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A New Lending Platform With a Singular Focus

by Peter Renton on August 27, 2013

BorrowersFirst logo

The two main p2p platforms in the U.S. have split personalities. They have to because they are catering to two different sides of their marketplaces: the lender and the borrower. But it makes for a more expensive and cumbersome website that splits resources and forces a mixed marketing message.

Jonathan Ende has a different idea. He is focusing exclusively on borrowers and creating a company and a website built from the ground up with one purpose: to delight borrowers. He calls his new company BorrowersFirst and they have been in stealth mode for many months. Recently, they invited me to their office to meet their team.

If it’s BorrowersFirst What About Investors?

You may wonder why I am featuring this new online lending platform that doesn’t cater to investors. Obviously, there is going to be an investor side of this company, it is just not an area that will have a public face or one they will be devoting much in the way of resources. Say what?

Unless you are brand new to the blog and p2p lending in general you will know there is a large oversupply of investors on both Prosper and particularly Lending Club today. That, combined with the fact that Ende, the BorrowersFirst Founder and CEO, is a 20+ year veteran on Wall Street, means that they are very confident the investor money will come. Ende even said this to me in our conversation:

If I wanted to raise $250 million through my network of contacts to invest in this asset class, I believe I could do that with very little trouble. Today.

Now, this could be the irrational exuberance of an overconfident CEO or it may in fact be true. Time will tell. But given what I am hearing from institutional investors today there is huge unmet demand for this asset class.

So, you are probably thinking now that regular investors are going to be completely shut out of this new platform. While it is true that BorrowersFirst is going to be for accredited investors only they would like to find ways for regular investors to participate at some point. More on that later.

How Exactly Are They Putting Borrowers First?

By not having to publicly appeal to investors they can focus their marketing on a single mission. Ende and his team have been talking with potential borrowers for months including several people who have obtained loans on Lending Club and Prosper. They have been learning the needs and wants of this group.

At BorrowersFirst they are planning on offering flexible payment schedules. Instead of one payment every month, borrowers could split them in two. They are also focused on a much simpler borrowing process. They found out that borrowers don’t so much care about the interest rate, the monthly payment is more important. So they will be emphasizing that point in the application process. They also intend to have friendlier collection practices, introduce reward programs and provide education.

They have also created an entire sister site called Money Stoop that is going to have a complete editorial team with the mission of making finance fun and engaging. Here Ende is going all out hiring Marcy Bloom, a former Conde Nast publisher, to manage the site content and there will be a team of top writers. His goal is to make Money Stoop one of the top finance sites online and BorrowersFirst will sponsor it.

A Team of Rock Stars

Ende has funded the entire operation himself and you can see he is firmly in control. The key to success, he believes, is to attract a rock star management team. He feels that he has done just that.

I was able to meet his entire management team either in person or by phone and while I can’t confirm they are rock stars, each person has an impressive resume with a great deal of experience in consumer lending.

Underwriting is a key area that can make or break a company in this industry. You want someone who knows consumer credit intimately and has built successful credit models in the past. Ben Duran is the Chief Risk Officer, he started his career in banking, built out the Decision Science and Fraud Risk departments at Dell Financial Services, and has been working with consumer credit models for 20+ years. Recently, at Bill Me Later (now owned by PayPal), he was responsible for building a model to make instant credit decisions for consumer online purchases. He has been poring over the Lending Club and Prosper credit models for months and believes he has built a better mousetrap that he will put to work at BorrowersFirst.

Most startups would hire a software developer and then buy a server somewhere to host their website and that would be the extent of their IT investment. This is not the case at BorrowersFirst. They have hired a top notch CTO, Terry Oehring, with 22 years of experience, who built a large IT security company and was most recently the CTO of WhyNotLeaseIt. He has brought on a team of seven developers, who he also describes as rock stars, to not just develop the website but to make it the fastest and most secure site in the industry.

They also have an experienced CMO, an E-Commerce guy and an experienced General Counsel. Where are they lacking? None of these people have any experience at Lending Club and Prosper. To overcome that deficiency Ende has brought on John Witchel, Co-Founder of Prosper, as a senior advisor.

