People to People Lending with Prosper

Uploaded by Google on 23.07.2007


MALE SPEAKER: OK, if I can have everyone's attention.
So today we have guests Karen Appleton and Andrew
Martinez-Fonts from to talk about the
Prosper Lending Marketplace.
And, I will ask--
this is being videotaped, so please keep any
Google-confidential questions to yourself until after the
videotaping has ceased.

KAREN APPLETON: Hi everybody.
How's everybody doing today?
Has anybody heard of Prosper yet?
Oh, excellent.
OK that's fantastic.
Oh, I'm so glad to hear that.
So then you know the basics.
We can spend some time on the more fun stuff.
But I'll go through the presentation.
Please feel free to ask questions as we go along.
Although if we get a whole lot, we can save
them until the end.
But feel free if you have a clarifying point you'd like to
make in the beginning, we can go for that.
Prosper, as you know, is an online marketplace.
It's like an eBay for money, bringing together people who
want to borrow money, with people who have money to lend
in a safe and trusted marketplace.
We handle the administration and all of the processing,
including payments, collections, verification and
validation of individuals, and do all credit
and anti-fraud checks.
It's a positively disruptive technology and it's
dis-intermediating the banks so it's pretty fun.
Pretty fun marketplace.
Prosper brings a sense of community to lending by
leveraging the power of groups to improve borrower repayment
under the key premise that people act more responsibly
when their actions have group consequences.
The benefit is higher than average repayment of loans due
to lower defaults, and better return on
investment for lenders.
Prosper represents the first time that people can
participate directly in the lucrative lending markets and
empowers individuals who are looking for alternatives in
personal finance.
You can earn higher returns than in money markets and CDs,
and create a highly diversified portfolio.
And there's also the benefit of this great lender community
that has emerged that's really enriches the whole process.

Just to touch on the history of the credit markets.
Through centuries and generations, there's been
community-based lending in villages and towns, between
friends and family.
And more recently, the community-based lending model
has evolved into credit unions, and savings and loans.
And in these models, we see strong borrower loyalty and
low acquisition cost, but there's a very low lender
Today, credit cards and banks are the key sources of credit.
And while they experience excellent diversification,
there is little loyalty and very high acquisition costs.

So in the Prosper community, we see excellent lender
diversification due to the one-to-many approach.
AUDIENCE: [INAUDIBLE] acquisition cost--
KAREN APPLETON: The cost that it takes a credit card company
to actually convert you to be a client, you get the
mailings, and the advertising and everything else, that's an
acquisition cost.
So we see an excellent lender diversification here, due to
the one-to-many approach that lenders take when bidding on
loans, low default rates from borrowers due to the strong
sense of community that is established, and the low
acquisition cost, because we're using groups as a
leverage point to drive borrowers to the Prosper site.

The loan listings, when they come onto the site they're
And it's a pretty eBay-like approach to listing items. And
we have the borrowers as the items or the objects for sale,
or basically the borrowers that are requesting credit.
And they're shown in a summary format.
And in addition, it's a very searchable database, where you
can look for a variety of characteristics that you might
be specifically searching for.
And you can look by credit grade and by other
characteristics, and pull those borrowers' requests that
most match the strategy that you're going to put together
as a lender.
We show the scale of credit grade and corresponding score.
When a borrower comes onto our site, we take a lot of data
from them to verify and validate that they are who
they say they are.
In addition, we pull an Experian Scorex PLUS credit
check, which we then assign that score, which is much like
a FICO score, to a credit grade, which is how lenders
can then evaluate the borrowers
who come to the site.

This is an example of a borrower listing.
And we've had every type of listing so far
that you can imagine.
Everything from breast enhancements, to breast
reductions, and plastic surgery, and credit
consolidation, and start-up businesses.
And this one is an example for a documentary film,
State of the Union.
You can see that we provide a lot of summary data so that
the lender can make an evaluation.
This particular borrower is looking for $10,000 and what
he does when he comes on--
AUDIENCE: Do you map their credit
ratings to default rates?
KAREN APPLETON: Do we map credit
ratings to default rates?
We provide both data points for you to evaluate.
So you'll see that, I believe, in the next screen you'll see
how that appears.
So the borrower will state the max interest rate that they're
willing to pay on the loan.
So the borrower is coming and saying, hey, I'd like to
borrow $10,000 and the max I'm willing to
pay for that is 13.75%.
In addition, we show some of the other core metrics.
They're timed listings, so you can come on and you can create
listings that will go from a range of 3 to 10 days.
Or you can request an automatically-funding loan,
which means that as soon as it's funded, you're closed and
you're good to go.
On the right-hand side where you see the borrower
information, this is the borrower's
user ID on the site.
This particular borrower is a member of the group.
And I'm going to talk about the group again, but the
groups are what drive a sense of community on the site.
And some other key data points.
We've got the credit grade.
This person is an A-rated score.
And if you looked on the last one, you can see an A has like
a 720 to 759.
So you get a good sense of that person's both ability to
repay and desire to repay.
Because you measure both from the key metrics.
This person's not been delinquent.
You can gauge this person's credibility by some of the
metrics that we provide.
In addition, we allow the borrower to state, with as
much or as little detail as they'd like, the
purpose of this loan.
So the lender then has almost everything that they would
need to know about this particular borrower to
determine if this is an investment that they would
like to make.
You can see a rate of 13.75% is a pretty darn good return
on your investment.
So we're living on the spread that the credit card companies
have always taken.
So you put your money in the bank,
you're making two percent.
The banks are lending it out to the credit card users at
19%, 29%, something like that.
And they've got that spread, which is how they fund the
acquisition costs of getting all their clients.
But we're kind of taking that out of the equation.
The spreads are now given back to both the borrowers and the
lenders on return.

