US peer-to-peer lending group Prosper has reached the milestone of 100,000 members, adding weight to a lending model that sees banks cut out of the lending and borrowing equation.
The Prosper marketplace has seen $US20 million in loans funded by individuals who search and bid for loans that meet their criteria based on credit scores, debt-to-income ratios and historic default rates.
Prosper’s UK equivalent, Zopa, is now planning on entering the US market.
So will we see an equivalent model get up in Australia? It seems unlikely given we have a vastly different credit reporting environment to that which exists in the US and UK.
Firstly the Australian market is dominated by two credit bureaus – Baycorp Advantage and Dun & Bradstreet.
Australia’s Commonwealth Privacy Act restricts the amount of personal credit information held by these groups to “negative” information, as well as inquiries from potential creditors.
While banks may be willing to wear the risk associated with making credit decisions with such limited information, it’s unlikely that individuals will do the same.
Prosper works with credit reporting agency Experian to assign a credit grade to each of its borrowers, however the eBay-like nature of the marketplace also means borrowers are able to build up a track record that is unique to Prosper.
Once the marketplace becomes more established, it’s possible this track record could become just as important as the borrowers credit grade.
The small size of the Australian market, coupled with our credit reporting environment could rule out interest from Zopa or Prosper, but perhaps it just requires some innovative thinking from a non-bank player or broker looking to capitalise on the long tail.
Friday, November 10, 2006
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6 comments:
Charis,
I would also be sceptical on this, but not so much for Australia specific reasons. To me, the whole point of a bank is risk mitigation through aggregation - an individual loan going bad is not a problem when you have 1,000 similar loans all going well, but it is a problem when it is the only loan you have outstanding. A bad, unsecured, loan may lose you 25 to 75% of the amount outstanding. Not so bad with security - but these cost more to arrange and are more technically complex. In the event of default there is also the time taken to realise the security during which you are without income.
You could choose to fund portions of many loans - but then what are you doing that is different from a bank?
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I cannot understand your positive versus negative scoring.
Are you saying that Australian Banks assume a higher risk than their overseas counterparts? Are our default rate less predictable? I note that Profits from Australian Banks Personal Banking divisions appear to be booming - seems to indicate that the banks can accurately take and win these bets.
The biggest issue I see for Zopa / Prosper is a razor thin margin model coupled with a lack of population.
razor thin margins... and i doubt we have seen the ugly face of fraud in this sector yet. just wait until the service actually gets popular (100,000 accounts is NOT popular relative to internet services). just wait till the service hits 1M and i guarantee fraud will skyrocket. the business model is doomed to become nothing more than an advertising platform (a gimmick) for large lending institutions.
Hi,
My name is David Farias and I am the founder of www.fygo.com in the US. Our model is a bit different than Prosper and Zopa in that we encourage individuals to form trusted lending networks (friends and family) where your credit score does not really matter to people that will lend to you at a fair interest rate. In the US, roughly half of the consumers have what is considered a bad credit score; this means that they have done everthing from been late on a few accounts to defaulted on loans. FYGO believes that for these individuals the best deal they are going to get is from people they know and trust.
The US also has a huge pay day market where individuals take out small loans of $500-1000 US and pay interest rates as high as 300% APR. We feel FYGO's trusted networks could really help these consumers as well.
How do you think the FYGO model would play out in Australia?
Your Friend in Finance,
David Farias
Hi David,
I think FYGO is a great idea that would work well in almost any market. From talking to people in the Oz I've got a feeling some local players would like to experiment with a similar type of model that restricts lending to specific groups (be they family and friends or some other community group). Best of luck with your venture!
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