Prosper has filed an S-1. I first posted about this interesting peer to peer lending network back in 2006. At the time I thought of it as a real pure play - a marketplace that utilized the ubiquity of the internet to help people connect and loan money to each other. Over the years I've been watching the company and while it has grown to over 830,000 members and has done over $178,000,000 in loan volume, it has not reached its potential.
Now I don't know what the actual financials of the company are. But their S-1 states that they charge 3% per loan and up to 1% per year in loan servicing fees. Based on their stated $178 mm in loan volume, that would be $5.3 mm in revenue on loan volume plus another $5.3 mm on loan servicing for the three years they have been in business. That's good revenue for a startup but just not enough for a company with this potential. I guess what I am trying to say is that the business model of Prosper requires a high volume of loans. Given that deliquency rates have undoubtedly risen from the current financial climate it is no wonder that Prosper has tweaked their business model.
So what would you do if you were in their situation and needed to ramp up loan volume? Well they have gone ahead and created a marketplace for people to trade loans. Thus their S-1 is not an IPO of the company. Rather it is a listing of their notes that will allow them to be traded on their marketplace. Essentially they are securitizing the loans on the marketplace. Thus not only will they make money on loans but also on their trading. The more the notes trade hands the more they make in fees. It's a very smart way to ramp volume.
Interestingly, securitization of loans is one of the very reasons that we are in the whole financial crisis in the first place. Bankers securitized subprime loans and sold them to investors for fat profits. When those notes started to go sour, things went bad. So it will be very interesting to see how the note trading proceeds on Prosper.
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