Launching with a Lemonade Stand

Ende described the current offerings of Lending Club and Prosper as the online lending equivalent of a lemonade stand. They have one product and you can get a small or a large (a three year loan or a five year loan). But far from being critical of this approach he is embracing it.

To start, they are going to offer loans up to $35,000 in three and five-year loan terms. They will have a 640 FICO cut-off with a 6% – 30% APR and they are focusing on debt consolidation loans.

The BorrowersFirst website will launch in private beta in early October after a small direct mail campaign is sent to one state so they can test all their internal systems and website. A broader public launch should happen before the end of the year.

In their first 12 months, their goal is to issue $250 million in new loans. That is a lofty goal. Let’s keep this in mind, Prosper took five and a half years to reach $250 million in new loans and it took Lending Club nearly four years to do the same.

From Lemonade Stand to American Express

This is a theme that was repeated throughout my time with the BorrowersFirst team. They want to take online lending from a one product offering like the lemonade stand to a sophisticated and diversified company offering a suite of products similar in scope to an American Express.

They expect to expand into auto loans, home mortgages and credit cards. In fact anywhere a consumer obtains credit BorrowersFirst wants to play. Curiously, when I asked about small business lending they said this is not on their radar. They want to stay focused on consumer borrowers; there is plenty of runway for them in the $11+ trillion dollar consumer debt market.

The Opportunity for Investors

BorrowersFirst is designed for institutional investors although officially they will be open for any accredited investor. But here is the kicker – investors have to take whole loans so unless you are putting $5 million or more to work you will not be diversified enough to participate (assuming you need over 300 loans to build a properly diversified portfolio). They will not be splitting up loans into fractions nor will there be any public loan picking.

The advantage for very deep-pocketed investors is that BorrowersFirst will have the ability to tailor loans to specific needs. Want three-year loans with an expected return of 10%? No problem. Want to delve into the lower end of the credit spectrum and shoot for 14% returns (with a larger standard deviation), no problem as well.

So, how can regular investors participate? Initially, they won’t be able to. But this industry is maturing and I know of at least one potential offering that is considering investing on their platform that may allow retail investors on board. I am not able to share details yet but stay tuned.

Final Thoughts

On paper and in person BorrowersFirst seem like a strong team. But they have set themselves a high bar for success. The $250 million number will be a stretch but it is a good measuring stick to see if their confidence is justified. Twelve months ago I would have said their goal was impossible but when Lending Club issues $174 million in a single month you certainly can’t say that any more. And given their transparency Lending Club has created a very public model for success in this industry.

There are still many unknowns here. How will the BorrowersFirst team execute? Will they be able to retain their top talent? As I said none of their key management has any “in the trenches” experience at Lending Club or Prosper and John Witchel, their advisor has been gone from Prosper for five years now. So, that could work against them.

Right now BorrowersFirst are working with a blank sheet of paper so it all sounds very promising and I could tell the team was passionate about what they are doing. They have created a solid foundation, now they have to build a great company.

Full Disclosure: BorrowersFirst paid for me to fly to New York and meet with their team in person rather than conduct my interview via a conference line. I don’t believe this article was compromised by their offer to pay for my trip, other than the fact it is probably a little more detailed, but wanted you to know anyway.

Disclaimer: This article is provided for information purposes only. It is not investment advice nor is it an endorsement for investing in the loans of BorrowersFirst.

{ 20 comments… read them below or add one }

James Levy August 27, 2013 at 11:12 am

What an excellent write-up of a company visit. A company which I had not heard about before, but now is on my radar, and looks like it may well become a household name one day. Reading Lending Academy is like having an P2P Lending intelligence agent on my payroll. Thank Peter for the great info here.

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Peter Renton August 27, 2013 at 4:09 pm

Thanks James. Happy to be of service.

