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Investor Demand Stronger Than Ever at Lending Club and Prosper

by Peter Renton on July 26, 2013

Investors large and small are finding out about p2p lending. And they are committing new money like never before. As many of us know we will live in a much more competitive environment for investors than we did six or even three months ago.

So much so that both Lending Club and Prosper cannot keep loans on their platform for very long at all. Earlier today I logged on to Lending Club and there were only 85 loans available. At Prosper there were just 55 loans. The vast majority of these loans at both companies were for the lower interest loans. Investors looking for the higher yield loans have far fewer choices than before.

I first wrote about the changes for p2p investors back in March when there was a huge influx of institutional investors. Then in May I talked about how to adjust to the new p2p lending reality where loans are snapped up quickly. Since then, even more investors have joined the p2p lending party.

Retail Investors Are Still Investing Steadily at Lending Club

One of my favorite places to go that graphically illustrates this new demand is the Nickel Steamroller home page. Scroll down to the bottom of the page and you will see a graphic that looks like this (there is also one for Prosper).

Lending Club loan inventory

The peaks are when Lending Club adds new loans at 6am, 10am, 2pm and 6pm PT every day (there are also small additions at 10pm and 2am). You can see how quickly investor demand comes in and fulfills the loans.

I have heard many complaints from individual investors who say they can no longer compete with large investors. And while it is true that many loans disappear within minutes or even seconds of being added to the platform, this is only happening to a very small percentage of loans. If most of the loans were being invested in immediately we would see an inverted “V” shape in the graphic above every time loans were added. But as you can see this is not happening.

What this tells me is that retail investors, as a whole, continue to find loans to invest in. Now, don’t get me wrong, if you have very specific filters then you may find it difficult to find loans but even today when there were just 85 loans available at Lending Club my Super Simple criteria found six loans.

I expect I will hear from investors who say that is all fine, but the loans that disappear in seconds are the best loans and we are left with lesser performing loans. That is quite possible, although we cannot know this for sure. Regardless, I believe that you can certainly earn an above average return even if you do miss out on a handful of the “best” loans.

High Yield Seekers at Prosper Need to be Quick

Now, over at Prosper it is a different story. If you are looking for the high yield loans then you are likely having some challenges the past few weeks. The vast majority of loans being added to the platform are AA, A and B grade loans. When I look at Nickel Steamroller’s detailed chart for Prosper in the last week most of the time there were less than 10 loans added each time for grades C and below. And these loans are typically fully invested within 20-30 minutes. So, if you can login at 9am and 5pm (Pacific) on weekdays and noon on weekends you will have the most luck.

Now, I am investing through the Prosper API and I am having no problem staying fully invested. But if I was having trouble putting my money to work then I would add B-grade loans into the mix. Some 3-year B-grade loans carry yields of above 15% and the 5-year loans can be over 17%. You can have a lot more choice at Prosper today it you add B-grade loans in to the mix.

Having said all that when I talk with Prosper management and they ask me what they can do better I say add more high high yield loans to the platform. This is what retail investors want.

So what do you think? Are you still able to stay fully invested? Or are you completely frustrated by the lack of loans that meet your criteria. I am always interested in your comments.

{ 27 comments… read them below or add one }

SarahV July 26, 2013 at 12:59 pm

I have about 3% of my investment sitting around in cash because I haven’t been finding much to invest in lately. I used to be able to keep it below $25 pretty much all the time.

This is on Folio, not LC or Prosper, so a slightly different issue I guess. But probably related. I’m guessing large institutional investors (and people using automated purchasing methods) aren’t selling (m)any $25 notes on Folio, so if they’re the ones doing all the buying, Folio will dry up a bit.

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Peter Renton July 26, 2013 at 1:34 pm

That is a good point Sarah. I think this influx of large investors will be impacting the secondary market too. I know of no large investor using Folio to sell $25 notes, or any denomination for that matter.

