Last week I interviewed Jim Catlin, the EVP of Acquisitions and Risk for Prosper (affiliate link). He is the person that oversees borrower and lender volume as well as the risk management model for prospective borrowers on Prosper. He had some very interesting things to say about where Prosper is at and what he expects in the future. Here is the interview:
SLN: What is the feeling inside Prosper about the changes that were made in December?
Prosper: Everyone at Prosper is very excited about the change; it is a simpler and more efficient system for both the borrowers and lenders as it helps money move more quickly from lender to borrower.
SLN: Before the change only a small percentage of the loans were being funded. Now every loan posted is being funded within a day or two. Was this your expectation and do you worry about the oversupply of investor dollars here?
Prosper: First, you are absolutely right, all the listings are funding. This is what we always hoped and expected, which is partly enabled by this changeover. Now that we are setting the pricing on the listings according to the credit rating and term of the loan; now we don’t have mispriced listings appearing, all the loans on there now deserve to get funded. If we had listings that were appearing and not being funded that would be a sign that we are not doing a good enough job on the lender side. Following the changeover, now the listings disappear as soon as they are funded. There is some reduction in the number of listings because we are pricing the loans fairly whereas before people could request an interest rate that was not reasonable and those loans would just sit there and never get funded. Now, those people aren’t able to post a listing.
SLN: Looking at your latest financials from the third quarter 2010, it looked like you had enough cash to last you through the summer of this year, so is there something in the pipeline as far as a new injection of cash soon?
Prosper: It is a fair question to ask but if you know a lot about Prosper you will know that our list of backers is really a-list (for those interested here is a complete list of Prosper’s backers). We have had conversations with them (our investors) about the next injection and we have very strong support from them. It is clearly something that is important and we are feeling very confident about getting our next cash injection.
SLN: When do you expect Prosper will be cash flow positive?
Prosper: We are on a rapid growth trajectory, we had a good quarter of growth in the last quarter of last year. January was only slightly up over December, but we are heading for another strong month in February and we expect March to be very strong as well as the second quarter and up from there. You should see rapid growth from us from here on out. We need to be quite a bit bigger than we are now in order to be cash flow positive. We are working on a new forecast right now that has us breaking even in 2012.
SLN: What approximate level of loan volume will you need to achieve that?
Prosper: I think it is safe to say that it will need to be between $20 million and $30 million in loans per month depending on the different characteristics of the loans we are doing.
SLN: One question that I have been curious about, as well as some of our readers, is about your higher risk borrowers. Who does a debt consolidation loan at 31% and do you think interest rates at that level are a positive for the borrower?
Prosper: A lot of the demand for the loans we have seen, the last couple of years in particular, have been driven by decisions that banks have made. Partly based on the changes in regulations in the credit card business and partly based on the overall tough economic environment that has caused banks to pull back on their lending. One obvious candidate for a high interest loan at 30% say, is someone who has missed a couple of payments on their credit cards and suddenly their interest rate is jacked up to 30%. But the interest rate on credit cards doesn’t take into account all the costs, there are late fees and overlimit fees so the effective interest rate on a credit card can get very high, very quickly.
So looking at the higher risk people, and these people have credit scores in the high 600’s for the most part, getting that balance on to a simple, fully amortized three or five year loan, that person is paying off the debt with discipline in three or five years. They are paying less total interest and paying off the debt in less time than the 20 years it might take by just paying the minimum balance on their credit card. If they get a five year loan in some cases the payment will actually be lower. It is a smart financial move for someone who got their card rates jacked up. It helps get their debts paid off in a disciplined way and helps them avoid falling of the cliff financially down into pay day lending which can be very damaging.
SLN: Peer to peer lending obviously has the possibility of being a large multi billion dollar industry one day. What is your vision of this space and for Prosper over the next 3-5 years?
Prosper: In terms of growth there are a tremendous number of opportunities for generating growth both from direct channels and online referral and broader business development deals. There is a huge runway just based on the way the business works today without changing the platform at all. But if you stand back from that, the platform is incredibly flexible and can be used in a whole variety of different ways. Fundamentally what we are doing is connecting demand for money to sources of capital, so you can imagine a bunch of different applications of that type of platform for say businesses, that aren’t big enough to tap into Wall Street type money but may still want access to greater sources of capital. Auto loans is another vertical that could be very interesting and home improvement financing is also an interesting vertical.
The other thing that is worth noting is what the last year has been about for us. You’re familiar with our history and the quiet period that both Lending Club and Prosper went through in order to comply with the SEC regulations. The last year for us has been about building the foundation we need to grow in a smart, long term and solid way. The changes in the last year have been dramatic inside Prosper insofar as getting the right risk management in place, delivering and communicating the lender returns, and creating a very tight ship when it comes to operations and reporting. We’re playing for the long term.