Two online person-to-person loan facilitators are fine-tuning their affinity marketing strategies but have staked out different positions on the benefits of offering financial incentives to participate in affinity groups.
Prosper Marketplace Inc. eliminated some referral fees that encouraged people to create large groups of people with little in common, and Lending Club Corp. is considering a plan by one of its affinity groups to let members offer financing to their own customers.
The two companies have found that fostering lending among people with a shared common interest — a model that has a long history in the financial services industry, especially in credit cards — also carries over to the emerging person-to-person channel.
Prosper began facilitating loans online between individuals two years ago, and though its services are available to anyone, the San Francisco company has found that lenders generally are more willing to extend loans to people with whom they share some kind of connection, and that these borrowers are less likely to default.
Prosper still encourages users to create affinity groups, and initially it offered referral fees to people who took on the task of organizing and maintaining them. These groups are organized around a common theme — people who graduated from the same university, for example, or who work in the same industry.
However, for many groups, the only common value is a desire to make money, and Prosper has found that such a weak bond often attracts plenty of participants but does not translate into better-performing loans.
Chris Larsen, Prosper's chief executive, said that loans originated through its largest groups, which have more than 100 people and who may have little in common, underperform loans made by members of other groups or by people with no group affiliation.
Loans between members of groups with more than 100 members have performed 30% to 90% worse than those made between unaffiliated Prosper users, Mr. Larsen said. And loans between members of groups with fewer than 100 members typically perform 10% to 30% better than those made between unaffiliated users, he said.
In September, Prosper stopped offering incentives to group leaders for expanding their groups, and since then many of the largest groups have stopped growing.
"It was pretty obvious that those group leaders were really after the financial incentives" and may not have paid much attention to the recruits' creditworthiness, Mr. Larsen said. "We had put incentives in place that maybe have created unintended consequences."
Christine Barry, a research director at Aite Group LLC of Boston, said that affinity groups based on a strong connection are more viable than those whose members just want a return on their investment. "By focusing more on social networks" than on the profitability of loans, an affinity group "has the potential to last a lot longer."
People will return to the lending site if they feel they have a social connection to it, Ms. Barry said. Prosper's initial plan of creating financial incentives for group leaders to attract as many as people as possible "was just a bad idea from the start," she said.
Lending Club initially used a model very different from Prosper's. The Sunnyvale, Calif., company began offered loans in May, but only through the social networking Web site operated by Facebook Inc., which is known for creating connections between members of specific groups, notably students who attend the same schools.
In September, Lending Club changed its model, making its services available to anyone, through its own site, and a key element of its expansion strategy has been marketing to members of already defined affinity groups, such as alumni and professional organizations.
A travel agent group has said it is interested in using Lending Club's service to help consumers arrange financing for the vacations the group's members are trying to sell.
Renaud Laplanche, Lending Club's CEO, said that even though he had not anticipated this type of arrangement, he finds the idea promising.
"A travel agent who is a member of the organization can also put in financing to their own customers through Lending Club," he said. "They are turning into a distribution channel for us."
Vacationers seeking loans through Lending Club still would need to join social groups, Mr. Laplanche said.
Most of its marketing efforts are focused on working with affinity groups for their endorsements. Mr. Laplanche said that even though an alumni association's site may not provide as many users as Facebook does, the affiliation provides credibility, since the association can verify that its members have attended a specific school.
Lending Club is also working on expanding to other social networks, including those catering to professionals, though he would not name any.
Ms. Barry said that Lending Club's expansion strategy has some risks. Working through affinity groups has benefits, such as improving the credibility of loan listings, but the travel group's motivations could work against them, she said. For one thing, the agents would be encouraging more people to borrow, not lend.
"It's a risk to only bring borrowers to the site" if there are not enough lenders coming in to meet the demand, she said. "I don't see it as a long-lasting strategy."
