groups

For Debate: Can Data from Social Networks be Used to Reduce Risks in P2P Lending?

wiseclerk 7 Comments

P2P Lending is mostly anonymous and loans are unsecured. To make the risks of lending to a stranger acceptable for lenders, p2p lending services had to provide models for the lenders to judge the dimension of the risk of not getting paid back.

The initial estimation of the risk-level could not come from the platform itself as it had no track record and could not build a model that “calculated” the level of risk involved for the lender. The consistent consequence was that nearly all p2p lenders relied on established third party providers for credit history data and credit scores. Prosper for example showed Experian data on default levels to be expected depending on credit grade.

Over the time it became obvious that the actual default levels at Prosper were much higher than the expected default levels based on Experian data. We don’t actually need to argue here what led to this (be it financial development of the economy, be it that p2p lending attracted bad risks, be it a poor validation process), but the result was that since defaults were much higher than expected, lender ROIs were much lower than expected at the time of the investment.

And this is not Prosper specific. Several other p2p lending services show clear signs that default levels will (or have) surpassed the initially published percentages of defaults to be expected based on external data.

Boober failed due to default levels, on Smava levels are higher than the Schufa percentages fore-casted, same is likely for Auxmoney defaults which will be higher then Schufa and Arvato Infoscore data suggested. The one exception from the rule is Zopa UK, which successfully manages to keep defaults low, as CEO Giles Andrews rightly points out.

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No more Prosper group fees

wiseclerk

Prosper.com announced that it will discontinue group fees in the near future for all new loans. Group fees, also called Group leader rewards or Group rewards allowed the group leader to charge a fee that is payed by borrowers with loans in this group.

The announcement:

At Prosper, we have been listening to your feedback regarding groups and group leader rewards.

The original philosophy behind Prosper Groups was to enable borrowers in close-knit communities to leverage the reputation and peer pressure of their group to attract more bids from lenders, resulting in potentially lower interest rates for borrowers, and lower default rates for lenders. We have found, after nearly two years of experience, that the strongest groups are comprised of close networks of friends and associates, where compensation is not the dominant motivation for the group leader’s services.

As a result, we are making changes to Prosper Groups. In the next month, Prosper will discontinue payment rewards on new loans for group leaders. Group leaders will continue to earn payment rewards on all eligible loans originating before the change. Group leaders can also receive referral rewards for referring borrowers or lenders to Prosper under our Referral Program.

We hope this change will encourage group leaders to grow their groups by inviting new members from their pre-existing social networks, turning Prosper Groups into a more powerful community development tool and making Prosper simpler for both borrowers and lenders.

For more details on these changes, please visit our Group Changes Frequently Asked Questions (FAQ).

Thank you for helping us become the Internet’s leading community lending site.

The original idea of the Prosper groups was, that social connections, that already existed offline, would be replicated within the Prosper group structure.
But most groups evolved online only with no previous offline connections between the members. The (the lack of) value of the groups for the Prosper concept has been discussed repeatedly in the Prosper forum. While some group leaders did a good job screening and vetting borrower applications and the group leader could be seen as a compensation for time invested; the majority of lenders seems to see the removal of group fees as a step in the right direction.

Dzogchen view on good groups

wiseclerk

Dzogchen analyses in this thread which Prosper groups have grown fast and larger. He uses own categories like 'distressed borrowers' to analyse group performance and found out that groups directed at some causes have experienced much higher defaults then others. E.g. in 'distressed borrowers' 12.1% are delinquent, while in 'entrepreneurs' it's 6.2% compared to 0.5 in 'computer users. techies'.

Following discussion included whether this allows predictions and if listings without groups are better risks. An asked for report was if borrowers that posted in the 'Review My Listing' did have a higher rate of defaults.

New group promotion tool for prosper group leaders

wiseclerk
Wiseclerk today released the prototype of a group promotion tool to be used for marketing purposes on websites.

The prototype displays all open listings of a given group. They look roughly like this:

Example display for group "Apple User Group":
prosper group promotion tool example

Example display for group "ProsperLenders":
prosper group promtotion tool

However this is only a picture. To see the full function, which includes automatic links to each of the listings check the the example in the upper right on this website (point the mouse over a listing).
The display will automatically update daily.
Be aware that while width is fixed, height of display will automatically change according to number of open listings. Therefore placement should be carefully selected, e.g. in left or right bar of a website.

To get the code for your website go here:
http://www.wiseclerk.com/group-promotion.php

As mentioned, this is a prototype.
I did choose a rather simple layout, allowing for the group leader to put his own headline above it, or to choose a border, or to place a prosper button alongside.

Feedback and suggestions are welcome!