In early February, Prosper announced that it had asked investors to limit their investment in fractional listings to a maximum of 10% of any loan’s requested amount. The previous limit had been 50%. This move was part of an effort to rebalance the marketplace on behalf of smaller retail investors, many of whom had begun to feel crowded out by larger investors who would snap up 50% of a listing immediately after it became available. In today’s post, we examine the data to determine what effect the changes have had on the market for fractional loans.
Duration of Availability
One seemingly intended effect of the 10% fractional funding limit would be to lengthen the amount of time that listings remain available before being fully funded. As we previously discussed the proportion of listings that rapidly become fully-invested increased greatly over the course of 2013.
In the graph below, we examine Prosper’s fractional listings so far in 2014, broken out by the duration that the listing was available for investment. This January, the trend continued, even in the fractional loan pool, where nearly half of loans were fully funded and no longer available within one minute of being listed. However, after the early-Feb changes, we can see a new and different pattern. Over the past several weeks, the fraction of listings ending in under one minute has dropped to near 5% of the overall pool. The proportion of loans remaining available for over an hour has seen a correspondingly large increase, helping to ensure greater investment opportunity for a larger number of investors.
Investors Per Loan
We have previously described the concept of multiple people investing in the same consumer loan as a transformative innovation in the history of finance. This democratic spirit, making available to ordinary investors something that had once been the exclusive provenance of large banks, has been a core driver of peer-to-peer lending’s brand and growth story. If this February’s changes are making a difference, one would also expect to see evidence in this metric.
In the graph below, we group all fractional loans in 2014 by the number of investors per loan and then view this distribution by week. As we can see, a fairly large proportion of loans in January had under 10 investors, and a rather sizable chunk had only 2 (which would make sense given the 50%/loan limit at the time). However, beginning in February, there is a dramatic change in the distribution. After Prosper’s changes, a vast majority of fractional loans now have participation from over 50 investors, and over half have more than 100!
As any multi-sided market grows, platforms face the difficult task of balancing supply with demand and catering to the needs of diverse constituents. The participation of major institutional investors adds stability to the market, allows borrowers to get credit more quickly, and decreases the likelihood of unfunded loans. At the same time, it is understandable that smaller investors who had previously enjoyed an ample supply of investable loans might feel crowded out by these bigger fish. As detailed in the above analysis, Prosper’s changes seem to be helping in maintaining a balance on their marketplace. Ideally, we will see massive growth in online lending, both on the existing platforms as well as from newcomers, ensuring ever-growing access to credit for borrowers and sufficient investment opportunities for investors of all sizes.