Another great month at Lending Club combined with a significantly down month at Prosper meant that we still haven’t quite broken $100 million in loans in one month yet. I thought it was a safe prediction that milestone would be broken in November. But Prosper was down over 20% from last month which certainly caught me by surprise. Let’s dig a bit deeper into the numbers at both companies.
Lending Club Issues $87.7 Million in Loans in November
The big news from Lending Club this month was crossing $1 billion in total loans issued, a milestone that happened on November 5th. But Lending Club certainly didn’t rest on their laurels. Despite a holiday shortened month in November they were up $5.7 million over the previous month.
There was a sharp uptick in average loan size this month at Lending Club. The average loan size was $13,741 which is the second highest on record, so plenty of large loans must have been issued this month. After hitting a 12-month low in September of $12,654 the average has increased significantly the last two months.
All in all it was a pretty typical month at Lending Club – up around 7% over the previous month. Below is their 18-month chart; the ever increasing black line is the three month moving average.
Prosper Issues $12.1 Million in Loans in November
Anyway you look at it this was a disappointing month at Prosper. After a record month in September of $15.8 million the trend has been downhill since then clearly demonstrated in the chart below. What is even more surprising is that the number of loans on their platform was the most ever – often more than 800 and sometimes as much as 1,000 loans available. For the first time since I started closely following this industry two years ago Prosper had consistently more loans available to investors than Lending Club this month.
Despite this increased choice in borrowers investing slowed down. Digging into the investor numbers, courtesy of Prosper Stats, it is pretty clear what happened. Worth-blanket2, by far the largest investor on Prosper, had a very small month by their standards. They invested just $661,000 which is well down from their 12-month average of $3.2 million. The number two investor, Index_Plus, had a pretty typical month and almost eclipsed Worth-blanket2 as the top investor with $612,000. The number three investor, MI2, was down 85% from last month and they invested a paltry $155,000 compared to the $1 million to $1.3 million of the previous three months.
So, two of the top three investors curtailed their investments sharply this month. If they had both had a typical month of investing that would have added around $3.6 million to the total and Prosper would have been close to a record month. The question is why did they stop investing?
I reached out to Prosper for an official response but received only a meaningless marketing-spin response back that wasn’t worth including. So, here is my theory. Back in April I discussed Prosper’s new bankruptcy remote vehicle, Prosper Funding LLC, that will protect Prosper investors in the event of a bankruptcy. Well, there was a lot of activity with the Prosper Funding SEC registration this month. This could well indicate that approval of this entity is imminent. Prosper would not commet on this whatsoever because they are in a quiet period with this registration. It makes sense, though. If this registration is imminent, and the big investors would likely know this, that they may be sitting on the sidelines until the registration is in place.
With the huge increase in borrower volume this month it seems to me that maybe Prosper is gearing up for an onslaught of investor money. Now, I acknowledge this is an optimistic view and I could well be wrong but I am not writing off Prosper just yet.
Below is their 18-month chart which until recently was looking quite healthy.
I was wondering about Prosper originations as well, seeing the number of loans on their site. But could they simply be loans that have not been funded piling up? LC would be averaging 2.9 million in loans funded per day, which means around 210 loans are issued per day and need to be freshly replaced. Whereas Prosper would be around 420k per day or 55 loans per day.
Jef, As you say and as Bryce points out below the number of loans on the platform is pretty much irrelevant to origination volume. Prosper had their best month when they averaged less than 100 loans per day. Lending Club had 2,000+ loans on the platform in June yet did only 60% of the loan volume as this past month.
Haha, I’m waiting for the people to come out and call this the “Great Prosper Loan Surplus of 2012,” opposite and equally incorrect as Lending Club’s so-called shortage the same month. People incorrectly perceive the instantaneous number of loans on the platform as the volume, when how fast they come off the platform is the other variable necessary.
We all should see the value of these institutional investors as helping speed the P2P platforms to profitability and stability.
Bryce, Your last point is the main reason why I have always been happy to see the interest from institutional investors, particularly at Prosper. We need these businesses to scale far beyond where they are today to create a sustainable business model for the long term.
I’ve been a long term Prosper Investor (EarlyRiser & Starica) and I’ve got a significant chuck of money there. I hope your theory about SEC registration is correct but I fear that Prosper is running out of capital and big investors are bailing. The genius behind Lendstats has been selling even his well-performing Prosper loans like nobody’s business and the slowdown for other top lenders is very concerning.
I have ceased all new loans in Prosper and I’m now building up my balance in LC. I hope Prosper survives, but I’m fearful they are not a going concern. Maybe LC will buy Prosper now that LC is cash flow positive.
EarlyRiser, There is no question that Prosper is a higher risk investment than LC right now. And Prosper will run out of cash in the first half of next year without another round of funding. But I think this funding will be forthcoming. And Prosper will continue to improve throughout 2013.
