As Chris Larsen steps aside as Prosper Marketplace Inc.'s chief executive, the company — and the rest of the peer-to-peer lending industry Larsen helped create — has the opportunity to change its course and possibly even merge with one of the very banks it originally sought to displace.
When Larsen launched Prosper, the first U.S. peer-to-peer lending company, in 2006, industry sentiment suggested the new lending model might disintermediate banks by recruiting consumers to pool their money to fund loans. Part of Prosper's allure was its eBay-like community structure, allowing consumers to seek one another out by affinity.
But the concept faced strong headwinds almost out of the gate, with the meltdown of the economy, staunch regulatory scrutiny from the Securities and Exchange Commission, and consumers retrenching on debt.
Prosper overcame these challenges and may be stronger for it today.
"The things that slowed [Prosper] down in past six years might be turning around," says Ron Shevlin, a senior analyst at Aite Group.
If Larsen's partial departure (he remains Prosper's chairman) signals a possible sale of the San Francisco loan facilitator to a bank, it has a precedent. Larsen, who co-founded another lending company called E-Loan Inc. in 1997, sold that company in 2005 to Popular Inc. of Puerto Rico.
"I've been [leading Prosper] for seven years, and I think my talents are in the early part of starting companies and getting them to where the model and product is proven," Larsen says.
Prosper "has been growing extremely fast now, and it is bringing in leadership that can take it from an emerging industry to a mainstream product," Larsen says.
Larsen would not elaborate on potential plans to start a third company, or on what Prosper's interim CEO, Dawn Lepore, has planned for Prosper. Prosper announced its CEO shuffle last week.
Lepore served previously as CEO and chairman of Drugstore.com, and vice chairman of technology for Charles Schwab Corp. Larsen has known Lepore for about 10 years and had previously tried to recruit her as chief executive for E-Loan, but lost out to Drugstore.com, he says. Prosper would not elaborate on why Lepore accepted only an interim role as CEO.
The hiring of a high-profile CEO might stem from the interest among investors to sell the company, experts say. Prosper could fit neatly into the technology portfolio of a bank, or even a large social media site (its main rival, Lending Club Corp., began as a Facebook application).
"The banks will adopt the best kernels of the ideas in peer to peer lending," says Craig Focardi, senior research director of retail banking for TowerGroup. Many top financial institutions might be interested in Prosper's technology, but Focardi would not name potential suitors.
Prosper may also be planning to remain independent as economic and demographic trends swing in its favor.
The economy is recovering and many so-called Generation Yers, who are between 18 and 35 years old, are coming into their own as earners, consumers and potential borrowers, Shevlin says. They are also extremely comfortable with social media and the many business products and services that potentially stem from it.
The fanaticism around social media is at an all-time high with Facebook's planned IPO. This may seem to work in Prosper's favor, but Larsen's company shifted course years ago to satisfy SEC concerns that its loans were unregulated securities.
"One of the fallouts of going through the SEC review process was that Prosper went dark for a period and could not make loans," says Mark Schwanhausser, a senior analyst for Javelin Strategy and Research.
Today, after many changes to the lending platform, nearly half of Prosper's loans are made by institutional investors, the company says.
"The 'social' part never really panned out how Prosper thought it would, [and] now most of those lending to individuals are [institutional or professional] investors," says Brad Strothkamp, vice president and principal analyst for the marketing and strategy group at Forrester Research in Cambridge, Mass.
The peer-to-peer lending market has had some notable flameouts, including CircleLending, which Virgin Group Ltd., of London, acquired in 2008 and rebranded as Virgin Money US before shutting it down in 2010.
Whether Prosper is on its way to becoming mainstream is another matter. Prosper reports it originated $314 million in loans since its founding. In January, it originated about $11 million in loans, an increase of 227% compared to the same month a year earlier.
Its potential market is nearly $1.4 trillion of consumer credit not related to automobile or student loans, says Joseph Toms, Prosper's chief investment officer.
But despite Prosper's growth, it is still a niche player, experts say.
A large bank like "Wells Fargo sneezes $300 million in an afternoon, it is not even a drop in the bucket," Shevlin says.