Bank of America Knocks Mint Off Top of iPhone App Store Finance Category

image Bank of America, which has been at or near the top of the Finance category (free apps) in the iPhone App Store since its July 11 launch, was back at the top today (12:45 PM Pacific). Mint, which has been number one since its Dec. 22 launch, moved to number two.

Contributing to the rise in the App Store standing is BofA’s purchase of a feature spot in the iTunes store (see screenshot below). The release of a new version Dec. 28, is also helping the download count. 

The BofA application now leverages the location-based capabilities of the iPhone, automatically showing nearby ATMs without inputting a Zip code (see video below, posted in the BofA mobile media center here).


iTunes App Store main page
(20 Jan. 2009)

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Note: For more info on the market, see our Online Banking Report on Mobile Banking.

Lending Club Launches UNCRUNCH AMERICA, a Microsite Advocating Social Lending

image During the Christmas holidays, Lending Club and its partners launched a clever new microsite, UNCRUNCH AMERICA at <uncrunch.org>. The site promotes peer-to-peer lending as a way to help increase the availability of credit in the United States (see screenshots below).

Joining the effort are four others:

The site explains the concept behind peer-to-peer lending and funnels visitors to Lending Club or On Deck Capital to borrow. Lending Club was promoting the site on its homepage (see third screenshot), but it’s no longer mentioned. And none of the other partners mentions it on their sites.   

The site consists of just two pages, the homepage and a Learn More page listing the partners. The homepage uses Flash to deliver five different messages. The red action buttons lead to a special landing page to Lending Club (see third screenshot).

According to American Banker, Lending Club hired Tobin Smith, the chairman of ChangeWave Research, to create the campaign.

Analysis
Overall, I like the UNCRUNCH idea. It’s timely. It has a catchy name. And it resonates with consumers. But companies must be very careful using consumer advocacy as a marketing strategy. While most consumers understand the need for the sponsor to make a buck, they can see right through anything that appears overly self-serving.

In financial services, credit unions have a distinct advantage here. As member-owned cooperatives, their consumer advocacy messages are believable. Shareholder-owned banks have less credibility, but can still pull it off if they back up their words with a record of action.

I think that’s why ING Direct’s We the Savers campaign works (see previous post here). For its entire eight years in the United States, the bank has consistently promoted savings and thrift. So few question its motivations behind the We the Savers petition drive, though clearly it supports the bank’s for-profit savings program.

On the other hand, UNCRUNCH AMERICA was a bit misleading when it first launched (see first screenshot below from Jan 7). But with the recent improvement in disclosing the site’s purpose and primary sponsors, I think it’s acceptable now (see second screenshot below from Jan. 19).

Here are the main improvements:    

  • It wasn’t clear that the primary sponsors were lenders. But the new site includes Personal Loans and Small Business Loans sections that clearly disclose the Lending Club and On Deck Capital involvement. There is also new fine print at the bottom of the page that further identifies the sponsors.
  • The original copy made it sound like a completely altruistic effort with its main pitch, Invest in America. That section has been completely removed and the site no longer solicits investors/lenders. It’s clear now that the site is designed to generate loan leads. The main button on the homepage was changed from Invest in America to I Need a Loan.

I’m relieved that UNCRUNCH.org has stepped up its transparency. At this point in the financial mess, we need lenders and other financial entities to be totally upfront with the public so as not to invite even more regulation than what is already coming. Given its six-month hiatus in 2008 while it revamped to comply with new SEC requirements, Lending Club should understand that better than most.    

Other financial institutions should consider similar cooperative efforts in their local areas. The public could use some positive messages from the banking sector. 

1. UNCRUNCH AMERICA homepage before improvements (7 Jan. 2009)

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2. Homepage after transparency improvements (19 Jan. 2009)

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3. Lending Club homepage featured UNCRUNCH button (7 Jan. 2009)
but it has since been removed

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Note:

1. For more info, see our Online Banking Report on Peer-to-Peer Lending

Pennsylvania State Employees Credit Union is First to Add Free FICO Credit Scores to Online Banking

image In what I hope is the beginning of a trend, Pennsylvania State Employees Credit Union (PSECU) is offering free FICO credit scores to its online banking customers. The CU says more than 200,000 members are eligible to receive free scores.