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Dan B August 27, 2013 at 12:06 pm

Just so I understand this clearly, are you saying that they paid for you to fly out there to meet with them……………or are you saying that they paid for you to fly out there & paid for you to meet with them? Knowing you, I’m assuming it is the former, but I’d personally be a lot more excited by the latter & I wouldn’t want others to think that of you. No need to thank me for looking out for you. :)

Hey, since you have come to expect these types of questions/observations from me, who am I to disappoint? :)

On a somewhat more serious note, when you wrote: “Unless you are brand new to the blog and p2p lending in general you will know there is a large oversupply of investors on both Prosper and particularly Lending Club today. That, combined with the fact that Ende, the BorrowersFirst Founder and CEO, is a 20+ year veteran on Wall Street, means that they are very confident the investor money will come. Ende even said this to me in our conversation: If I wanted to raise $250 million through my network of contacts to invest in this asset class, I believe I could do that with very little trouble. Today.”

So is this meant to suggest that their CEO is confident that he can “with very little trouble”, raise $250 million today from investors to fund his company, or that he is confident that he will have very little trouble finding enough “lenders” to fund $250 million worth of loans? Or are we saying………. $250 million to fund his company today & another $250 million to fund loans within the next 12 months?

No, I’m not going to go off on the “today” comment. It’s just too easy. :)

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Peter Renton August 27, 2013 at 4:14 pm

Just to be clear: they paid my airfare and one night’s accommodation in New York. I received no payment whatsoever on top of the expenses directly incurred.

As for the $250M, their CEO is confident that he can raise that money for investment in loans. I have no idea how much he is looking to raise to fund his company operations, if any, because right now he is funding the entire company himself.

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Andrew Johansen (Randawl) August 27, 2013 at 5:55 pm

This is exciting and interesting news for the P2P crowd. Quickly stymied in part by the knowledge that it is institution-focused.

“But this industry is maturing and I know of at least one potential offering that is considering investing on their platform that may allow retail investors on board. I am not able to share details yet but stay tuned.”

I know you probably can’t comment on this further, but most would infer that this means an ETF of sorts similar to what LCA provides but open to non-accredited investors. It’s less exciting for me personally since I enjoy significant benefits of individual loan selection than the returns that an “indexed” unsecured consumer credit fund could provide. However, I can see a large percentage of people (even some of those that frequent our forum) wanting a piece of something like this. It’s been a long time in the making.

I will be surprised if a fund first surfaces from BorrowersFirst’s originations than Lending Club’s, however.

(I appreciate the full disclosure.)

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Peter Renton August 27, 2013 at 8:22 pm

Randawl, You are right in assuming I cannot provide any more details on the offering looking to invest in BorrowersFirst. But I can tell you this. There are already plenty of private funds in existence today that invest in Lending Club and Prosper (for accredited investors). The oldest one started investing over two years ago. But as yet there are no mutual funds for regular investors.

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Joleran August 28, 2013 at 9:21 am

This is extremely worrying news as an individual investor, and I see this as a power grab to take over P2P lending as we know it.

Working with institutional lenders and tailoring the experience for the borrower, they will quickly steal away the most desirable loans from LC and Prosper if they handle implementation and brand awareness properly.

The idea of a selection of consumer credit mutual funds similar to what Randawl is proposing is the only saving grace for the individual investor looking to use consumer credit as an investment vehicle, and with sufficient diversity of fund offerings things could work out. If these funds are long in the coming, there is a market opening for a platform to open as a lender and a fund manager in one.

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Martin August 28, 2013 at 10:58 pm

Joleran, I don’t think Lending Club and Prosper will allow them to take away their market share. A consumer credit market is quite large and still available to absorb more borrowers. I am just puzzled with their claiming on more friendly collection for example. Are they going to pet those who are in delinquency?
I do not think we should be concerned. Now it looks to me like a scream in a dark room. And if I am wrong and it will lower LC and Prosper’s market share and there will be no more loans available for us, small guys, I can always move my money to the stock market.

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Peter Renton August 29, 2013 at 10:04 am

The total market for revolving consumer credit is around $850 billion. Of that, I have heard from both Lending Club and Prosper that $200-$300 billion is the real addressable market for p2p lending. So, right now there is plenty of room for more players.

