This article is a little history of Prosper. If you are reading this page, there is a good chance that you already know that Prosper is a Peer-to-Peer Lending company, but you might not know that it was the first one to operate in the United States. It was founded in 2005 by Chris Larsen and John Witchel. The full story however, begins much earlier.
In 1997, Chris Larsen co-founded e-Loan. His vision of the company was that it would allow both borrowers and lenders greater freedom to set interest rates. At the time of conception, there was a huge discrepancy between the interest rates paid to investors vs. the rates charged borrowers. The company was successful, and by 2000, its value was estimated at over a million. However, Larsen left the company when it was sold to Banco Popular in 2005.
In 2006, Prosper launched as the first peer-to-peer lending company in the United States, with Chris Larsen as CEO. Within one week of the initial launch date, it had attracted lenders with more than $750,000 to lend. Prosper also attracted a lot of media attention.
During its first three years of operations, Prosper gained more than 890,000 members, and generated $179 million in loans. It granted 29,000 loans.
To borrow or lend on Prosper, you must be a registered member, and you must be a citizen of the United States. Forty-seven states, and the District of Columbia allow peer-to-peer lending. Prosper requires a strict identification process, including social security number, driver’s license, a bank account number and a home address. Each prospective borrower is given a rating that reflects the amount of risk indicated by credit rating, credit history, income, and so on.
Initially there were a variety of ways that lenders could participate. They could contribute directly to a loan, or they could participate in a portfolio plan where they could create a set of criteria for lending and Prosper would administer the funds. There was also a group plan, which was intended to be a sort of reciprocal situation. The idea was that if the borrowers and lenders knew each other that the borrowers would have a greater emotional investment in repayment.
However, not everything went quite as planned. The rate of non-repayment was greater than originally anticipated. They had planned in a certain amount of loss, since it is and was inevitable that some people would not pay back the funds they had borrowed; but the rate exceeded expectation. The groups created opportunities for self-serving behavior, which also caused problems. In addition, there were regulatory issues that placed a major stumbling block on the road of Larsen’s concept.
As a result of these things, adjustments had to be made to the original plan. Larsen was reluctant to let go of the idea of the groups, and continued to tweak the original concept. He introduced a “floor” – a point below which bids could not be made on a particular loan, because excessively low bids would drive the price down so much that it would no longer be profitable.
In order for the Prosper method to work – the system where many lenders provide a portion of a loan – lenders do not lend directly to the borrower; instead, they purchase promissory notes. It was ruled that these notes constituted securities, which Prosper was not licensed to sell. November 4, 2008, Prosper was ordered to “cease and desist.” For nine months, it was in a holding pattern while its status was determined. In July of 2009, it did receive SEC approval, and was able to resume issuing new loans.
Meanwhile, Lending Club had applied for SEC approval before it got too big. It was in a position to take full advantage of Prospers nine-month quiet period, and remains a rival peer-to-peer lending platform.
Prosper was and is a company that operates solely through the Internet, and it is technology driven. It began as a wide-open Web 2.0 operation, but discovered as time went on that some controls were necessary to give structure and even to maintain fairness between lenders and borrowers.
Prosper has competitors. In the traditional world of banking and lending, one executive of the company commented that credit cards were actually Prosper’s biggest contender for business from the traditional credit industry.
Of course, Prosper also has competition from other peer-to-peer lenders. Lending Club remains one of the largest, but there are also companies such as Kiva and Zopa. Best Crowdfunding Websites features links to all four of these companies because each has a unique business set-up. The crowdfunding tip of the week for this area is examine each to find the one that best suits your particular investment or borrowing needs, keeping in mind that Prosper was first and has extensive experience as well as an excellent reputation.
Prosper and other peer-to-peer lenders stand a good chance to revolutionize traditional lending practices by cutting out the middle-man between borrowers and lenders. It also has the advantage of being convenient for today’s plugged-in millennium generation, as well as other busy people who frequently use the Internet to conduct business. It will be interesting to see what happens in this arena in the near and distant future.