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Stu July 26, 2013 at 3:46 pm

hi Peter, I consistently have this problem at LC but not at Prosper. I buy different rated loans based on my own proprietary scorecard I put together and in an attempt to buy 10 loans at LC, I have had to buy 22 and still only have 8.

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Dan B July 26, 2013 at 5:59 pm

I’m probably misunderstanding you, but you”re not saying that (on average) only 36% of loans you pick are being issued, are you?

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Dennis July 26, 2013 at 6:24 pm

I’m having a terrible, frustrating time at Prosper. Loans disappear faster than I can hit the “invest now” button, and I’m talking (what seems like) in milliseconds sometimes. I notice that almost every note that hits the platform in the grades C through E is instantly 50% funded. The best borrower profiles in those grades get further funded (fully) in seconds; two 50%er’s working in tandem?? Thank heavens for Lending Club though because I’ve been able to keep adding money there while getting it put to work relatively fast.

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Peter Renton July 27, 2013 at 11:59 am

Thanks for sharing Dennis. Prosper needs more high yield loans on their platform there is no question about that – I think they need 10-20 times more than they currently have so that these large institutional investors can meet their quotas and leave some leftover for the rest of us.

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Chris July 26, 2013 at 9:52 pm

We are reaching a point of significant supply & demand imbalance. In this case, demand is outpacing supply which some could argue is a positive sign for both the technology and the sector. However if the imbalance continues at this pace demand will outpace supply to a point it becomes an elusive asset class. Granted, many people can voice a problem without offering a solution, so I will take a stab at it. In order to attempt to bring supply better in line with demand we need to increase it in at least two methods:

1. More lending platforms. The sheer recurrence of positive demand data month after month, year after year, indicates that we need more Lending Clubs and Prospers out there for investors to choose from. I know this is easier said that done, but at the end of the day surely the marketplace is growing large enough to support more than two “main” players.

2. Existing platforms need to offer larger loans: This would immediately increase supply by having the existing platforms offer $50k, $100k, and up loans. Obviously the credit profiles would be different – actually a number of things would have to be different. Nonetheless, the byproduct of larger loans means more opportunities for investors to take positions.

I will be the first to offer criticism to my proposed solutions as they are by no means perfect. The central point I am trying to make is that supply and demand are way off; and I would much rather see supply increase than demand decrease.

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Peter Renton July 27, 2013 at 12:07 pm

I think the crucial point you make here Chris is that we need more platforms. There is such huge investor demand that it will only be met by several new platforms gaining traction. And I don’t think we are just talking consumer loans. I think small business loan platforms can be just as, if not more, appealing for investors.

Increasing the loan size to $50K is something that others have suggested and will provide a bandaid solution. But until we have 10-20 platforms each issuing $100 million or more in loans a month I believe we will have undersupply of borrowers. I actually think we will get there but it is going to take a few years.

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CA-Lender July 31, 2013 at 3:38 pm

@Chris,

I was about the post the same comment, until I read yours and I couldn’t have written it better myself.

As for the increased loan amounts, I’d wouldn’t want Prosper or LC to jump into $50k or $100k notes, until there was several years of default history on the current maximum of $35k and how those default rates compare to the previous maximum of $25k. With that said, if the defaults aren’t significantly higher, then I’d love to see higher limits, even, more personalized limits based on each borrowers qualifications. Heck, if Bill Gates wanted to borrow on Prosper, would you want to limit him to only $100k?

There are also two other options to help solve this supply / demand imbalance. First one, is (and I hate even saying this) lower interest rates. Second is another round of heavy marketing and promotions to get new borrowers.

I know that Prosper has been marketing to repeater borrowers, but I haven’t seen or heard too much marketing to obtain new borrowers.

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Chris July 27, 2013 at 12:52 pm

You make a thought provoking point:

“But until we have 10-20 platforms each issuing $100 million or more in loans a month I believe we will have undersupply of borrowers.”

