Taking Internet Finance to the Next Level, Part 1
Jan 5, 2008 4:00 AM PT
Internet banking and stock trading was all the rage during the late 1990s. Now, two emerging areas of e-finance -- peer-to-peer lending and microfinance -- are disrupting the status quo even further and moving their markets into a new stage of development.
These companies are doing business mostly overlooked by their more established brethren -- enabling individual lenders, borrowers, entrepreneurs and investors to find and connect with each other directly.
Similarly, the Net is also key to the rising prominence of the corporate social responsibility and ethical investing movements, as well as the extension of philanthropy well beyond the wealthiest individuals who have traditionally been the source of charitable donations.
It's not just the networking power of the Internet in the areas of marketing, online investing and loan origination where new networking technology is changing the way personal finance gets done, however. Mortgage lenders such as Thornburg Mortgage are realizing operational benefits in the loan processing and administration areas while adapting to the new opportunities and challenges wide-area networking technology in general has brought forth.
A Leaner, Borrower to Lender Form of Financial Intermediary
Prosper.com cofounder and CEO Chris Larsen has been harnessing the power of the Internet to shake up the retail lending world since the mid-1990s when he founded E-Loan. Larsen led the company through a 1999 IPO and a 2005 acquisition by Popular, by which time the company had closed more than US$27 billion worth of consumer loans.
With Prosper.com, Larsen's consumer banking expertise is complemented by the computing expertise of the company's chief technology officer, John Witchel. Witchel is the driving force behind FlashMob Supercomputing, a massively parallel computing collaboration that seeks to make supercomputing available to the masses.
Nearly $97 million in consumer loans have been funded through Prosper.com's e-lending platform and more than 470,000 members have signed on as members -- about 330,000 joined last year.
Prosper.com's formula is relatively straightforward. It doesn't lend, borrow, assume the risk or earn the reward for any loans members make. It simply provides the Internet platform through which prequalified borrowers and lenders can find each other, evaluate and negotiate the terms of typically small personal and business loans that are based on set of standardized rules, terms and conditions. For this, Prosper earns a percentage fee of all loan transactions.
"We believe in having an open marketplace where borrowers decide the maximum rate they're willing to pay and lenders decide who they're willing to fund and at what rate," Larsen told the E-Commerce Times.
An average 2,245 borrowing requests were listed on Prosper.com on a daily basis last year. Borrowers are rated and classified as Prime Select, Prosper Select, Near Prime Select and Sub-Prime Select. Rates increase along a sliding scale for loans that have averaged $6,141 in principal. In October, they ranged from 9.09 percent for Prime Select Index loans to 10.45 percent for Sub-Prime Select Index loans.
Exporting the Peer-to-Peer Lending Model
Prosper.com in August announced that it was joining with SBI Group to launch a Prosper joint venture in Japan, as well as explore opportunities in other Asian markets. By doing so, Prosper is joining with a large and well-established corporation committed to bringing innovative financial technology to Japan and Asia. SBI's online finance businesses include SBI E*Trade Securities, Morningstar Japan and E-Loan.
Prosper.com spent about one year working on the design, development and testing of its Web services before launching it for the general public. So what does it take, technologically speaking, to be successful in the fast-growing peer-to-peer lending market? "Safety and security have to be the No. 1 priority [and] a relentless development program and release schedule," Larsen told the E-Commerce Times.
While it is the company's policy not to disclose the technology and techniques it employs to prevent fraud and ID theft, Larsen noted that the company does have an identity theft guarantee that returns the remaining principal balance on any loan funded through Prosper.com that was obtained fraudulently by a perpetrator of ID theft.
While agency credit ratings are the primary means of qualifying and rating Prosper.com's borrowers, they are not the sole criteria for qualifying Prosper.com borrowers.
"In addition to a credit grade, which is determined by a credit score, we provide a multitude of data points that are pulled from borrowers' credit reports. And of course, people are free to be as expressive as they choose in terms of why they're requesting their loan, etc.," Larsen explained.
The Mortgage Market
While the accessibility of the Internet and its growing application processing powers are fostering changes on the customer-facing marketing and loan origination side of the e-lending business, the Internet, wide-area networking and Web application services are facilitating change on the operations side in the back-office.
Thornburg Mortgage is a leading provider of single-family super-prime residential mortgage loans focused primarily on the "jumbo" and "super-jumbo" segments of the adjustable rate mortgage market.
As is the case industry-wide, the company has had a tough time since the emergence of the sub-prime mortgage market crisis and the subsequent tightening of liquidity. That isn't preventing it from using new technology to generate more and better lending opportunities or trying to realize greater cost and operational efficiencies.
Three key areas of information technology, in particular WAN (wide-area network) and broadband communications, workflow systems integration, and the Internet have had a positive effect on the mortgage lending business, according to Paul Decoff, Thornburg's chief lending officer.
WAN, Workflow and the Internet
Improved WAN communications has enabled the company to distribute and coordinate the flow of work to multiple locations while providing immediate access to information in a centralized fashion and in a reliable, cost-effective manner, Decoff explained.
"This creates more efficient decision making for loan underwriting and approval in addition to more effective workflow for the group. This also results in helping the people in the sales field make quick decisions, gives capital markets hedging information, and quicker underwriting for loan approvals. I really believe that WAN and broadband communications has had a larger impact on mortgage lending than the Internet," Decoff told the E-Commerce Times.
The integration of workflow and loan origination systems is another area where new digital computing and telecommunications technology has yielded benefits.
"Having the workflow software integrated with the LOS (loan origination system) tells our workgroups what to do next with loan applications. This is like a robust project management system -- from the file level it can speed up the underwriting process and coupled with the WAN it really makes workflow more efficient and allows us to distribute tasks across multiple locations," Decoff elaborated.
Making use of the Internet, meanwhile, has "had a huge impact on lending at TMA," he continued.
"For example, due to the Internet, the company can provide multiple physical locations access to information at the same time. This infrastructure really supports an outsourcing model for our lending partners, vending partners such as LenderLive and Cenlar, and our acquired subsidiary, Adfitech," said Decoff.
Digital document imaging has sped up and made the loan underwriting more efficient, even for exception loans that don't conform exactly to typical standards, he said.
"From a business standpoint this outsourcing model can financially reduce fixed costs and transfer variable costs -- meaning that the only time we incur costs is when we actually make transactions. So we would pay on unit basis to LenderLive and Adfitech," he concluded.