EarlyRiser and Peter,
The fact that LC has registered cash positive recently signals that p2p lending is becoming an ever more promising business model. And unlike already mature or saturated industry sectors such as personal computers or even tablets, this is a fledgling space with so much more room to grow. So it is not a zero-sum game at this point yet. Success on one platform (LC) should bode well for the other (Prosper). On the other hand, failure of one could cast doubts on the entire industry.
I am just wondering whether if institutional investment in the loans were to even out between the two platforms, would or could both LC and Prosper be cash positive–or at least become cash positive in the near future? If the answer to that question is “Yes,” then the shortfall Prosper is experiencing right now has more to do with their execution than the industry itself. P2P lending could still comfortably accommodate these two major players. After all, they don’t employ the same strategies. (For lower loan grades such as E and HR, it appears to me that Prosper seems to be stealing some business from payday loan shops, but LC doesn’t cater to that kind of borrowers.)
Well, just a thought.
KC, I think that the main reason that Prosper is not as big as Lending Club right now is because of execution. I think there is plenty of money, both from retail and institutional investors, to get both companies to profitability in the near future. For example, Prosper has decided not to go the LC Advisors route and as we have seen in the last 18 months having their own funds has been a big catalyst of growth for LC.
Yeah, I agree with Peter in that I wouldn’t try to draw too many conclusions from one months results at Prosper. Let’s see how December & January numbers turn out.
@EarlyRiser:
You shouldn’t infer too much from “The genius behind Lendstats has been selling even his well-performing Prosper loans like nobody’s business”. He has been listing and selling his notes with a 3-4% premium for many years. It’s part of his strategy.
Besides the status of the Bankruptcy Entity that Prosper is about to finalize, I think the other issue that has some people hesitant to put new money to work is the lawsuit against Prosper which is supposed to be settled sometime later this month.
CA-Lender, It is true the judge may issue a ruling this month but the class action lawsuit against Prosper may not be settled for a while to come. If Prosper wins the case is over, but if they lose there may well be negotiations. Of course, there is also the possibility of appeals which may also cause it to drag out.
I don’t get it, Prosper had some great investor incentives during the month of November, 2% cash back on All notes higher than D and 3% cash back on certain featured listings. I’m absolutely shocked that even with these incentives, Prosper had such a down month.
My sense is (and I have not been told this by anyone at Prosper) is that they knew there might be a slowdown in the institutional investor side so they ran these investor incentives to try and cushion the blow. From what I can tell investment from retail investors was up in November, but not nearly enough to make up for the shortfall in the institutional money.
I disagree on how great the incentives were. Rarely will any incentive pull me away from my criteria unless it offsets the lower return by those featured listings. Less than 0.1% of my returns have been from incentives. I am likely not alone.
Jason
Good to hear from you Jason. I am also not swayed by these incentives but it does seem that plenty of people are. I just let me AQI’s run and pretty much ignore the cash bonuses on offer.
@Bilgefisher,
I (and I’m sure some of the other larger lenders), received a special incentive email from Joseph Toms, which offered a 5% incentive to invest in “Featured notes” from Nov 22-26th.
Many of those notes were well in my criteria (C-HR), and we’re already 40 or 50% funded. Seemed like they wanted to make sure to get those fully funded before the end of the month.
Ironically, many of these notes were ones that I was going to invest in anyway.
Is the 5% incentive one of the largest ones Prosper has offered?
I think 5% is definitely the largest.
In 2011 (can remember the month, but it was mid year), I received a special 4% bonus, and a spreadsheet for notes to invest in for the 4%, but never 5%. It certainly had me wondering how much expense Prosper was willing to go to close November without too much of a drop from Oct numbers.
Thanks for the update on Prosper’s bankruptcy remote.
Peter,
Since Prosper is not making money it thought the below excerpt from the S-1 document was interesting………
Annualized rate currently set at 1% per annum of outstanding principal balance, but which Prosper Funding may increase in the future to an amount greater than 1% but less than or equal to 3% per annum. Any change to the servicing fee will only apply to Notes offered and sold after the date of the change.
………I would assume that they will raise the service fees on the loans sooner than later to bridge the gap to profitability.
Jack, I would be very surprised if there is a change in the 1% service fee at Prosper any time soon. With Lending Club at 1% and Prosper still in need of new investor money I simply cannot imagine an increase here. Of course, down the road anything could happen but I doubt we will see any change in service fees at Prosper in the next 12 months at least.
What they might do is increase service fees on loans paid off early because here their revenue lags far behind Lending Club. I wrote about service fees a couple of months ago:
https://www.lendacademy.com/an-in-depth-look-at-investor-service-fees/
Could part of the problem been TOO much supply of borrowers?
With almost 1000 notes available, and without worth-blanket2 funding 90% of the notes that he likes, could it been that too much investor money was spread around these 1000 notes and many never reached 70% and ended up unfunded?
Interesting idea. That may have worked against them as investor money was spread across more loans. Frankly, I have been surprised by how many loans they have on the platform right now. That is why I thought they must be gearing up for an influx of investor money. Will be interesting to see what December brings.