When I posted my previous comment I was envisioning (hoping) for at least 3 – 5 mainstream platforms. If we reach a point in the future to where there are 10 – 20 mainstream (high volume) platforms, I can’t help but wonder how the long established brick-and-mortar banking system could remain sustainable? One would assume that some number of those firms would simply also create investor accounts (as some of them have now already done). But if we reach a time when 10 – 20 platforms are handling $100M in monthly originations each, then in effect we have now created a real market for private and personal debt. If a true market or exchange system were to be developed for private debt at this scale, one could only ponder at the disruptive implications and opportunities for further innovation.

I keep coming back to the same conclusion: If I were a traditional commercial bank in the current era, I would be brainstorming on how to reinvent myself because dark days are ahead – especially if we were to ever reach a 10 – 20 platform system you propose.

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Peter Renton July 29, 2013 at 5:56 am

Banks are not going to take this lying down. They have been a highly profitable industry for decades, even centuries. I think we will see banks buying many of these 10-20 large platforms and operating them as independent divisions.

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White Coat Investor July 31, 2013 at 1:43 pm

More providers isn’t the solution. The last thing I want to do is deal with more providers. I’d just as soon have more notes available on Lending Club and all the others go out of business. It’s bad enough logging in to my two LC accounts and one prosper account frequently.

The problem is that smart investing in this asset class is providing such high returns that investors are flooding in, which will eventually, in turn drive down returns and drive some investors out until a balance is found. My solution may be to become one of the institutional investors. It’ll cost me some in fees, but save me a lot of time.

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Peter Renton July 31, 2013 at 9:03 pm

I disagree. More providers will help not because you should open an account but because many other investors will. This will mean less competition among investors at each individual platform. Just imagine if we have 100 times the amount of investor dollars at Lending Club in three years but only 10 times the number of borrowers. That will make today seem like the good old days. We want many other platforms so the investor demand can be spread among many different places.

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Matt Burton July 28, 2013 at 2:16 pm

Chris-
While I agree with Peter that the supply problem would be solved if 10-20 platforms matured I believe that we will see 50+ platforms emerge over the next 5 years since the cost for starting a new one is decreasing and the business model has been proven by LC and Prosper.

Matt

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Dan B July 28, 2013 at 10:45 pm

Matt………..Wow, it’s a shame that Peter frowns upon gambling on this blog because while there is no such thing as a sure thing, betting against your “50+ platforms emerging over the next 5 years” call is pretty damn close to a sure thing………….. though I’d want a definitive definition of what you mean by “emerge” before placing a wager :)

Also, just out of curiosity, how exactly has the business model been “proven” by LC & Prosper?

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Peter Renton July 29, 2013 at 6:02 am

While I can’t speak for Matt, I am happy to provide my own opinion. If Matt is talking about pure consumer lending platforms then I would agree that 50+ platforms is a stretch. But if we include online small business lending platforms then that number is certainly reachable. We are already at 10+ platforms today and when the JOBS Act is finally implemented there will be a gold rush of sorts here where I could easily see more than 50 platforms emerge within a couple of years. Now, not all of these will gain traction but many will. So, I don’t think we will see 50+ platforms doing $100 million in month in five years but we will have a vastly different environment to the one that exists today. That much I am quite sure about.

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Dan B July 29, 2013 at 2:53 pm

Of course it does depend on how we “define” all this. But I think the most important thing you said is “gain traction”. Now I don’t know what your definition of “gain traction” is…………. though I suspect it might be a bit more liberal than mine.

The way I see it is that in the entire time that either of us have been commenting about p2p, stretching back to 2009 (& through no fault of our own), zero new p2p companies that are available as investments to the general public have “gained traction” in the US.

I think it is safe to say that almost all of us here would like to see this flourish, but let us be realists & recognize that 5 years ago p2p in the US consisted of LC & Prosper……………….& today p2p in the US consists of the same 2 names. Have these 2 names so decimated their competition? No, because there have basically been no competitors. Have these 2 sucked up so much of the market so that there’s nothing left for potential competitors? No, that’s not it.
Has the business model really been completely proven here? Are customer acquisition costs that high? Is there just not enough money to be made here? Now I may not have the definitive answers to all of the above, but I’m pretty sure the answers are not going to be that pleasing to most people here.

