back to banking.
RS: That’s right. Think about Alibaba, Tencent and Amazon. They had cloud computing for their companies. They were so good at it, they took the cloud computing out and made it available to other companies. In Amazon’s case, it was AWS and now it’s the largest cloud hosting system for other companies. But it started out as a piece of Amazon. I think that’s what’s going to happen. We’re going to take these things that we do so well. Maybe the credit model. Maybe the verification model. Maybe the way we do servicing or borrower attraction or the funding and take these pieces and help the financial system and the banking system around the world use and be supportive of what we’re doing.
I think that’s a great opportunity. We talked about it a lot yesterday here at the conference. I look forward to talking about this in Singapore in a few weeks.
ED: If you take it the way that the Chinese especially have been taking their own road in evolving the industry, they put a wealth management component into that – Yirendai and our good friends, CreditEase, who is also a thought leader in his part of the world. Now Alipay and Lufax, right? The American players have specifically avoided taking that road of being broader in the businesses that they can call peer-to-peer. There’s no wealth component. There’s no payment component. Is that a self-restriction in their own minds or is there still a lot of work to be done on the asset side of the business?
RS: It’s coming in America also. I’m very good friends with Greg from Lufax and Ning from CreditEase and Yihan at Yirendai. We watched how they have put the gamification into the mobile model, how they have asset management and wealth management and some money transfer and some other payment solutions. What you are seeing in the U.S. now is that the online lenders, the peer-to-peer marketplace lenders, are creating asset management divisions and funds and deposits and other ways to help the investors and the borrower do more and have more access to not just the peer-to-peer borrowing and lending, but as you said, payments, money transfer, asset management and wealth management.
ED: But part of the reason the Chinese are taking that road is because they’ve got more lenders than they have borrowers.
ED: And the market is so hugely liquid. There’s this constant excess battering from the institutional investor community. You don’t see a lot of that in the U.S. How are institutional investors finding their way in this industry? It’s attractive if you’re a hedge fund and everything else is not giving you that kind of return anymore.
RS: Right. In 2013, as I mentioned, Prosper was just retail peer-to-peer, but we couldn’t find enough retail people here in the U.S., unlike in China, to fund all the borrowers who wanted to come to us. So as I told you, my background is from Wall Street and so we, my partners and I, went to Blackrock and Citigroup and Sorrels and Fortress and Third Point and all the big institutions and the business development companies and introduced them to this opportunity and made it operationally easy for them to work with us. Then we worked with the banks who could leverage those loans and the rating agencies who could rate them.
So it really is just three years old, the institutional nature in America, the banks and hedge funds and business development companies owning these loans. Now they want a lot of this because the yield is almost 8%.
ED: But they will put a certain pressure on the industry that will shape it a lot differently than what it is today. So how do you give them the pushback and keep it as pure as possible? If I’m an individual lender, that I can still go onto the site and be treated as valid as a huge institutional player.
RS: That’s an excellent question. Every day at Prosper, we have the retail fractional loan pool and we have the institutional pool. We make sure that there is no bias, that there is no allocation dissimilarities between the two pools and we make sure that the retail investors and the retail pool, the fractional pool, have all the loans they’re looking for. That there’s plenty of supply and that they’re getting the same type of loans as the institutions. The institutions, we have an active side where the institutions can come in and re-rank Prosper and buy the ones they want.
But the most popular way the institutions just want a passive allocation. It’s a beta trade, not an alpha trade. It’s an exposure access trade. That’s how we keep it separate and distinct and making sure that retail gets what it’s looking for fair and equal.
ED: But given the fact that the banks themselves might, if you take Dodd-Frank and how it might be modified, I don’t think it might be overall repealed, and if you take out the Volcker Rule, and that slide that you showed yesterday, which was very interesting, you actually treated the loans being originated like a tranche, almost the same as was it was in the 2008 crisis.
RS: No, not the same.