Although, Wamu and HSBC (note 1) both offer free scores for their respective credit card customers, PSECU is the first financial institution to offer scores to checking account customers within the online banking area.

There is no charge for the service, but members must enroll to participate. A new score will be posted online each month in the online banking area. Members also have the option to receive alerts when their scores are updated.

image The service is powered by Fair Isaac’s MyFICO service. According its press released today, the company is talking with other financial institutions about participating in the  Scores on Statements program. Currently, 1.5 million consumers have access to free credit scores through the service.

Bottom line: Without knowing the financial arrangements, it’s impossible to estimate the ROI. But credit scores have real value to consumers and any financial institution providing them for free is likely to improve its standing. It’s also possible that a free credit score service could be a profit center if fee-based credit report monitoring options are marketed to enrollees of the free service (note 2).  

PSECU page explaining the free FICO score program (link, 15 Jan 2008)

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Notes:
1. Only HSBC’s Sears Solution MasterCard includes the free scores. 

2. See our Online Banking Report on Credit Report Monitoring for more information on the opportunities for retail banks and credit unions. 

SmartyPig Releases Social Savings Metrics; Launches in Australia with ANZ Bank

image SmartyPig, which launched its social savings program in March 2008 (previous post) and debuted at Finovate Startup (video here), hit the world stage Dec. 16.

The company, operating out of world headquarters in Des Moines, Iowa, partnered with ANZ Bank to launch SmartyPig in Australia. ANZ was able to lay claim to being the first to offer social savings down under (see note 1).

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The site is nearly identical to the stateside version, but ANZ has a smidgen more branding (see screenshot below). Also note the new emphasis on being 100% free, a benefit echoed on the U.S. site as well.

However, unlike U.S. partner and part owner, West Bank (note 2), which has the SmartyPig logo plastered all over its site (see screenshot below), the ANZ site has no mention of the product, it even draws a blank using ANZ site search.

Social savings metrics from SmartyPig
Because SmartyPig’s sole emphasis is on goal-based savings, its results provide unique insights into the market. While the company has not released account totals, its partner, West Bank disclosed that total deposit in the program amounted to $5.6 million at the end of Q3.

While that’s less than $1 million per month since launch, since many accounts start very small, it could be a healthy number of accounts. And with the requirement of automated savings additions, the growth potential is excellent. Assuming a $1,000 average account balance (note 3), the company would have attracted more than 5,000 total accounts during its first six months.

After the initial launch spike, site traffic has been steadily increasing to 25,000 monthly visitors in December (see chart below).

SmartyPig has made available information on the savings goals made by users. The data is through Oct. 2008 (except total deposit amount) and includes only the totals from the U.S. site. 

Total amount on deposit (30 Sep 2008, per West Bank 10Q): $5.6 million

Primary account holder by age*:

18-25 >>> 30%
26-35 >>> 37%
36-45 >>> 20%
46+ >>>>> 13%

*By law, primary account holders must be 18 or over,
so children’s goals are owned by their parents

Average goal amount across all holders on the following dates:

April 1 >>>  $3,900
May 1 >>>> $7,300
June 1 >>> $7,400
July 1 >>>> $7,400
Aug 1 >>>> $7,900
Sep 1 >>>> $7,700
Oct 1 >>>> $8,600

Goal amount by category:

Travel >>>>>>>>>>>>> 21%  (Avg = $4,400)
Holiday spending >>> 12%   (Avg = $900)
Electronics >>>>>>>> 10%    (Avg = $2,500)
Home improvement >> 6%  (Avg = $12,900)
Unspecified >>>>>>>>> 5%   (Avg =  $9,800)
Weddings >>>>>>>>>>> 5%   (Avg = $7,900)
House down payment or addition >>> 4%  (Avg = $22,200)
Emergency fund >>>>> 3%   (Avg = $6,600)
Babies >>>>>>>>>>>>>> 3%   (Avg = $5,100)
Home furnishings >>>> 2%   (Avg = $3,500)
Car or car expenses >> 2%   (Avg = $6,800)
College >>>>>>>>>>>>> 1%   (Avg = $9,700)
Other >>>>>>>>>>>>>> 26%  (Avg $10,700)

Average projected time until goal met based on savings rate: Just over 4 years

 

SmartyPig ANZ Version (13 Jan 2009)

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USA partner West Bank’s homepage (14 Jan 2009)

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Traffic chart from Compete (14 Jan 2009)

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Notes
:
1. See our most recent Online Banking Report: Growing Deposits in the Digital Age, for more info on social savings, along with 16 other strategies.

