New Academic Study Quantifies the Benefits of Group Membership for Prosper Borrowers

In the recently published study “Emergence of Financial Intermediaries in Electronic Markets: The Case of Online P2P Lending“, Sven Berger and Fabian Gleisner examined more then 14,000 Prosper loans (originated from Nov. 2005 to Sep. 2007) to evaluate the benefits borrowers derived from joining a Prosper group versus listings with no group affiliation.

They tested the following hypothesises for statistical evidence:

  • Borrowers within groups are able to borrow at lower credit spreads.
  • The recommendation of a credit listing by the group leader leads to lower credit spreads.
  • A group leader’s bidding serves as a credible signal for the quality of the credit listing and results in lower credit spreads.
  • A group leader’s bidding on a credit listing signals information quality and has a stronger impact on credit spreads than a recommendation by the group leader.
  • A higher group rating leads to lower credit spreads.
  • Increasing group size leads to lower credit spreads.

They found that the group leader as intermediary played a very important role on the ability of the borrower to obtain a loan and to obtain this loan at a lower then average interest rate.

Since most of the bids on group affiliated loans came from lenders that were not members of the group, the authors conclude that the group leader has an important signaling function.

Some of the empirical results:

  1. The results … confirm our fundamental hypothesis H1: the use of an interme- diary in the electronic marketplace significantly lowers borrowers’ loan spread. Group affiliation ceteris paribus lowers the credit spread by 25 basis points. (page 15)
  2. Does the choice of the intermediary matter? Should borrowers make demands on paid intermediary services? In order to be able to compare the net impact of unpaid and paid groups, we analyze Bor- rower Rate Net … and find that intermediation significantly lowers borrower’s cost of credit overall. However, we document a dif- ference in the net impact of group membership of 42 basis points: An unpaid intermediary reduces borrower’s credit spread by 107 basis points, a paid intermediary by 65 basis points. It follows that the group fee can turn the case for a paid intermedi- ary borderline. The average group fee of 110 basis points … will more than counter the net reduction in credit spread. Taken together, inter- mediation has a positive net impact but the choice of intermediary matters. We hereby do not com- ment on the overall impact of paid groups, since this analysis does not incorporate the intermediary’s role in overall access to credit or the long-run performance of the loan thus originated. (page 15ff)
  3. the group leader’s bid for the borrower’s credit listing exerts a significant stronger impact on borrowers’ credit conditions than a recommendation. Moreover, Certification is only significant at the 10-percent level. We can confirm Hypothesis H3b: the regression coefficient of Group Leader Bid exceeds Certification. (page 18)

The study delivers strong evidence that Prosper borrowers benefited financially from joining Prosper groups.

Read the study now in BuR – Business Research.

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No more Prosper group fees announced that it will discontinue group fees in the near future for all new loans. Group fees, also called Group leader rewards or Group rewards allowed the group leader to charge a fee that is payed by borrowers with loans in this group.

The announcement:

At Prosper, we have been listening to your feedback regarding groups and group leader rewards.

The original philosophy behind Prosper Groups was to enable borrowers in close-knit communities to leverage the reputation and peer pressure of their group to attract more bids from lenders, resulting in potentially lower interest rates for borrowers, and lower default rates for lenders. We have found, after nearly two years of experience, that the strongest groups are comprised of close networks of friends and associates, where compensation is not the dominant motivation for the group leader’s services.

As a result, we are making changes to Prosper Groups. In the next month, Prosper will discontinue payment rewards on new loans for group leaders. Group leaders will continue to earn payment rewards on all eligible loans originating before the change. Group leaders can also receive referral rewards for referring borrowers or lenders to Prosper under our Referral Program.

We hope this change will encourage group leaders to grow their groups by inviting new members from their pre-existing social networks, turning Prosper Groups into a more powerful community development tool and making Prosper simpler for both borrowers and lenders.

For more details on these changes, please visit our Group Changes Frequently Asked Questions (FAQ).

Thank you for helping us become the Internet’s leading community lending site.

The original idea of the Prosper groups was, that social connections, that already existed offline, would be replicated within the Prosper group structure.
But most groups evolved online only with no previous offline connections between the members. The (the lack of) value of the groups for the Prosper concept has been discussed repeatedly in the Prosper forum. While some group leaders did a good job screening and vetting borrower applications and the group leader could be seen as a compensation for time invested; the majority of lenders seems to see the removal of group fees as a step in the right direction.