Chris Larsen of Prosper on the social impact of peer-to-peer lending

By June 02, 2008

As more and more Americans are struggling to obtain loans from financial institutions, P2P lending, also know as “social finance”, appears to be a viable alternative to the credit crunch that affects the U.S. economy. Chris Larsen

, the CEO of Prosper, America’s largest people-to-people lending marketplace with 700,000 registered users, talks about the value of using Prosper’s online auction platform (Prosper is the only lending marketplace in the U.S. where it’s entirely up to consumers to set the interest rates) and the democratization of finance.   You wrote on Prosper’s blog that Web 2.0 markets have the potential to end the elites’ destructive “money then merit” model and predicted that the wisdom of the crowds will prevail. Is Prosper about democratization? What the Internet is doing in many parts of the economy is bringing a massive decentralization of power. We have seen it in news and entertainment and it’s now coming to finance. With Prosper we are giving everybody the equal opportunity to get a loan and, for the first time, any American with 50 dollars or more can participate directly in the consumer credit market. We think that people are going to make better and richer decisions than institutions because they are going to consider not only the return but also the social impact of their investment.   Prosper’s marketplace is open not only to individuals but also to institutional lenders. Doesn’t it go against the philosophy of social lending which is supposed to empower individuals rather than institutions? That’s a great question. It doesn’t violate the principles of social lending as long as you don’t give any price breaks to the institutions. Take eBay, for example, where small and big businesses all trade. That’s the way the world should work! Institutions bring benefits to the individuals because they bring more liquidity as well as a rational view on pricing which can be constructive.   Prosper seems to attract less subprime borrowers and more people with good credit scores. Is that a direct consequence of the credit crunch?  How has Prosper evolved over the past two years? When we first started two years ago there were a couple of things going on: I think people, when they first heard about peer-to-peer lending, assumed that it was a place where borrowers go when they can’t get a loan anywhere else. Now they understand that [p2p lending sites] are the place to go to get access to credit with lower interest rates because there are more people competing for loans so we see a dramatic shift in the credit quality of folks registered on our site. A year ago 25 percent of our loans were “subprime” as opposed to about 5 percent today which is reflective of the P2P market becoming more mainstream. The credit crunch has helped us a lot because many credit-worthy people that used to be able to get a loan anywhere are having a harder time getting good rates.   What’s the biggest challenge for Prosper looking at the longer term? Well I think there is a broad challenge of any sort of open market place or social network and that’s really balancing transparency over privacy. Lenders want as much information as possible and of course generally borrowers want to reveal as little as possible. We have to be the neutral party that finds the right balance between the two. We also have to be vigilant in the balance between freedom and safety. In our view we want people to have enough freedom to pick their own interest rate but at the same time we have to make sure to catch the fraud and prevent identity theft. Finally we want to continue to grow but grow in a way that provides good returns and good value to both sides. You don’t want a situation where the market is too favorable to borrowers or lenders. Both sides have to win.   Are you planning any international expansion in the near future? We have launched a joint venture in Japan. We worked with SBI, a Japanese bank. That’s our first market outside the U.S. Overtime we hope to add additional markets.   by Anne Sengès, for Atelier   FEEDBACK For comments on this article, email us at

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