Once you decide that you want to make a bid on a particular
loan request, there are two ways to bid.
This is an example of a manual bidding process.
And what we show you is that summary data again-- what
you're bidding on--
and then the bid details.
You can bid in increments of $50.
One thing that we strongly recommend to all lenders is
that you create a very diversified portfolio.
It's very rarely recommended, unless it's perhaps a friend
of friend situation, that you bid large increments of money.
Like you would never come and bid that whole $10,000 on that
documentary unless maybe you knew the guy and you thought
it was a great idea.
But typically you come in with increments of as little as
$50, so that you create for yourself this very
broad-based, diversified portfolio of loans.
But we're showing you here the Experian
historical default rates.
So on all the As that we have in this massive Experian
database, and As likely default at 0.9%.
AUDIENCE: Do you show Prosper's default rate?
the default rate at Prosper's market?
KAREN APPLETON: So the question is do we show
Prosper's default rates?
At the moment, we're creating that data right now.
We've been live since February 13 of this year.
So our data is not yet as rich as the Experian data is.
But as we build our files, and we develop that information,
we will make it published on our site.
We intend to have a completely transparent site so you will
be able to know what were they Experian default rates and
what have the Prosper default rates been.
So yes, you'll be able to see that.
AUDIENCE: This doesn't mention a term.
Is this a 10-year loan?
A 2-year loan?
KAREN APPLETON: All of our loans are 36 month terms,
fully amortized, no prepayment penalty.
OK, so that's the one package we have right now.
But over time, of course, you'll see the expansion of
the set of products.
AUDIENCE: Are the all unsecured loan?
All of our loans are currently unsecured.
And then we have a $25,000 max.
So basically--
all states are different.
We currently operate under individual state charters.
So currently, we have to adhere here to whatever the
state requirements are.
And typically, in general terms, there's a minimum of a
$1,000 and a max of $25,000 right now on those loans and
they're all unsecured.
AUDIENCE: You mentioned having a transparent site.
API so that the borrowers [INAUDIBLE]
The question is do we intend to have an API.
Our API is set for launch at the end of the summer.
AUDIENCE: Can we be beta testers?
KAREN APPLETON: Can you be beta testers?
That's up to Andrew Andrew can--
I'll take your business credit.
You can have mine.
Either way.
KAREN APPLETON: OK, so again here, at the moment we have
the Experian historical default rates.
You can see there's a 0.9%.
So as you bid, you want to keep that in mind.
Because if you've got this diversified portfolio, and for
the sake of easy math, if you've got 100 loans in your
portfolio and they're all in the same bucket as this, you
can expect to have a 0.9% default rate.
If you're making 13.75%, Prosper charges 0.5% servicing
fee, and there's a point 0.9% chance of default you can get
to the point of understanding what your returns
are going to be.
And I don't know whether anybody's got a stock
portfolio right now that's returning at 13.75%, but if
you do, then you're doing the right thing.
And if you don't, you should be on Prosper.
AUDIENCE: I take it the default rates are annual?
The historical default rate is based on two
years of Experian data.
ANDREW MARTINEZ-FONTS: But it's an annualized rate.
KAREN APPLETON: But it's an annualized rate.
KAREN APPLETON: It's so unbelievable.

KAREN APPLETON: The default rate this is not the return.

The amount at which you're lending is 13.75% and the
expected default on that is 0.9%.
So you take the 13.75% minus the 0.9% minus the 0.5%
servicing fee.
So you're left in the neighborhood of twelve-ish.
So your return would be about 12%.

you said it was an annualized rate, so over a 3-year term,
They're two-year loans.
You're right that it's not an absolute--
KAREN APPLETON: The math is not perfect on--
ANDREW MARTINEZ-FONTS: --comparison, but it's fairly
close because of the amortization schedule of the
loan, if the loan defaults in the 34th month, you're losing
a lot less than you would in the middle of the
second year, so--


So your question has to do with balance on how do you
balance the number of borrowers on the site with the
number of lenders on the site.

That's what our whole purpose is to build this marketplace.
And again, we draw a lot of comparisons to eBay because
they have the same situation.
Is it the products that drive the business, or is it the
buyers that drive the business?
And in our case, of course, the borrowers are the product
and the lenders are the buyers.
And we have to manage that equation very carefully.
And yes, we are working on a lot of initiatives and
programs that seek to balance that equation.