2. Des Moines, Iowa-based West Bank owns 18% of SmartyPig according to its 30 June 2008 SEC filing.

3. My guess, not a number that has been disclosed.

EFT Network Inc. Launches Remote Deposit Capture via Fax

imageRemote deposit capture (RDC) via mobile phone has to be the coolest way to make paper checks disappear from your office and reappear in your account. But from a usability standpoint, it leaves something to be desired, limiting its appeal to geeks with a check to deposit every once in a while. 

Businesses with several checks or more every week need something more convenient and easy to use. Proprietary scanners connecting to PC-based software apps work well, but require installation and training, not to mention $30+ per month in service fees.

image Enter FAXTellerPLUS, a new solution from Hawthorn, NY-based EFT Network, that uses the common fax machine for the input mechanism. The bank runs the software on its end freeing the user to get back to their business once the fax transmits.

Today’s press release says the four banks using the system are processing “thousands of transactions per month.”

How it works:

  1. Bank sends customers a special sleeve that holds up to 3 checks to be transmitted and includes info on the customer so deposit can be directed to the correct account.
  2. Customer transmits the check (front and back) to the bank via standard fax machine.
  3. Bank sends confirmation back to customer via fax or email.
  4. Funds are deposited in customer’s account and images viewable online.

If this works as billed, it could put RDC into the hands of micro- and small-businesses as well as consumers with access to fax machines at home or work. If any readers have used or tested the system, please let me know your experience by commenting here or emailing.

Lending Club Regains Momentum, Posts 40% Gain in P2P Loan Originations Compared to Dec. 2007

image If you think your 2008 was stressful, imagine having to shut down for an extended and unknown period (it turned out to be 6 months) just 10 months after launch. Then spending hundreds of thousands of dollars on SEC paperwork that your major competitor avoided (temporarily it turns out), all the while watching that same competitor take your market share while you keep your mouth shut via SEC mandate.

That was Lending Club’s year. But unlike so many horror stories of the past year, this one has a happy ending, at least so far. Not only did Lending Club reopen for business Oct. 14 at our Finovate conference (demo video here), within weeks they had already moved ahead of last year’s origination pace (note 1).

As you can see in the table below, Dec. 2008 was substantially ahead of Dec. 2007 in all measures except average loan size and approval rate, which dropped a full 2 points:

  • Number of applications increased by 78%
  • Number of approved loans increased by 43%
  • Dollars originated increased by 29%
  • Average loan size approved declined by $1,000 (9.4%)
  • Overall approval rate was 8.5% last month compared to just over 10% a year ago

Table: Lending Club loan origination results: Dec 2008 vs. Dec 2007

  Dec
2008
Dec
2007
Change % Change
Number of loans originated 238 167 + 71 43%
Dollars originated $2.28 mil $1.77 mil + $0.5 mil 29%
Number of loan applications 2,798 1,575 + 1,223 78%
Approval rate 8.5% 10.6% (2.1%) (20%)
Dollar value of all applications $24.2 mil $14.4 mil + $9.8 mil 68%
Average loan size approved $9,600 $10,600 ($1,000) (9.4%)
Average loan size declined $8,600 $9,000 ($400) (0.4%)
Site traffic (unique visitors) 78,000 58,000 20,000 35%

Source: Loan volume from Lending Club, site traffic from Compete, calculations by Online Banking Report, 8 Jan 2009

Here’s the monthly origination chart (in US Dollars) courtesy of LendingClubStats.com who compiled the figures from data provided by Lending Club. 

