I don't believe it was fraud, although as others have pointed out the outcome is the same.
Prosper operated in the mode of a 1990s dot-com company start-up company. The basic goal of such an outfit is to come up with a concept and devise software to implement the concept, and then sit back and watch the money roll in. The idea is that if one has a good concept and good software, the business is supposed to run itself. The whole world of back-office operations and individualized customer interactions was thought a relic of high-overhead, non-scalable brick and mortar businesses, a relic a successful dot-com is expected to figure out how to leave behind.
It was on this basis that Prosper's basic value proposition characterized the entire spread between what a bank's depositors get and what it's borrowers pay as pure profit potenial. If it could replace the entire banking business by a concept and some software, with no need for an expensive back office, individualized evaluations by highly paid professionals, etc., it could make huge sums by cutting out the middleman and all the middleman costs, extracting only a small transaction cost on each loan and doing loans in volume. Its whole goal was to be a low-cost, high-volume, completely-automated operation. It would achieve the holy grail of dot-com entrepeneurship. Prosper would simply be a broker, simply a place on the internet where lender and borrower would meet. It would get a fee for each meeting. What happened afterwards needn't be its concern, or a charge on its purse.
I didn't work of course. Prosper, and we, have learned some of the same things a lot of other dot-com start-ups, mostly defunct, have learned. And like them, we've also learned it the hard way.
The first thing we learned is the middlemen didn't actually sit and do nothing for their money. They provide valuable and expensive services essential for success, and hence earn and need to charge a much higher fee per transaction than contemplated by a high-concept, low-overhead, completely automated, look-ma-no-hands value proposition. Screening out fraudsters and collections cost. They require the sort of professional analysis and individualized decision-making and follow-up, and a staff to do it, that simply costs more and is less dot-com like than the Prosper model contemplated.
The second thing we've learned is that loans require a certain amount of individual attention and judgement: completely automating the process sounds great in theory but turns out not to work in practice. Success comes in finding the right balance.
Lending Club has been somewhat more successful than Prosper in part because it was less revolutionary. It behaved somewhat more like a traditional bank, doing a lot more work on each transaction, screening borrowers, setting prices, running collections, and communicating with both borroers and lenders. In addition, both Lending Club and Prosper have substantially increased their fees, basically through a ~3% origination fee. The new fee structure still has them keeping less of the take than a traditional bank, but a lot more than Prosper's original low-fee hgh-volume model.
Both may have to become even more bank-like, even more actively involved in loans than at present, to ultimately succeed.
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Topic: Fred93's Blog - Paradise Lost; Deadbeats Won (Read 17604 times)