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Joleran August 29, 2013 at 7:23 pm

I realize that the total amount of consumer credit easily allows for multiple players, but the real kicker is consumer awareness. When LC & Prosper are already having trouble finding enough borrowers to meet lender’s needs, it wouldn’t take much of a draw from their supply to start to cause some real issues. Now, if the release of the new platform increases awareness and brings in new borrowers, perhaps things will work out.

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Martin August 28, 2013 at 10:50 pm

So they are creating a closed group – a bank in essence. Nothing for small guys. I am not sure if they gain investors, maybe they will I can’t judge, but to me it sounds like a group of people are creating a payday loan company using investors for fundraising. To me it is not transparent and I am not interested.

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Peter Renton August 29, 2013 at 10:06 am

While it is very true BorrowersFirst will not be as transparent as Lending Club and Prosper I am not sure where you got the “pay day” concept from. The interest rates charged by BorrowersFirst will be similar to Lending Club and Prosper – which is a far cry from any pay day loan company.

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Dividend investing Martin August 29, 2013 at 11:25 am

That was just a far cry comparison. I didn’t mean that they are making it. I only wanted to express my frustration of a brick & stone office of a company outside of my reach as an investment opportunity. This was meant as derogatory remark, not description of their business model. And far away from saying LC or Prosper are payday lenders!

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Dave September 5, 2013 at 9:47 pm

Curious as to how this industry will develop with more companies competing over consumer debt the charge-offs will increase, interest rates would decrease, and risk would increase. What’s your projection?

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Peter Renton September 6, 2013 at 7:09 am

Dave, I think eventually your predictions will come true. When all the low hanging fruit have been taken and the industry becomes more competitive, it stands to reason that interest rates will fall which should lead to lower returns for investors. But there is a lot of runway left before that needs to happen, so I don’t expect much change in the short term.

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David September 14, 2013 at 7:56 pm

Hi Peter, First off, I’d like to say that I admire what you are doing and I appreciate the effort you are putting into your site and it is helping a lot of people including myself. It’s nice to have a sounding board to communicate with.
So, I’ve just opened an account with $2000 to start. Here is what I’ve calculated:
$2000
80 notes at $25 each
8% default rate.
~7 notes defaulted or $25×7 = $175
Principal = $2000-175= $1825
$1825 x average return 8.5% = $155
1825 + 155 = $1980, loss of $20 and no access to funds for 3 to 5 years.

Maybe I’m being overly pessimistic, but it seems like this is a bit of a zero sum game with the amount of defaults. Anyway…I’m already going ahead with it. I guess I see this as more of a charity or coup against the establishment. Anyway…thanks again for everything.

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Peter Renton September 15, 2013 at 7:37 am

David, I presume you have opened an account at Lending Club or Prosper, I have been an investor on both of those platforms for several years earning excellent returns. Here are my comments based on your predictions:
1. You are assuming that all of your defaults will happen immediately before a payment has been made. That is highly unlikely. Defaults happen over time and during that time you will be receiving principal and interest payments on the notes, thereby lessing the impact of a default.
2. These are full amortized loans. What this means is that principal and interest payments come in every month. So, access to your funds will happen gradually, over the three or five year period.
3. If you are receiving an average gross return of 8.5% this means you are investing in the lowest risk loans – so your default rate is extremely pessimistic for those loans.

You can always see the details of my returns – I make them available here:
http://www.lendacademy.com/my-returns-at-lending-club-and-prosper/

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David September 15, 2013 at 10:24 pm

That makes sense. I wasn’t taking into account the inflows before default. Thanks for clearing that up. I opened an account with Lending Club mainly because I read about a lawsuit with Prosper.

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Peter Renton September 16, 2013 at 4:54 pm

Glad you opened your account. Just an fyi…the lawsuit with Prosper was settled earlier this year and it pertained to the period before both Prosper and Lending Club were regulated by SEC – as in pre-2009.

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Dan March 12, 2014 at 3:58 pm

The real threat to all of P-to-P is when banks start to come out of their innovation freeze – and there are signs of thawing already.

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