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Source: LendingClubStats.com, 8 Jan 2009

Also, site traffic is up 35% year over year according to Compete. 

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Source: Compete, 9 Jan 2009

Notes:
1. The number/dollars of loans originated and applied for at Lending Club in Oct. 2008, Nov. 2008, and Dec. 2008 were all higher than the respective months in 2007. 

2. For more info on the market, see our Online Banking Report on P2P Lending.

New Peer-to-Peer Lender Pertuity Direct Nears Launch

image Just when it looked like U.S. regulators were about to kill the market for P2P lending, a new entrant is about to launch. Apparently, with the full blessing of government watchdogs.

Pertuity Direct, originally scheduled to launch at our Oct 14 Finovate conference, is about to go live with a new approach to P2P lending. In an off-the-record discussion with founder Kim Muhota and marketing director Lisa Lough yesterday, I learned about their novel approach to make the service appeal to borrowers, investors, AND regulators. It could be the model for the industry going forward.

While I’ll reserve judgement until I can actually use the service (it’s still in private testing), I’m impressed with the company’s thinking and encouraged that it appears to have successfully navigated the regulatory minefield and will make it off the ground in early 2009.

We’ll cover it in more detail at launch.  

Note: For more info on the market, see our Online Banking Report on P2P Lending.

Bank of America Launches a Blog…Finally

image What better way to start the new year than to blog about a blog. And it’s big news. Bank of America, through its Center for Future Banking (see note 1), launched a blog called The Future Banking Blog. The blog, quietly began after Thanksgiving (note 2), has averaged about 2 posts per week,  about right for a banking blog (note 3).

The content so far has been wholly unrelated to Bank of America or its products. The blog is part academic, part strategic, bringing insights from the Center’s joint team of MIT academics and BofA business execs.

The design however, is pure Bank of America (see below). It uses the BofA color palette and includes a prominent powered by logo in the upper right. It’s also housed under a bank URL <futurebanking.bankofamerica.com>.

All in all it’s a good effort, positioning BofA as a thought leader in the upside-down world of commercial banking circa 2009.

image

Note:
1. The Center is seeking an Executive Director. The position was posted on Dec. 16, but given the holiday, it’s not too late to toss your name in the hat.

2. Hat tip to Colin Henderson at The Bankwatch for writing about it.  

3. For more info on financial institution bloggin, see our Online Banking Report on Banking and Social Media.

Chase Bank, Mint Top the Charts with New iPhone Apps

imageimage No one knows for sure how Apple compiles the list of its top-selling iPhone apps, but it’s related to how many are sold during the past few hours. I’ve seen speculation that the measurement period is 2 hours (see note 1).

But there is no doubt about the benefits of rising to the top. The winner receives prime exposure in the iTunes Store and on the iPhone itself (see screenshots below).

I’ve checked the Finance category rankings dozens of times since the store opened in July, and the top app had always been Bloomberg with Bank of America usually the runnerup.

But Friday, a new top seller emerged in the Free list in the Finance category (note 2), Chase Mobile  while Bloomberg and BofA were each knocked down a spot to numbers 2 and 3. The Chase app was released just one week ago (12 Dec). But by Saturday morning (20 Dec), Chase had already been replaced at the top by online personal finance startup Mint, which released its iPhone app Monday (15 Dec), but it didn’t show up in the iTunes store until 1 AM Friday.  Mint stayed at the top all weekend and is still number one now (10 AM Pacific, 22 Dec).

imageIn the screenshot below and right, you can see the free publicity derived from holding the top spot. Also, note that you should put your name into the application. Bank of America, ranked number 3, neglected to include its name in the title, so it loses some branding value. Although, they would have to use BofA to fit into the space.  

Chase App (link to iphone App)
The Chase app itself is attractive and is similar to Bank of America’s with a login button to the website and an ATM/branch-finder utility. As of this evening, 64 reviews have been posted with an average 3.5-star rating out of five, slightly better than the 3-star rating of Bank of America’s iPhone app with similar features.

Mint App (link to iPhone app)
As expected from a company that is carefully using design to help distinguish it from the pack, Mint’s new app is great looking. Across all aggregated accounts, the mobile app shows account balances, transactions, and progress towards budget goals. A nifty alerts icon on the bottom provides a convenient way for users to keep tabs on important info on the go.