KAREN APPLETON: I don't think either are
hard to get, really.
It's been surprising.
I think it's a matter of keeping everything moving
forward at the same pace, as opposed to
getting one or the other.
It's a pacing issue.
AUDIENCE: How many lenders and how many
borrowers do you have currently?
KAREN APPLETON: How many lenders
and how many borrowers.
Since we're a private company and we're only about six
months old, we don't release data like that.
But I can tell you that it's been in balance so far.
That, relatively speaking, I think as much as we
can expect so far.
And the growth has been incredible.
Driven a lot right now by the press.
We were just in Business Week last week in the IT 100.
And we've been in the Wall Street Journal three times.
We've been in The Economist, Smart Money and many, many TV
shows, including ABC World News Tonight.
And that has driven a lot of the initial
business to the site.
And then it's our responsibility to make
AUDIENCE: Could you tell me [INAUDIBLE] on the site now,
how many loans I might be choosing from?
Currently on site, we've got anywhere from say
900 to 1,200 listings.
And since they fluctuate, they are flowing in and out at any
given time.
Some are closing and rolling off.
Others go unfunded.
In a sense of the true marketplace, we do not qualify
the borrowers, in terms of what they're requesting and
whether or not it makes sense.
We allow the marketplace to make that
final buying decision.
So you could have a borrower who comes on the site and
says, I'm a high-risk borrower, and I want you to
lend me $25,000 at 5%.
Well, the market's not going to bid on that.
So that type of a loan will just expire unfunded.
But we don't want to step in and say, hey, you might want
to change this or that, or.
We just don't want to micromanage the process.
We want to let the marketplace drive the flow.
AUDIENCE: So what happens according to the terms and all
that if Prosper itself goes out of business?
KAREN APPLETON: What happens if
Prosper goes out of business?
We have initiatives in place that people would step in and
take over the loans.
These loans actually become assets to you.
So you actually, technically, are not a lender on the site.
We technically are the lenders.
What happens is, and the regulatory environment
requires that, when that loan closes and originates, we
technically own it for a nanosecond before we then
-divide it and technically resell it to you.
It becomes an asset to you.
So it's yours and it would then be just a matter of
servicing it, if something should happen to us.
But we're not going anywhere.
AUDIENCE: One of the reasons [INAUDIBLE] well is that

AUDIENCE: So are you planning on disclosing more information

KAREN APPLETON: Well, I think that you've lots of questions
within that question.
I think you're asking a question about safety, trust,
and verification.
And our responsibility to validate whether the
information that a person puts in their listing is actually
true or not.
And how we will then provide that information so the
lenders make as a sound decision as they can, right?
That's about the gist of it?
Those three points?
So with respect to providing more information, yes.
We're continuously driving through what is the right
balance of information to both protect the borrowers'
privacy, and allow the borrower to reveal as much as
they would like to reveal, but also to be certain that we are
giving as much data to the lender as possible so that
they can make a sound decision themselves.
So yes.
We're currently taking a look at the next
generation, as you remember.
Maybe it's been two months now that we released the key
metrics, those six data points under the credit information.
And that was really key.
Because that then gave the lender the ability to see,
well what was delinquent?
Has this person been delinquent before?
Because that's going to be a big driver.
If their late every single time, well, what's the
possibility they're going to be late again?
Probably much higher.
Whereas, this guy's never had a delinquency.
Well, that's a pretty good bet that he's going to be a solid
re-payer, right?
So some of that information is going to be revealed.
And just stay tuned for some of that.
We're balancing that now.
In respect to contacting borrowers who don't pay.
Through this site, you can technically do it.
We don't recommend it.
We don't recommend that you get in touch.
We've got state of the art technology in place.
We do in house follow-through on our end if someone's late
on a payment.
And then we got three of the best credit agencies out there
who operate just like a credit card company does to go out.
And we say let the
professionals collect the money.
Oh hang.
So we had two other points there.
Did you want to touch on anything else?
ANDREW MARTINEZ-FONTS: Well, I think the overarching answer
your question is that we approach the marketplace in
the sense that we are truly a marketplace and we want to
give Lenders the ability to see as much information as
they need to make an informed decision, while still
protecting the borrowers' privacy.
So we don't want a situation where lenders are knocking on
the doors of people who owe them $25, right?
Because they've gotten halfway through a loan and they're
still out $25.
At the same time, we recognize that it's important that we
provide lenders with enough data, such as credit
Information that, for example, this guy has
had four recent listings.
So you could look at those past listings, and if he
represented himself as a woman, or talked about his
surgery, and on this one he hasn't mentioned it at all,
that can be part of your vetting of this borrower.
So that's the overall approach that we have, is we've
got all this data.
Let's just present in a way that makes sense.
Let people search on that and make their lending decisions
based on that data.
question about if you went out of business.
If I used it [INAUDIBLE]
diversify So let's say I have 200 loans outstanding and your
company goes out of business.
Do I then have to do the paperwork on 200 different
loans individually just to get my money from these people?
We'll consolidate and aggregate that for you.
You won't have to manage 200 loans.
ANDREW MARTINEZ-FONTS: We have an arrangement with a loan
servicing company.
And so we would basically transfer servicing of all
those loans to that loan servicing company.
But the loans are still held in your name, so effectively
you own that.
and are prepayments allowed [INAUDIBLE]
Prepayments are allowed.
The question is are prepayments allowed?
Yes they are.
Recovery rates?
I don't have data on recovery rates at the moment.
We're just moving to that stage of the game.
I'll be able to release that, and that'll be on the site
when it's available.
AUDIENCE: It seems like they're two ways [INAUDIBLE]

and the other way is to sell [INAUDIBLE]

so using what information you told me [INAUDIBLE]

