In the year since Prosper Marketplace Inc. unveiled its peer-to-peer online lending service, the company has attracted 175,000 users and issued $36 million of loans.
That portfolio pales against the typical retail bank's in dollar terms, but Prosper says it has been sufficient to draw certain lessons about how consumers are using the system, and what was and was not working in its initial approach.
As a result, Prosper has made several changes to its model, including imposing a credit score threshold for borrowers and making more information available to lenders. It also has canceled a customer service outsourcing deal that it says was not working out — a cancellation it expects to improve its relationship with borrowers.
Chris Larsen, the San Francisco company's co-founder and chief executive, said that the model is based on creating a community, and that all the changes were made with an eye toward increasing that sense of community.
"We're here really to provide the tools, not to make the judgments," Mr. Larsen said in an interview Monday. "We're really trying to create that sense of an eBay for money."
Prosper's Web site enables users to ask other members of the community for loans, and to specify a maximum interest rate they are willing to pay. The site posts the listings and includes information about the borrower and the loan's purpose to help lenders decide whether to offer to fund part of the loan. Lenders must submit a "bid" on the loan, indicating how much money they are willing to kick in, and at what rates. The listing is approved if enough people are willing to lend money; the borrower gets a loan that reflects the lowest rates offered at which total bidding is sufficient to satisfy the loan.
Loans are generally for three years. The maximum amount people can borrow varies by state but is generally about $25,000. Prosper is not available to borrowers in Nevada, Rhode Island, and South Dakota.
Interest rates range from below 8% to more than 20%. The fact that lenders generally fund only parts of a single loan helps them reduce their risk in the event of a default. In the year since the service went live in February 2006, Prosper processed 7,200 loans funded by 295,000 separate parts.
Mr. Larsen said the sense of community has been a key element in Prosper's early success. Many users join groups with a common interest or background, such as alumni from the same school. This added connection can guide lenders to borrowers they trust, and both sides can ask each other questions in public discussion areas.
Some groups are based on users' common background, such as their religion or where they live. Others are based on lifestyles, such as Macintosh users or educators. Still others are based on their intentions for the money; one group is for borrowers primarily interested in paying off their credit card debt.
The company has spent the past year working out some of the bugs in the system, and last month it rolled out several changes. One of the most significant was barring high-risk borrowers, which it defined as those with an Experian Scorex Plus credit rating below 520, or those with no credit history at all. (Lending is still open to anyone.)
Mr. Larsen said that in the past, loan requests from such people accounted for 45% of Prosper's listings but generated only 8% of its loan volume. "Most lenders, unless they're interested in charity, are not interested in those loans."
The loans dragged down the statistics for the high-risk category, he said, and even when they went unfunded, Prosper had to pay for background checks on the applicants and keep their listings live.
Prosper also has revamped its Web site, adding a question-and-answer section for borrowers to respond to potential lenders' concerns. Before this, such questions could be answered only in Prosper's online forums, which are separate from its listings. Also, lenders now can get details on a borrower's employment history.
Dan Schatt, a senior analyst for the Boston market research firm Celent LLC, said all this data makes lenders more comfortable about funding loans.
"The kind of information that's coming to Prosper lenders is even greater than the information that a bank would potentially get," he said. "It's one of the most transparent services I've seen."
Mr. Larsen said Prosper had problems with some customer service functions it had outsourced to a company in the Philippines. "We had a lot of complaints, and we were not happy about it."
He gave as an example a situation where the company's automated system could not verify a customer's identification. "We send them to a manual check where they have to fax in a document proving who they are. … We were not pleased with the turnaround times we had on that," he said.
Prosper has since brought that function back in-house.
Mr. Larsen has long advocated transparency in offshoring. In 2004, when he was the chairman and CEO of E-Loan Inc., he let borrowers choose whether their loan applications would be processed domestically or in a foreign country. Since time zone differences made it possible for applications sent overseas to come back faster, many people chose that option.
Prosper has also had to deal with some instances of identity theft, though Mr. Larsen said this has been a relatively small problem for his company. It reimburses lenders for the full amount of loans when criminals steal money by borrowing under someone else's name. (This applies only to identity thieves; lenders are on the hook when legitimate borrowers default.)
In cases of identity theft, Prosper provides data to law enforcement agencies, and last month that led to an arrest. Mr. Larsen said he hopes to make an example of the scammer.
"You don't just go after them to the cost of the theft," he said. "You go after them because you are also trying to send a clear message to this community of crooks. It's very commonly known that they share information about who are the weak companies that don't do anything and who are the companies that really go the extra mile and go after people and put them in jail."
Mr. Larsen said that the rates available to lenders are high enough that someday some people may be able to support themselves by lending through Prosper. "I don't know if anyone is actually making a living on it so far, but it's structured so that it is possible."
Mr. Schatt also compared Prosper with eBay by saying many of Prosper's users saw it as "more than just a part-time hobby."
He said he decided to give the service a try after attending a Prosper user conference last month. He put up $1,000 of his own money as a lender and has made two $50 loans at rates of between 13% and 15%. He has bid the rest of the money on other loans at an average rate of 18%.
Since he is bidding on somewhat risky loans, he acknowledges that some may default, but he said that even if they do he thinks he stands to make more money than he would investing that cash in the stock market.
Gwenn Bezard, a research director at Aite Group LLC of Boston, said the challenge for companies like Prosper "is to strike a balance between being an open marketplace … and being a financial institution."
The decision to cut off borrowers with low scores shows the balance is shifting, he said. "By implementing a threshold, it is certainly going in a direction where they are giving some guidance to lenders."
Prosper's $36 million of loan volume, "compared to the consumer lending industry's, is peanuts," Mr. Bezard said. "To grow the business, I do say they're going to have to go beyond the self-directed lenders."
He suggested a model like the one eBay uses to guide users from casual sellers to full-time merchants. "If you grow as a merchant, you'll see that eBay is going to give you more tools," he said. "You have to offer tools to people who are not going to do a lot of research."
