P2P Lending and market leader advantage

Twit/blogger friend Mike Templeton, online manager of the Iowa CU League’s The Members Group, a payment processing CUSO, tweeted this morning that another twit/blogger friend, Ron “The Shevlinator” Shevlin was just quoted in an Aite Group report about large banks starting to have success with marketing online. This report reminded me that Ron recently commented on Open Source CU that he was secretly skeptical of the future of P2P Lending sites, (like Prosper), because someday banks will wake up and smell the coffee, and simply do it themselves.

Woah, Ron, hold on there. You may be right, but I think you are wrong on this point, and here’s why: Why haven’t banks and credit unions gone running to develop their own P2P Lending solution as of yet? For most FIs, there are many reasons: 1.) They haven’t heard of P2P Lending. 2.) They don’t see why lots of people would jump on this. 3.) They aren’t legally able to do it. 4.) They don’t see it as significantly different than what they are currently doing. 5.) It would canibalize their own lending business 6.) Their field of membership/geographic reach is too small to make the investment in technology infrastructure worthwhile 7.) Most FI’s don’t have the resources in time, expertise and dollars to invest in such an effort.

But say you ARE a huge bank, and do have the time, expertise, and resources to roll your own P2P Lending solution. You still have a number of strikes against you.

1.) Prosper has a multi-year headstart on you. This headstart is significant in customers, transactions, reputation, and expertise, both technological and tactical.
2.) Why would people choose you over Prosper? This is where reputation is all-important. If you’ve been fee’ing your customers to death, they’re not going to come running to you just because you announce you have P2P Lending.

I can hear the counter-argument now: “Prosper is a niche presence that most Americans have never heard of.”

Indeed, while the current membership of 725,000 is a small percentage of all Americans, it is nevertheless big enough to make it the fourth largest credit union in the nation if it were a credit union. And Prosper is growing fast, and is now starting to advertise. Also, while this membership is still relatively small, it is composed of the early adopters. While the mega-banks have advertising budgets that may exceed Propser’s entire operating budget, for the most part, the people who would go online and use P2P lending are not the ones that would be influenced by television and other mass-media. The people who utilize P2P Lending are the people who are involved in social media, such as blogging, Facebook, Twitter, LinkedIn, Brightkite, etc.

Prosper has what I call the eBay advantage. eBay is not the best auction technology that exists. I’m sure Christie’s and Sotheby’s have superior auction sites. But eBay is where everyone is, which is an upward cycle. All the buyers are there, which means that all the sellers go there, which means that all the buyers go there, etc. And the other thing which continues to make eBay the place to go for your online auctions is the issue of reputation. Hundreds of thousands of people have carefully managed their reputation in online buying and selling on eBay, and this reputation is not transferable. All these folks are not going to leave behind their reputation on which they’ve expended huge effort. And now that Prosper has community reputation features in P2P lending and borrowing, all the more reason why Prosper will remain the place to go in P2P Lending.

Okay, that’s my two cents, tell me why I’m wrong! 🙂

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11 Responses to “P2P Lending and market leader advantage”

  1. Ron Shevlin Says:

    I think, Morriss, that there are 2 predominant reasons why large FIs haven’t offered p2p:

    1) No pain. They simply haven’t experienced — or perceived to experience — any loss in business from the existing p2p platforms. I’m not arguing that their perception is right or wrong.

    2) It’s a radical change to their existing approach to risk and loan portfolio management.

    If they start feeling the pain, they’ll find ways to deal with #2.

  2. Jeffry Pilcher Says:

    If a CU hasn’t heard of P2P lending yet, they are facing bigger problems than “innovation.”

    I agree with Ron. If/when/once these P2P sites prove viable, the big banks will come in Microsoft-style and just rip the idea right from under their feet. Prosper’s momentum won’t mean anything. If B of A, Wells Fargo or WaMu wanted to offer P2P, they would eclipse Prosper’s loan volume in under a year. If they all moved at once, Prosper would be facing a very bleak future.

    First-to-market seldom yields the advantage(s) one might expect.

  3. Colin Says:

    I lean towards Morris here, but then I am biased {disclosure; CommunityLend].

    Banks are torn on many things at the moment that are connected. p2p is one of them. They are also torn on social media, and how that impacts their brand. The underlying thing that worries them is upsetting the share of market applecart. Financial services are a zero sum game, today, and yes p2p will canabilise. p2p will also require being ‘out there’ and Banks hate that. They want customers in their bank domain, so they can ‘own their customer’.

    This is where Ron starts to be right … when p2p begins to cause them pain from loss of market they will either participate in a Prosper type marketplace as some of the early leaders are doing quietly now, or look to buy/ build their way in. Part of the success factor in p2p is the view that customers can objectively see true alternatives for their banking. Its hard to see how one bank can offer that?