So the question is how do we continue to make the market
more and more efficient.
One is API.
Certainly, that's going to help a lot.
The second you're referring to is a
secondary market for loans.
And that's coming as well.
We expect that to be available Q1 of '07.
Where we'll be able to take packages of loans and auction
them just like we do with the individual borrower requests.
So those are--
like the bond
KAREN APPLETON: It'll be like a bond market.
This is a new asset class.
It's consumer bonds.
It's investing in people.
ANDREW MARTINEZ-FONTS: Hey Karen, you should also mention
outstanding artist because that's effectively an
automated site
Let me go back to the presentation for a minute.
Because I think that when I mentioned to you that the
process that I just showed you was how you make a manual bid.
And this is what it looks like when you have
made a manual bid.
You can bid of increments of a minimum of $50 again, up to
the top of the loan if you'd like.
And you're making a bid at the lowest rate that you're
willing to accept.
So you may bid.
While it may show up on the screen is at 18%, you may
actually have bid 15%.
But you'll hang in there until that auction process kicks in
when a loan is fully funded.
This is what it looks like.
So you can see as you take a look to the
far left, the bidders.
There are lots, and lots, and lots of bidders at varying
amounts, at the rate that they're going to currently be
available at.
And then the amount that they bid on an individual basis.
The red Xs at the bottom are the folks
that have been outbid.
And then the check mark means that you're so
currently in it.
Here's the way to make a custom portfolio.
This is an automated process for bidding.
So you can either going in and make a manual bid.
Some folks absolutely love it, because they've got the
ability to read through and they love the human contact
that process gives them.
In a custom portfolio, or standing order, you've got the
ability to state the exact criteria
that you want to match.
And then we will automatically go out through the borrower
database and find those requests that match exactly to
your payment.
And you can set almost any type of
criteria that you want.
For example you could bid specifically on certain groups
that you like.
So there might be a group of schoolteachers that you think
are a perfectly good investment and you might
select to have funds diverted to any loans filled
in groups like that.
You might say I only want to bid on loans that are
currently 75% or more funded.
You can set various minimum credit grades that you'll
accept and minimum rates you're willing to accept
within those credit grades.
And then we will flush that out into the overall database
and match you up with those requests.

So I've touched on groups.
And I think that groups are really important to note.
We believe that the groups are the foundation of the Prosper
Groups can be any selected group of people who share a
common interest. It can be a large group that can be huge.
We've got a group that's well over 1,000 right now.
And we've got other groups that are five or six.
And they come together based on whatever their common
interests may be.
It may be investing, or boating, or it may be an
ethnic background, or it may be just a core belief.
They don't have to know each other, but they have to share
a common belief or value system.
And borrowers join specific groups to boost their
So groups are joined together so that there's a sense of
community around the borrowers in those groups.
Borrowers join certain groups to boost their reputation, and
to overall achieve lower interest
rates from those lenders.
So individual lenders do exist. You do not have to be
part of a group to borrow on Prosper.
But we recommend to those borrowers that they join a
group so that they have the benefit of the community and a
sense of reputation.
The group's leader has a responsibility as well.
The group leader can accept or reject members into the group.
And they also are notified if a borrower is delinquent on
loans so that they can touch bases with them and say, hey
is everything OK?
Is there anything I do to help?
They don't carry any of the burden or responsibility for
the repayment.
But they do drive that overall sense of community and
responsibility, and the shame that is also associated with
not paying back their loan.
AUDIENCE: [INAUDIBLE] be voted out of the group?
KAREN APPLETON: Can you be voted off the island?

If you're a borrower with a loan in a group, you're stuck
in that group.
There is a possibility for a group leader to take
members out, yes.
AUDIENCE: What's your feeling about the groups are working
so far and what would [INAUDIBLE]

So the question is about groups.
How do we think the group model is working
right now and what.
I guess what I can tell you right now is a lot of what
we've been focused on in the past couple months, in terms
of our strategy has been focused on the lenders--
Making sure that the lender experience is rich.
And drive enough data to keep moving forward.
So we've been working on several
enhancements with the lenders.
We are currently turning our attention to the groups.
And we are giving a lot of deep thought to how the groups
are working right now.
What we want to see.
What types of modifications need to be made.
So stay tuned for that.
I don't know whether Andrew might want to say anything
more about the groups right now.
But yes, we've got data now.
And we can look and see how things have moved.
And now we can say, OK, what's our next step here?