Another difference from most banking apps: Mint lets users choose whether they want password protection enabled after their initial login. If you choose to log out, then the app erases all data in memory, and you must log back in next time. If you choose not to log out, then your data remains visible until the next visit with no login required (note 4). This is a great convenience, but something that may not be allowed at regulated financial institutions.

Some users have reported trouble with the app on older phones. On my first-generation iPhone running version 2.1 software, the Mint app wouldn’t download. But once I upgraded the iPhone software to version 2.2, it downloaded flawlessly and all functions worked perfectly. In Mint’s forum, some users were reporting problems with the Budget feature, but it seems to work fine for me (forum thread) (note 3).

Top Apps in the finance category of iTunes’ App Store
(7 PM Pacific, 19 Dec 2008) 

image

 Top free finance apps list displayed on iPhone:
          at 7 PM Pacific, Fri. Dec. 19                               at  2 PM Pacific, Sat. Dec. 20  image        image

Chase Mobile iPhone app                    Mint iPhone app main screen
main screen
(19 Dec 2009)                          (19 Dec 2009)

image       image

Notes:
1. That 2-hour window could be about right. When I made this screenshot, the new Mint app was at number 10; two hours later (9 PM) it had risen to number 5 (see screenshot above). By 9 AM Saturday morning (20 Dec) it had risen to number 1.

2. The App Store divides the top apps into two categories, free and paid. The top 20 free apps are listed on the right side and the top 20 paid apps are listed on the left. The apps in the middle are listed by newest first.

3. These operating system incompatibilities, a real problem in pre-1995 online banking services, had largely been left behind when banks embraced the Web in the mid-1990s. Unfortunately, mobile banking will add to your tech-support costs. 

4. Mint also reminds users that they can choose to lock their entire iPhone for extra security.

5. For more info on the market, see our Online Banking Report on Mobile Banking

Announcing the Finovate 2009 Conference Series: FinovateStartup and Finovate2009

image

We know 2009 promises to be a challenge, but if history is any judge, more lasting innovations will be put in place next year than any year this century. Necessity truly is the mother of invention, especially for startups. 

Next year, we will again showcase the best and brightest ideas at our Finovate conferences:

imageFinovate Startup:
San Francisco – 28 April 2009

The conference features the launch of new companies in financial tech, as well as young companies launching major new products and features. Last year, we had 40 startups participate (see first screenshot below), and this year we expect even more (see demos from 2008).

imageFinovate 2009
New York City – 29 Sept. 2009
We head to NYC for the third year in a row to showcase the best of 2009 in the online and mobile space. Company size is irrelevant; it’s all about what’s new and what’s hot (see demos from 2008, 2007).

Attend a Finovate conference in 2009
About 700 of the most innovative execs in banking, finance and technology attended a Finovate event in 2008. The events are fast-paced, just a single day, and allow you to network with the presenting execs along with the decision makers in the audience. Both attendees and presenters love the format.

If you want to join the excitement, you can sign up up now at deeply discounted prices. Tickets are transferable, and refundable, so the risk is low. If you want to bring your entire team, email Eric Mattson, [email protected], for a team price.  

Present in 2009: FinTech startups
If you have a young company involved in the online or mobile finance area, there is no reason not to be at FinovateStartup. This year, we are opening the floor to any qualifying startup. So, for the price of a single ticket, you are ensured a table at the event to show off your company and a chance to demo on stage (see previous FinovateStartup demos). 

The earlier you apply, the more benefits you receive. Please check out the Presenters page or email to [email protected].

Present in 2009: other FinTech companies
At Finovate2009 in NYC, we’ll put the best two dozen ideas on stage regardless of the size or location of the company. Last year, we had popular demos from large companies including Intuit and CheckFree/Fiserv as well as startups, Mint, Credit Karma, NeoSaej and others (see previous demos from Oct. 2008 and Oct. 2007).

If you have a dynamite new product and are interested in launching it at Finovate NYC, please email [email protected] or check out the presenters page.