    A related question, is whether Banks will start to look different in the future, and some for example, might become product factories that source all their products through p2p.

    In any event, it is certain that being the first to market, and market leader places Prosper in control of its own destiny. p2p is probably the most watched disruptive influence in Banking strategy groups, while the product groups scratch their heads about where to make this fit.

  4. Brian Says:

    I’ve been equally baffled at the apparent lack of interest in P2P Lending by “traditional” financial institutions, although I suspect that there are many who are adopting a wait-and-see approach with the emerging trend. Not to mention; an industry magazine recently featured Prosper CEO Chris Larken on it’s cover, so clearly there’s some interest.

    Ron is undoubtedly correct in that the P2P volume has been nothing more than a drop in the lending bucket (if that), and so banks don’t feel threatened. I would enjoy seeing someone stick their neck out though and embrace the trend. Many banks still offer contract collection services, and could easily build upon that infrastructure.

    Social networking has spawned a number vendor-supplied or shareware options to build your own solution. Has anyone seen a similar offering for banks / credit unions / economic development entities to create their own P2P Lending network?

  5. tydae57 Says:

    There is a new p2p lending company that is coming out called Vestorbid.com, I found that company by searching the different P2P companies and I left my email for information and they sound easier that Prosper.com. I treid Prosper from a community computer that other more that likely tried it on as well, and they closed my account. They said it seemed fradulant. They left me upset and in a bad position, because my credit scores quailified for a loan. So I searched the web and found Vestorbid.com in which has the same criteria for qualifying as Prosper, but better. Visit their website and leave your email address and they will send you more information about their company.

  6. Morriss Partee Says:

    This company smells very fishy to me. I visited the Vestorbid.com site, and it looks like a booby trap for identity theft or some other no-good purpose. My advice: Do not visit the site, and certainly don’t type any information into the fields offered there. I don’t think a reputable financial company of any type would create such a poor site with no contact information of any kind on the About Us page. I checked out Vestorbid.com on WhoIs and all of the contact information is hidden. Not the tactic of a legitimate company.

  7. Laney Says:

    I just went on the site and saw the Vestorbid page, and it looks just like the Loanio site, also the About Us page shows about the company and they give a follow up number, I actually called and got lots of information from someone and I like the Company and I will be waiting for them to open their doors!!!

  8. bamalucky Says:

    Check out prospers.org if you want to know why Prosper.com will fail.

    the co-founder just left the company

  9. Manbird12000 Says:

    I think the only advantage that P2P Loaning has over conventional loan models, is that it gives a person a chance to get a loan that they would not otherwise be able to get, and at times be able to pay less interest.

    From a Borrower standpoint, you are still dealing with a bank that wants a monthly payment over a three year term.

    It’s a ‘one hand washing the other’ deal, borrows get their cash, lenders get a lucritive investment opportunity.

    It’s a difficult model to compete with, because of one simple reason:
    take a $100,000 loan
    1,000 people could easily invest $100 dollars on a risky bet that they might see some return, and the only people they have to answer to is their spouse.
    On the other hand, the consequences of a bank parting with $100k on a risky borrower is much greater, not only from the fact that they are fronting all the cash, but their criteria for loans on Risky to HR borrowers would not look too good from a stock standpoint.

    Banks borrow capital based on their own credit rating (stock price history and trend), I don’t see how lowering their standards to grab up a lion share of risky loan apps with flimsy guarantee’s of return. would help their bottom line or their growth? (e.g. ‘need money to build my garage’ or ‘trying to pay off credit debt because I’m not responsible with my money’)

    That’s what got us in this economic state in the first place (bad investment vehicles) The day Banks particpate in this niche market will be the day that ‘credit worthy’ people start flocking to P2P loaning solutions.

  10. Morriss Partee Says:

    Prosper.com is already open to institutional investors. I can’t locate information on how many banks are already participating. If anyone can locate that information, feel free to post here.

  11. Morriss Partee Says:

    Going back to Ron and Jeffry’s original comments here, when it comes to personal networks, first mover advantage has more advantage than you would think. We agree that Prosper is to lending what eBay is to auctions. We don’t see anyone (including Sotheby’s and Christies) making inroads into eBay’s dominance in auctions. I think you are overestimating Banks ability to flip a switch and suddenly dominate in this field. Especially since personal relationships are so fundamental to the business. Prosper continues to innovate in their relationship tools that benefit both borrowers and lenders. Also, many people will come to Prosper and other P2P lenders precisely BECAUSE they are not banks.

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