ANDREW MARTINEZ-FONTS: Let me actually talk a
second about groups.
The idea behind groups really providing reputation to the
borrowers who are members of those groups.
And in the same sense that the group provides a good
reputation to the borrowers so that lenders will have more
confidence in them.
Borrowers, by making repayments, can also provide a
reputation to the group that this is a group that has
borrowers who make repayments.
What you're seeing on the site right now is really weak in
that sense.
All you can see is that this group has 20 loans and they're
all current.
Or there's one late.
Or there's one that's two months late.
But eventually we'll actually roll out a
rating system for groups.
And it's based on the group's ability to improve expected
default performance.
So you remember the chart about, A's are expected to
default at 0.9%.
If a group drives a better default rate for their A's,
they'll get a five star rating, which would be the
highest rating.
If their A's are defaulting at 1.2%, they'd
probably be below average.
Two star, one star group, for example.
That should give lenders a better sense of what does it
means to lend to this group?
Like, I'm Vietnamese and I really want to lend to this
Vietnamese group.
But they're always late and their rating as a result is
zero stars or one star.
Is that really a group that I want to be involved with?
And some lenders inevitably will say, yes, I really
believe in these people.
I want to help.
We haven't quite gotten to the point in Prosper where people
are doing charity loans, but I expect that if Hurricane
Katrina had hit around this time this year, or if it had
hit this year, it's possible that people
would have put up listings--
I need some money to make my rent in Houston, or whatever
the situation was, where lenders could actually help
people, and maybe not even expect--
KAREN APPLETON: That's my next line.
I'll let you [? get going. ?]
KAREN APPLETON: Prosper and socially responsible
investing, which is, I'm sure you're all aware there's been
just huge buzz in this marketplace of socially
responsible investing, double bottom line, micro-finance.
And we believe that Prosper's a fantastic platform.
And we had in fact talked with many organizations on both
sides of that equation.
Organizations that want to lend to others in need, and
organizations who help those in need who want to open up
their borrowers to the marketplace of lenders.
So we think this is a huge market for us.
We also see that there's a need to have a double
portfolio, perhaps, on Prosper that allows you have one
portfolio of loans that's here to help entrepreneurs or
others in need, and one portfolio that's geared
towards making a good return.
So that's kind of the balance that we're trying to hit on
that side as well.
AUDIENCE: Hurricane Katrina.
We just learned that during Katrina there
was a lot of fraud.
And if something like that happens this hurricane season,
you'll probably have lots of listings of people saying hey,
give them money and people will just vanish.
How do you prevent that?
KAREN APPLETON: Well, the question has to do with fraud
and fraud prevention.
Here's a slide we have on security and risk management.
I think that maybe what happened in Katrina were that
maybe documents weren't required or things like that
but on Prosper marketplace, we require that the borrowers
provide us with all of their key data points--
Their driver's license number, their social security number.
We access their credit history.
We ask them the questions that only they
would be able to answer.
And we have a very stringent and automated in-house system
that is rigorous tracking and management of the individual's
verification, validation, close interaction with the
credit bureaus.
And an individual's repayment is then tied back to the
credit bureau as well.
I mean that is at the heart of providing a safe marketplace.
And that is one of the commitments that we.
Have. So not only do we have the technology in place to
help us with that.
We also have people who are just managing and monitoring
the overall process.
It's a very safe system.
Specifically identity theft.
Say I was able to get someone's social security
number, driver's licence number or their
credit report somehow.
How would you prevent that?
Have you actually had experience [INAUDIBLE]
KAREN APPLETON: We catch most of the folks that come in and
are trying to dupe the system or something like that.
But since we're requesting bank account verification, and
we do the challenge deposits like PayPal does, they have to
then report back to us what those deposits were.
So they have to access to the account, and in addition--
AUDIENCE: need to do is open an account.
Open a new account in the name of that person [INAUDIBLE]

So we also have other things at play in that system, OK?
So we're checking that.
Have you ever applied for credit online and they ask you
questions like during the years 1995 to 2000
where did you live?
What street did you live on?
So we have systems like that in place that are designed to,
I mean nobody would know the answer to that.
Heck, I have a hard time remembering where I
was living in 1995.

To answer your question directly.
We have had incidents of identity thieves come to the
site, set up a profile, set up bank accounts, and attempt to
transfer money.
In all of those cases, we have certain rules in place that
effectively say, if you're doing this, this and this,
we're going to check you out a little further.
And although our technology has a well-developed risk
model and then we also have an identity verification team who
reviews documents.
We actually request faxed social
security numbers, bills--
KAREN APPLETON: We'll talk to them.

So there have been a few incidents where people have
tried this, and we've been able to catch them in all
those cases.
AUDIENCE: [INAUDIBLE] --delinquents.
I mean you haven't been around long enough [INAUDIBLE]

ANDREW MARTINEZ-FONTS: Well not that we know of.
We think that by now we would have known if there was
someone who was trying to use someone else's bank account to
get the money and transfer it out and the problem is that
there's a huge paper trail in this system.
So if you're really trying to get us, you've had to give us
a ton of information.
And it's not just your identity, it's your electronic
paper trail, as it were also.

KAREN APPLETON: So the question has to do with, in
addition to validating the individual's credit history,
do we also validate the story?
If you think about the Proper system as a set of gates,
there are a number of gates that a borrower has to go
through before they get their money, right?
They have to verify their identity, they have to put
their bank account on file.
They have to get through lenders, right?
Lenders have to have the confidence to bid on them, if
they think that their story is legitimate.
So before we even get to the point where we're thinking
about sending them money for a loan, the community of lenders
has to have decided that this is someone who not only is
credit worthy but also seems to be a
Katrina victim, for example.
And that's backed up not only by their address information,
their listing description, potentially pictures that they
might upload, their group background.
So you could see a group that set itself up as the New
Orleans Red Cross and actually they verify that everyone in
their group has shown them documentation and proven that
they live in New Orleans, et cetera.
So that's another gate.
And then when they get to the point of us sending them
money, we actually will look through listings.
And in a fairly cursory way for some listings, where we
have a high degree of confidence,
let them pass through.
But for others, where we think the stories don't check out,
and we have lenders report those stories to us, too.
Hey, can you check this out?
This looks a little funky.
They said this in this listing, but
that in this listing.
And we actually will verify that information.
We've had people send the title for their car purchase,
and proof employment at certain places,
and things like that.
So we do go beyond basic identity verification when we
suspect that there might be something going on.
KAREN APPLETON: And the lender community has emerged as just
a very, very strong force.
So you can get into Yahoo groups and things like that,
that the communication between lenders, they'll vet these
borrowers down to the detail.
And you'll see somebody say I called so and so and asked
them to fax me their full credit report, and their
employment history, and I verified their email address
was where they said they worked, and they'll go through
this whole process.
So there's additional off-site vetting that goes on.
It's pretty interesting to see what emerges.
But then you'll see everybody jump on.
You'll see like a whole bunch of lenders, they all agree, OK
this is a good one.
And you'll go boom-boom-boom-boom-boom, and
that loan will just fill up.
have any access to the information of that borrower.
KAREN APPLETON: You can communicate on the site
If you're a borrower and I'm a lender, I can send you an
email on the site saying, hey, here's my
offline email address.
I would like to get some more information before
I bid on your loan.
Can you contact me?
So we allow that to occur.
I've noticed a secondary market [INAUDIBLE]