Press
Last year, more than 50 financial, technology and personal finance press and analysts attended the Finovate conferences. If you’d like a press pass for either event, please email me at [email protected].

Presenters at FinovateStartup 2008

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Presenters at Finovate 2008

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Giving the Gift of Microfinance: 2008 Update

image With capitalism bruised and battered in the past year, it’s more important than ever to teach our friends and family about the ultimate upside of business and commerce, the potential to lift families out of poverty permanently. And the need is high, as always.

Unless you have your own personal foundation, there is no better way to do that than by spreading a bit of your wealth around the globe through microfinance companies such as Kiva.org, eBay’s MicroPlace, and a host of others.

This holiday season the major microfinance companies are making it easy to spread the word, and the money, with gifting options. And with Christmas just a week away, here’s a last-minute option that doesn’t require a trip to the mall. 

Kiva <kiva.org>
Kiva is using the same approach as last year, but with an updated paper gift certificate (see below) that can be printed and given to the recipient or sent directly through email. It’s a simple solution that works fine for its rabid fan base. The homepage (below) features a prominent link to the gift page and a counter across the top tracks number of certificates purchased this week (more than 13,000!).

MicroPlace
MicroPlace has a snazzier gifting landing page (see below), not surprising given its eBay backing. The microfinance nonprofit is promoting gift options heavily across the Web, with a large banner last week on the search results page at BN.com (see below) and a costly top banner and right-side skyscraper ad on TechCrunch yesterday (see below).

Microplace is spurring giving with a small Chilean piggy bank that will be sent to the recipient along with an e-card (givers can choose not to send the bank). But the big difference with Microplace’s gift program is that it’s only a “gift in your honor program.” That means the giver chooses the entrepreneur to invest in, rather than the recipient. That gets the money invested faster, but it’s not as satisfying a learning experience, either.

Final comment: There’s not much here that needs improvement. But I do think it would be better to let the giver decide whether they want the recipient (of the gift card) involved in choosing who gets the micro loan. 

And financial institutions: Here’s a great cause to get behind. Not only does it make a difference, it shows you support the small business community.

Kiva homepage features gift option (17 Dec 2008

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Preview your gift certificate before sending (17 Dec 2008)

image

 
Microplace ads at Barnes & Noble (early December 2008)

 image       image

Banner on top of TechCrunch (16 Dec 2008)

image

 Microplace gifting landing page (17 Dec 2008)

image

Open Letter to SEC: Leave Peer-to-Peer Lending Alone

Dear Mr. Cox:

image I don’t have to tell you that the Madoff mess has dominated the Wall Street Journal headlines for the past few days. You probably saw Jane Kim’s recap today tallying the $25 billion in known losses so far in a wide-reaching, long-running fraud perpetrated by a firm overseen by your agency.

It’s not that I blame you for the Madoff fraud. The cops can’t catch every crook. But now that you have your hands full with this matter, I have an idea as to how you can free up some staff resources to sort out the mess Mr. Madoff left.

You’ve probably been too busy to read Netbanker (see note 1), but if you had, you’d know that I haven’t been very happy with the way the U.S. peer-to-peer lending industry has been treated by the SEC this year. Thanks to your agency’s efforts, the three major providers have all been shut down for extended periods and several others have been dissuaded from opening at all.

Currently, just a single company, Lending Club, remains in operation, but they were crippled much of the year by a dark period as they spent hundreds of thousands of dollars meeting SEC registration requirements. Thankfully you approved their registration statement and they are now open for business, albeit weighed down by massive ongoing reporting requirements. 

As recently as last year, we had as many as a dozen companies in various stages of launching companies in this space. The goal is to connect people with excess funds to those in need of money with a fair rate of interest established via open bidding in a transparent market. What more can you ask for? 

And even before the SEC became involved, it’s not like these companies were skating by with no regulation. They spent considerable time and money obtaining lending licenses in individual states and/or working with existing regulated financial institutions to originate loans. In addition, the startups all had to comply with a myriad of federal consumer protection statutes. In fact, you could say they were already operating as highly regulated companies.

