Will double fees reduce the number of borrowers on Prosper?

As was reported last week, Prosper increased origination fees for borrowers for new loans initiated after January 4th. Prosper announced it on their blog as a pricing change and a few blogs (including us) reported the change. For us it was largely overshadowed by the improvement in collections which Prosper also announced at the same time.

It wasn't until I read the article about the rate increase on Netbanker that I realized just how significant this rate increase is. Borrower origination fees have doubled. From Netbanker:

"As noted in our recent research report on the P2P lending market (here), the exchanges need to boost revenues to remain viable. Even with scale, a 1% borrower fee and 1% servicing fee just doesn't provide enough revenue with the relatively small loan sizes currently being funded.

For example, using Prosper's previous pricing on a typical $7,000 loan, it would earn about $130 in the first year, then another $50 for the remaining two years of the loan (see note 1), for a maximum of $230 in lifetime revenues per loan.

So until loan sizes increase dramatically as secured notes become more common, Prosper has raised its prices for the core portion of its loan demand, the alt-prime and subprime portion. The company left its superprime, class AA price alone because it competes with banks and credit unions for this type of borrower.

...most loan origination fees increased by 1 point, although C and D loans were increased 2 points. Looking at the company's mix of business during the first half of 2007, the new pricing would have doubled its loan origination revenue from about $500,000 to just over $1 million. The weighted average fee under the prior pricing was 1.2%, compared to 2.4% under the new formula."

Matt's article on how Prosper makes money gives us some insight on what Prosper's expenses and revenue might be. Prosper has also raised $40 million in venture capital. How much have they burned through? Do they need to raise fees?

How do Prosper borrowers feel about the rate increase? Why has the Prosper community, which is normally very critical of Prosper missteps, not complained about the change? Is this a natural evolution as P2P lending matures? (Lending Club has raised lending rates .5% but the money goes to lenders, not Lending Club.) Will this, over time, reduce the number of borrowers who are funded on Prosper? Will it force lenders to reduce their rates in order to make up the difference? Lots of questions and few answers...

P2P Lending Report: Disruptive service or market niche?

Veteran analyst Jim Bruene, who runs NetBanker, has just published a 48-page report about Prosper, Lending Club and Zopa - Person-to-Person Lending 2.0 - Disruptive service or market niche? As part of the research process he became a lender and a borrower at all three major U.S. P2P lending exchanges: Prosper , Zopa, and Lending Club. He also set up friends and family loans at Virgin Money USA and LoanBack.

The report was originally expected to come out earlier but due to the rapid changes in the market he delayed the report. As he explains on Netbanker, "I had originally intended on publishing it in early December. But as I was trying to wrap things up, Zopa launched its new U.S unit. So I stopped the presses and added an analysis of its unique model. Then as I was finishing that, Lending Club made a significant change last week, becoming a national lender instead of state-sanctioned one. That too is now in the report."

Here's the abstract:

Person-to-person lending is the perfect product for the Web 2.0-social-networked consumer. Why, then, has growth been relatively slow compared to other networked services? Because it’s a difficult business. Not only are P2P lenders competing with 20,000 other financial institutions for good borrowers, the are up against thousands of investment alternatives for funds to lend, all the while waging a fierce battle with fraudsters and deadbeats. It’s not a business for the faint of heart.

In this report, we look at the market as a whole, examining the strengths and weaknesses of existing products. We list opportunities both for web-based startups and existing financial institutions and lay out a ten-year market forecast. Finally, we take a close look at the four major U.S. P2P lenders: Prosper, Lending Club, Zopa and Virgin Money.

If you would like to have a copy of the report you can get it here. It's only $595.

Prosper and Lending Club to present at FINOVATE 2007

Online Financial Innovations, which publishes Netbanker, has announced FINOVATE 2007 where twenty of the most innovative companies in the financial, banking and lending industries will gather in New York to offer a glimpse of the future of online and mobile banking and personal finance. Lending Club and Prosper will both make seven minute presentations in front of an audience of 200 leading executives, investors, analysts, members of the press and bloggers. The demos will be followed by intimate networking sessions where the attendees will get access to the presenting companies and their executives. Tickets are $500 and there are 100 left. The conference will be on October 2nd in New York City.