the other thing I've noticed, too, is there's some lenders
that are actually borrowing money [INAUDIBLE]
And they keep building it up.
They lend out all their money and then they ask for $25,000
more then they go out and bid on more loans.
It seems more like a pyramid scheme because if they start
defaulting then that whole thing could come crashing
down, is there anything--
So we're talking about borrowers who borrow to lend
on the site.
You can only have one at a time.
So you can't have 10 loans right now.
In effect, that would limit the ability.
So they have to pay back loan number one before they would
get loan number two.
And if their borrowing to lend on the site, their whole
strategy is to say I want to make enough back in one month
to cover what my loan payment is going to be.
Because they're getting paid back.
They get paid back on every loan every month, right?
So that's the strategy.
Do we have anything in place to prevent someone who, what?
Might over expose themselves or something like that?
Not really.
But the borrower does, of course, have that
responsibility of repayment, and is responsible for their
own credit, and that's what it's tied to.
That's why only individuals can borrow, too.
AUDIENCE: Don't you want people to do that?

KAREN APPLETON: I want people to use the platform for what
serves their purposes the best, as long as it's not
doing anybody harm or causing anything unsafe to happen.
So yeah, I think it's great.

Do you intend to be open about that process [INAUDIBLE]

KAREN APPLETON: I think we have a
combination of both in place.
And Andrew might want to speak to this a little bit
more or maybe not.
I know that we have some technology in place for
security and fraud protection that we don't talk about.
It's our IP.
It's how we do it.
It's our secret sauce.
It keeps you safe.
That's just kind of the way it is.
If we revealed it, then who knows.
Maybe somebody would gain it and we just don't want
to take that risk.

We may reveal that.
We have not specifically discussed that.
But in terms of a transparent marketplace, it may be
something we just reveal.
Just not right now.
AUDIENCE: Yeah, I just wanted to comment about [INAUDIBLE]

I agree.
So in terms of arbitrage, secondary markets would help.
Because someone who has built up this great portfolio, they
can turn around and put that back out onto the site.
I think that's a good use for it.

KAREN APPLETON: The minimum is $1,000.
However that would amortize out because we take it from
the monthly payment.

The other source of our income comes from borrower's side.
So the borrower pays a 1% origination fee at the time
their loan closes.
So we've got 1% on the borrower's side.
1/2% on the lender side.
AUDIENCE: So when you release the API, you're hoping you can

ANDREW MARTINEZ-FONTS: I personally don't think there's
any problem with people using the site through an API where
they're not actually participating in a qualitative
way on the site.
Because there's going to be plenty of community as it is.
There's plenty of people who use eBay through an API and
never go to the website.
And they pump billions of dollars of
business through eBay.
And eBay doesn't really have a problem with that.
And they have plenty of community going on with all
those people who sell $10 and $20 items every month.
But they really maintain that ethos that eBay loves, so,
Oh my gosh.
You want to go--
I'm sorry.
So there's going to be some lenders who are better able to
predict looking at all these different metrics, like
delinquencies and the description of the lender, are
there going to be some lenders who are better able to predict
who's not in default and so actually what I sometimes do

visually and whatever he bids on or she bids on I bid on
because it seems like we tend to look at the same thing
So you're looking for a follow the leader sort of a--
AUDIENCE: --which lenders are better able to predict who's
not in default and maybe then allow vendors to form
communities where they share that information [INAUDIBLE]

These are great ideas.
We are likely to release a follow the
leader approach to bidding.
Where you might say, hey, I love the way that Cellar Door
does this and I want to follow him.
And we would of course allow Cellar Door to say, yes, it's
OK for me if people follow, or no it's not.
And then they can reveal their standing order, so to speak,
for how they bid on the system.
Lender groups, that's another item up on the table.
The other idea is, should lenders have the
ability to be anonymous.
If you're going to allow people to follow lenders
should you also allow them to be anonymous?
These are some of the--
AUDIENCE: They're giving out for free basically.
The fact that they bid on something.
But yet on these on these smaller closed communities of
discussion, they all tag together anyway.
So these are all ideas that are on the table.

--other than the things buy now.
How do you think [INAUDIBLE]