The biggest of the group, Prosper, even made all its data available to the world including the good, the bad, and the very, very ugly. They could very well be considered the first open source financial institution in the world. Their unique transparency gave us all a ringside seat to watch the ebb and flow of a new market gaining traction. 

No, Mr. Cox, it has not been a smooth ride for Prosper. More than 20% of the loans made the first year have already gone bad, and ultimately the losses may end up above 30%. But with an average interest rate of 17% on the 70% of the balances ultimately repaid, most lenders will get most, if not all, their principal back from their speculative bets. That’s a better return than blue chip stocks over the same period. And I’m sure the investors in Madoff Securities would be happy with to have 98% of their principal returned.

But even before the SEC got involved in P2P lending, things were improving for lenders. The open market fostered quick learning as lenders learned from both from their own mistakes and those of others in the community.

And the exchange operators were learning even faster. Prosper now makes much more borrower info available and began verifying certain applicant statements. As a result, returns appear to be improving. Although, against the backdrop of a severe recession, it’s hard to make good comparisons.

Had these companies been left alone, journalists would be writing stories about how P2P companies were stepping into the lending void left by the turmoil in the banking sector. And how wise the U.S. regulators were in letting this new area thrive amidst the collapse of HIGHLY REGULATED financial companies around the world.

But instead, the SEC decided it needed to keep closer tabs on the tiny $100 million annual volume originated in these markets (that’s just a single day’s worth of fraud by Mr. Madoff). Your agency came to the surprising conclusion that loans, made between individuals in a regulated peer-to-peer market, are securities and needed SEC oversight. And based on recent events, what exactly does that even mean? Besides requiring a flood of documents uploaded to your servers, are you really going to assign an agent to watch over these $3,500 loans. I don’t know what your 2009 staffing plans are, but I’m guessing everyone will still be pretty busy.  

The decision to classify these loans as securities will ultimately cost Prosper as much as $10 million, a potentially fatal blow. Prosper has been shut down as it goes through the SEC-registration process. The SEC ruling has already cost the company at least $2 million in cash: $700,000 just to create the documentation for your agency to review, $1 million to pay-off state securities regulators, and an undisclosed amount to settle with your agency. And the company must still settle or fight the class-action suit, where lenders, who knew perfectly well the risks they were taking (Hello… they were lending to strangers on the Internet!), will try to win back their loan losses by asserting that Prosper was selling unregistered securities.

Furthermore, you are driving innovation and competitors out of the market. The original pioneer in the industry, Zopa, withdrew from the U.S. market, despite a thriving business in the United Kingdom because of the threat of SEC registration. End result: There is just a single U.S. P2P loan exchange operating today. Had you stayed out of it, we’d have at least five, probably more. 

I have this to say to the SEC:

  • Rethink your oversight model: We’ve seen hundreds of billions lost by SEC-regulated companies this year. You weren’t even able to sniff out a $50-billion Ponzi scheme in your own backyard. Maybe you don’t have enough resources. I buy that. Even mammoth funds with virtually unlimited resources were duped by Madoff. So let me ask the obvious question. If you are short on staff, why are you wasting them on controlling the $100-million P2P market where every bid, loan, and repayment are open to scrutiny by the community. 
  • Embrace openness: Instead of stomping on a new, open and self-regulating market, maybe you could learn from it. As Don Tapscott proposed in his BAI Retail Delivery keynote last month, let’s open source financial holdings. If Madoff had made his trading data public, his customers could have monitored the flow themselves, and figured out about $49.9 billion dollars ago that he was fabricating his results. 

Bottom line: Leave the P2P lenders alone. Their open approach reflects an order of magnitude far better than the broken regulatory model employed on Wall St.

Regards,

Jim Bruene, Editor & Founder
Online Banking Report & Netbanker.com

<whew!…stepping off soapbox>

Note:
1. In the spirit of openness, Prosper, Lending Club, Zopa, Loanio, Pertuity Direct and other P2P startups are customers of ours, buying research reports and admission to our events. But the total gross revenues from the sector amounted to less than 2% of our total revenues. We do not invest in any companies we cover, nor do they pay us for consulting, or influence our editorial coverage in any material way.