ED: And you actually package that and put it back into the market. So would the peer-to-peer players become guilty of the very thing that banks were guilty of almost ten years ago?
RS: In general, in the 2008 period, the industry took black bags you couldn’t see, and they put mortgages and things in the bags – no transparency – and securitised them. They didn’t have skin in the game and they didn’t do the servicing. We’re doing it very differently. These are clear bags. They are transparent and we’re still doing the servicing. So if the loans don’t work, we don’t make any money. That wasn’t true. There wasn’t the alignment between the securitisers and the buyers and the product. Here, it’s very open, very transparent, and if we don’t do it well, the institutions don’t buy and we don’t make any money.
That’s why we’re so open and so transparent in the way we do securitisation. We share the files publicly. Everybody knows what’s in each tranche in the securitisations that we do. It’s very different than it was.
ED: Something that is not being talked about this year yet and for some real reason, is what’s the data telling the players today? How many data points do you have on each borrower, each lender? What’s coming through on the data front? In fact, I see very few – in fact, I’ve not heard anything this year that tells me that the data is teaching the industry something.
RS: I think that’s a great question. We have more than 500 pieces of data on every single borrower. We publish that data at Prosper into what we call the ecosystem to Altify, DV01, PeerIQ, Orchard and Manja. We now have the data, not just coming from us, but now in this independent ecosystem that normalizes the data and does other views and visualisation of the data and risk and the performance and the default. I think this industry is as transparent as it’s ever been today and a lot of it is powered not just by us, but by us sharing data with the ecosystem, who then shows it in an independent way in a comparative way, for the investors and the borrowers.
ED: Final question – conversation with the banking industry. Is marketplace lending or peer-to-peer, which would you prefer is the terminology?
RS: We don’t really use peer-to-peer anymore. I like to call it online lending in a marketplace format. I think that’s what’s really happening. The number of banks calling us today who want to get involved in this is as high as it’s ever been. They missed online trading. They missed robo advisory. They missed ETFs. They’re not going to miss online lending.
ED: It’s funny that you keep repeating that, this ETF thing that they missed. ETF allows for stupidity to be part of the industry. It brings an entire industry to the lowest common denominator so that the excuse for that to be something called a professional – so there’s this model where an institution makes money from data as an excuse for that. Whereas, if you are a true believer in where the world is moving into an open marketplace, that broker model should no longer exist. So you seem to keep thinking of another role for the broker at every point as it evolves in your evolutionary model.
Just tying that to the last question, which was this conversation that you’re having with banks, and something I’d like you say in what you want to reply is this, that in the U.S., banks seem to be looking at the marketplace lenders as an origination platform, like I wasn’t able to originate 60,000 loans for mortgages in a month and here the platform can do that for me, so let me use them. But once they’re on board, it becomes traditional banking all over again. Whereas in other parts of the world, the banks are not even interested in that because they still get the customers they want to and marketplace lenders are small in that regard. So, I think I’m putting several things in there –
RS: So, think about the experience here in America. A person goes to the bank. It’s a manual process. You have to physically go there and it takes a lot of time. So, banks are saying no or taking a lot of time. What we’re able to do is we’re able to help the banks say yes and have a great experience, a net promoter score and a relationship with that customer. That’s what the banks are enjoying is our ability.
ED: It’s not your job as a marketplace lender. Your job is to create validity or authenticity for the industry itself. You should be true to the industry, not selling it out back to the banks.
RS: We’re doing both. People can come to us and we can help them and we can be part of the whole financial system and work with the banks, work with the tech companies. Work with the big investors and the individual investors.
ED: What is this contingent approach? Is there a fear that one or the other might not work or is there –
RS: It’s not a fear. It’s really a diversification and it’s an ability for us to take what we’ve done and distribute it widely. I think you’re going to see some big announcements with the online lending community and the banks, not just in North America, but in Europe and the Middle East and in Asia.