KAREN APPLETON: You know, fraud is just one of those
things I think you always have to stay one step in front of.
There's always going to be new ideas.
There's always going to be people
trying to game the system.
And if your technology is always just one step ahead and
you're on top of the system, you have a much better chance.
But as we saw with PayPal, it's an ongoing struggle.
Do you want to address that any further?
Unfortunately, it's part of the world we live in.
ANDREW MARTINEZ-FONTS: I really look forward to the day
when we get to Paypal scale and we don't have to worry
about fraud at that point.
so the money's sitting there awhile.
What interest am I earning on that money?
KAREN APPLETON: Currently, you do not earn
interest on the site.
That's another area that we're seeking to come up with the
best resolution for.
We're registered as a lending institution, not a bank.
Banks can pay interest, lending institutions cannot.
We're working through what the best case scenario is.
And again, it's what PayPal had to determine for
themselves, is what was the best model.
So that's something that we expect to have an announcement
by, I would say conservatively, by the end of
the year on.
But right now you don't.
But you can transfer funds on a regular basis.
And I think, relatively soon, we're going to have the an
automated ability, too.
So on the site, you might say, I want to transfer $500 week
or $1,000 a week or a month onto the platform, so that you
would have the ability to leave the money into an
interest-bearing account, having it transferred in as
you want to put it to good use.
AUDIENCE: What I would want is a thing where I didn't have to
make sure that the money was going in at the same rate it
was going out.
So that I could just maybe have it on demand like a
standing order up to $5,000 and as the funds get taken
out, you call my bank and pull the money out so that I don't
ever have to have the money sitting around at no interest
because [INAUDIBLE]
more important than that is just not having to
deal with it myself.
No, I hear you.
That's a--
ANDREW MARTINEZ-FONTS: We're actually almost there.
I mean, at this point, we're about to build recurring
transfers, like monthly transfer, weekly transfer.
But standing orders already work, in the sense that you
could say, I only have $20,000 in the system, but this
standing order has a $100,000 worth of capacity.
So that when any transfer hit my account, it's automatically
going to get lent out through that standing order.
And whenever enough funds are available from repayment, they
will also get bid out into new bids.
So the system is already fully automated and--
AUDIENCE: You can have a standing order that's not
actually fully-funded and it just won't get activated?
ANDREW MARTINEZ-FONTS: Well, it won't starting bidding
until there's money there to place a bid.
KAREN APPLETON: But it will stay in place, ready to fire.

I think the motivation is right.
I can see them working in micro-lending in East Asian
countries where it's been tried already
because you know people.
You've grown up with them [INAUDIBLE]

your screen name people I've never met.
And so I'm wondering why you think I would feel some sort
of responsibility to people who might be in it just to get
[INAUDIBLE] membership as well.
And it's not [INAUDIBLE]

seller group.
A seller would be very keen on part [INAUDIBLE]
because that's that seller's bread and butter.
seller's screwed.
But here [INAUDIBLE]
25 grand [INAUDIBLE]
reputation's gone to hell but I don't care.
ANDREW MARTINEZ-FONTS: And the same way that on eBay the
incentive is set up for the seller to perform.
On our site it's that the group leader
is incented to perform.
It's not necessarily the borrowers.
Because the idea is that the group leader brings borrowers
into their group that they feel a high level of
confidence for.
That they will improve the reputation of their group.
There are a lot of group leaders who admittedly are
just trying to--

Just for the sake of growing?
ANDREW MARTINEZ-FONTS: --slash and burn.
Like they're just grabbing all those borrowers out there who
don't have groups.
And they're saying hey, come on in, the water's fine.
And ultimately what will happen to those groups is that
they'll have really poor reputations.
Lenders won't lend to them. and those groups will leave
the system.

It's a chicken and egg problem.
There's not enough time.
There's not enough reputation available yet.
But ultimately that's--
AUDIENCE: What are the incentives
to the group leaders?
KAREN APPLETON: There's a match reward fee.
So when a group leader brings in a borrower of a particular
grade, they're paid a match fee.
And then they're paid a percentage of the repayments
over the life of the loan.
So the group leader is incented on the return.
So that drives it as well.
And another thing is, I mean, this is an example of an email
that went up on the site saying, hey, thanks.
If you've got a borrower who literally didn't have other
options that were nearly as good, they're really grateful.
I mean they really, are truly like, wow, this is a
lifesaver to me.
I couldn't have gotten this, or I consolidated, I was
paying 29%.
And I was not making a dent in the principal.
I was paying just interest every month.
And now all of a sudden I've got a different opportunity.
I'm not saying that that's 100% of the population, but
there's a significant percentage.
And when there someone who feels so grateful, you can bet
that if it's a difference between paying their Chase
bill or their Prosper bill, they're going to pay us.
AUDIENCE: I think what you need is a network sort of a
Linkedin-type network-type thing so that I can say, here
are my references.
And this is my ability to borrow from other people.
More like a microfinance type thing where the lender knows
somebody else, someone knows somebody else.
KAREN APPLETON: So somebody vouching for someone else.
That's a good idea.
AUDIENCE: Mutual fund, right?
Some people are very good at betting so they [INAUDIBLE]
that lender group and they say, okay, [INAUDIBLE]
I love that.
AUDIENCE: So, what do you think banks have missed
opportunities to give loans to people like this?
KAREN APPLETON: That's a big question.
Why are banks not doing this right now?
I think that it's so far and away from what they've done in
the past, that it just slips outside.
And they've got such stringent barriers on the types of loans
that they make, they don't look to the person.
And this, for the first time, is allowing lenders to look at
the people and say, it's OK you were delinquent on one.
I believe you.
I believe that that medical history problem, or the
inability to pay the bill because your father died, or
whatever it is.
I believe in that and I'm going to lend you the money.
A bank is not going to do that.
So it's hard for a bank to go from this model
of, here's the framework.
Don't deviate.
And sorry, that's what the book says we have to do here.
To this model, I just don't think they're ready to--
they may get there, but not today.
But this is the right way to go.