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Matt Burton July 29, 2013 at 3:08 pm

We can agree to disagree on what it means to gain traction. My definition gain traction is companies doing +10 million in transactions. I disagree Lending Club and Prosper are the only players today. Daric is launching shortly. Circle Back Lending just launched (http://www.prweb.com/releases/2013/7/prweb10972468.htm). You are also ignoring all the international players. Ron Suber said at Lendit that this space is in top of the second inning. I agree with him. We still have a long game to be played.

Matt Burton July 29, 2013 at 9:15 am

Dan-
I am already tracking 23 platforms (http://www.orchard-app.com/wiki/index.php/Company_Directory) so I dont think that 50+ in 5 years is much of a stretch. In the Ad Tech space we saw the space go from 10 platforms in 2007 to over 500 platform by 2012. See http://www.lumapartners.com/resource-center/lumascapes-2/

In terms of business model Lending Club and Prosper proved that you can build a online origination platform for consumer debt. You don’t get a $1.5 billion dollar valuation from Google without proving your business model. Your welcome to bet against Google if you like but I welcome those odds.

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Dan B July 30, 2013 at 4:32 am

Matt…………You are correct about one thing & that is that we clearly have very different definitions. Your examples of Daric which hasn’t even launched & Circle Back which launched 12 minutes ago, as examples of companies that are gaining traction, leaves me almost speechless. And yes, I am ignoring the “international players”, because I was led to believe that this was a discussion of US p2p & as far as I know there are no “international players” gaining traction in the US. Am I mistaken or is this another case of a difference in definition?

I also disagree with your notion that LC & Prosper have proved their business model. Call me crazy, but I always thought that businesses are started with the goal of making money. Until you can show that you can consistently make money……………you haven’t proved your business model. BTW, I wouldn’t have a big problem betting against a Google investment or valuation, because I know that Google ( & various other companies) are making bets, nothing more. They know that some will work out fabulously, others not so much. Their slapping of a valuation doesn’t in itself prove that a business model works…………….Or do we need to visit the long list of optimistically valuated startup companies of the last 20 some years that aren’t even around anymore?

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Mr. 1500 July 31, 2013 at 12:32 pm

“The peaks are when Lending Club adds new loans at 6am, 10am, 2pm and 6pm ET every day…”

Didn’t you mean PST, not ET?

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Peter Renton July 31, 2013 at 1:26 pm

Indeed I did. That is now fixed. Nice catch.

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White Coat Investor July 31, 2013 at 1:39 pm

This problem is getting to be enough that I’m considering abandoning my personal efforts to invest in this asset class and paying someone else to manage it for me through one of the funds that does so. This is getting ridiculous. Just to manage a low five figure amount I have to log in multiple times a day? Give me a break. They’re rapidly running off any kind of serious individual investors due to the time commitments necessary. I check on my other asset classes once a quarter or less, why should I have to check on this one twice a day in order to keep things reinvested?
/rant

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Peter Renton July 31, 2013 at 9:05 pm

Lending Club needs automated investing and they need it yesterday. I am not sure what is taking them so long – I first talked to them about this over 12 months ago and back then they said they were working on it. Right now, the only way for most retail investors to stay fully invested is to login multiple times a day. That is not a sustainable long term solution.

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Mr. 1500 August 1, 2013 at 7:14 am

They sure do need automated investing! I’d kill for that! I do all of my investing on Prosper that way.

Is there an option for automated investing for the big dogs? Do you have to be an accredited investor? If you have written about it before, please point me to the post. Thank you!

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Peter Renton August 1, 2013 at 9:50 am

Most of the big dogs invest through the API in an automated way. The options for non-accredited investors are these:
http://nsrpremium.com/ – from Nickel Steamroller and uses the API (this is what I use)
https://www.interestradar.com/ – does not use the API but is an affordable option.

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Mr. 1500 August 1, 2013 at 9:19 pm

Thank you, much appreciated.

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