is one thing that you said initially is that you
acquisition cost would be very low [INAUDIBLE]

talking about the groups giving all these benefits by
basically giving their reputation to their borrowers.
There seem to be a very weird double role that you intend
for the groups.
What's the deal here?
KAREN APPLETON: In terms of it's going to be too expensive
to acquire borrowers through the group leader's efforts or
what's the--
ANDREW MARTINEZ-FONTS: It is that the borrowers actually
pay the group leader for their reputation so that payment--
AUDIENCE: In the beginning in the first or second slide you
said that it would be for Prosper to acquire the
borrowers [INAUDIBLE]

group leaders finding and bringing in new borrowers.
Whereas now you're talking about that the point of the
group is to validate and confer their reputation onto
the borrowers.
And for me that seems like a strange double mode.
What's the deal?
ANDREW MARTINEZ-FONTS: Well, the idea is that the group
leader is earning money by bringing people
on a platform, right?
That money is actually being paid by the people who come
onto the platform.
So it's effectively as if you were a group leader.
And I came to you as a borrower and I said, I'm
willing to pay 2% of my loan if you will provide me the
reputation of your Google employee group.
And you say, OK.
You're a Google employee, and I trust you and here we go.
So I create a listing every time I make a re-payment you
get 2% of my interest rate, right?
AUDIENCE: But that's a little bit different than what you
had initially.
Initially, I think what the [? slide said ?] was, you said
that the acquisition cost for each borrower would be very
low at Prosper--
It's still low compared to what the bankers--
is acquiring leaders.
Not certainly borrowers.
AUDIENCE: But your example was that the borrowers come in to
the leaders instead of the other way around.
Because this acquisition cost, for example, was [INAUDIBLE]
When I was talking about acquisition cost, I'm talking
about compared to what the banks pay to acquire their--
and this is far less than that.
AUDIENCE: So, I want to say a little more about well

It's reported back to the credit bureaus.
So not only is it a good way for us to drive the
responsibility side of it, but it's also a really good way
for borrowers with either very thin credit files, or newly
out of school, or new to the country or
something like that.
They can build a credit file here as well.
AUDIENCE: So a lot of what they could work now is
assigned credit rating.
But of course you guys [INAUDIBLE]
about micro credit and helping really poor people of course
there are a lot more of those in the developing world.
So what are your really-- they're
really sort of long-term.
But what are your really long-term visions for
international expansion and how to deal with the fact that
there aren't these established credit ratings out there?
Most countries don't have credit ratings.
So I think we're on the leading edge of that.
AUDIENCE: --micro-finance [INAUDIBLE]
lot more [INAUDIBLE]

KAREN APPLETON: No, I hear you.
When we go international, there's going to be all kinds
of issues to address on all of those fronts.
How do we detail the credit in the same way we do here.
Well, it won't be done in the same way.
It's going to have to be a model that fits the cultural
dynamics of that country.
And the group dynamics, the group side of that equation is
going to have to also be modified.
So I don't know the answers to that right now.
But we know we want it.
We'd love to go global.
AUDIENCE: Do you have any plans to actually punish
people, the individual reputations of the group

KAREN APPLETON: We just haven't even gone there yet.
AUDIENCE: Yeah, I just wanted to [INAUDIBLE]

KAREN APPLETON: And we'll provide those as we get them.
Because again, our key belief is that in communities that
have a sense of responsibility and the corresponding sense of
shame, that the repayments are going to be higher and the
defaults are going to be lower.
But that will be proven out when we're able
to reveal the rate.
ANDREW MARTINEZ-FONTS: Just to be totally upfront about it,
we haven't had any defaults yet, because defaults are
defined as--
ANDREW MARTINEZ-FONTS: It would be on the first due date
of the loan plus one month of lateness plus three months of
collection so we're not going to start seeing defaults, if
we have any, until mid-July.
And so at this point, publishing zero
would be not helpful.
We will start publishing soon as there's
delinquencies, right?
Because late payment is a problem.
And that is an indicator to default.
AUDIENCE: And in this rate, what grades are
getting more interest?
ANDREW MARTINEZ-FONTS: --be showing that.
KAREN APPLETON: Do you have a question?

an early winter [INAUDIBLE]


KAREN APPLETON: Well, it's truly not gambling.
Because you are hopefully basing it on the data that's
provided in making a--
KAREN APPLETON: Well we have the Experian default rates,
which are--
my expectation?
My full expectation is that our default rates are going to
be a lot lower than.
And that's just my expectation.
I don't have any proof of that at the moment.
KAREN APPLETON: But any other incentives to--
I mean, I think that the best part of being an early adopter
here is that you're growing with the community.
The rates are fantastic right now.
And I keep going back to where else can a private investor
get rates like this, at the same time they're part of a
brand new industry, cutting edge, new asset class, and
have the ability to be part of the community and grow the
whole thing?
And at the same time be earning this kind of money?
And some people have strategies
where they go all high-risk.
That's all they want.
And their portfolio looks like 100 loans at 28% return.
But we know that the historical data says, well,
it's going to be between 15% and 29% default rate on a
hundred loans.
So you could easily say, well, why don't you just go all AA's
at 8% and just call it a day?
But the fun for them, the enjoyment of the whole
process, is that they're betting.
And they're going through the process, and they're walking
through and they're taking a big hand in what
their outcome is.
My personal strategy is to spread it around.
I like a diversified strategy that's got bits and pieces in
every bucket that will, overall, provide--
I have about 320 loans in my portfolio earning about 13%
return now.
I like it.
It's all mixed up.
I think it's pretty safe.
It feels good, so.
But everybody comes up with what works best for them.
what fraction of those people [INAUDIBLE]
But it's actually pretty even.
The overwhelming majority of listings are in the lower
credit scores.
But the actual loans that are made are pretty even across,
distributed across--