During the month of June I had the privilege of visiting Propser’s headquarters in downtown San Francisco to get an inside look at the group of amazing individuals who are slowly but surely building the future of marketplace lending. David Kimball, CEO of Prosper came to the organization after spending the bulk of his career at Ford and USAA in senior finance roles.
As Prosper continues to transition from a startup culture of burning cash to becoming a mature stalwart lending business, David is keenly aware of the challenges and opportunities ahead of him as CEO of one of the most highly watched and scrutinized new age lenders. The actions he and his team make will continue to set the tone for the alternative lending industry, and for that matter how our financial markets as a whole are shaped in the future.
Check out part 1 of our 2 part discussion where we chat about those very challenges he and his team are facing head on to prove out the winning proposition that is Prosper.
CL: David, you have an extensive background in financial work both in positions at USAA and Ford. Though Prosper is also in the finance space, it is a rather large break from the traditional and well-established firms you have worked for in the past, so why Prosper and why now?
DK: I was fortunate to build my career at both Ford and USAA. Ford was a great education - they are really willing to take risks with their employees, and they gave me responsibilities that, in hindsight, I’m not sure I would have given myself.
Then I transitioned to USAA, which is a phenomenal brand that has an integral mission underlying everything they do. They start every meeting with a mission statement. It really is an altruistic company that wants to better each and every one of their consumers, and I loved that.
I'd had these two phenomenal experiences at established companies, but was starting to feel like it was time for a change and a new challenge. Prosper had reached out, and candidly at the time I didn’t know if it was a fit, but it was a good opportunity for our family to go to the Bay Area!
During the interview process I asked one of the interviewers, "Why can't a bank do what you are doing at Prosper?" He just flipped the question back to me and said, "You've worked for a bank. You tell me." It was obvious that I had to join the team.
I view Prosper as a great opportunity to make an impact, and to work with a thriving community of passionate individuals. When I interviewed, I fell in love with the board, and felt in my heart that having this opportunity was worth it - even if I was taking on more risk by joining a young organization.
CL: You were first CFO at Prosper and then transitioned into the CEO role, what was that transition like?
DK: I arrived in March of 2016, and jumped into Prosper in the midst of a turbulent time for the industry. The timing turned out to be helpful because it gave me the opportunity to get to know the company and employee base really well. When they eventually approached me about the CEO opportunity, I had the benefit of knowing that I would be leading a team that had been phenomenal through a tough time.
I have an encouraging board and employee base, and the former CEO, Aaron Vermut, has been great in sharing both his time and perspective. Overall, the transition was easier because I felt that I had a strong support system.
CL: For those who don’t know can you define Prosper as a business?
DK: Prosper is an online marketplace lending company that gives borrowers access to unsecured loans between $2,000-$35,000 and enables individual and institutional investors the opportunity to invest in consumer credit. Loans are used for a variety of purposes, such as a medical expense or special occasion. Many of our borrowers also use their loans for debt consolidation. Because Prosper has the efficiencies of a digital marketplace, we are often able to offer loans at a lower price than you may have for a revolving credit card.
We truly want to be able to advance the financial well-being of our customers. On the flipside, investors get a chance to invest in an asset class that has a pretty great return and a short duration. It's an opportunity to invest in something that they've not traditionally had access to.
CL: Many people worry that the marketplace lending space business model is not sufficient to sustain over the long term. What do you say to people who think that relying on outside capital rather than a balance sheet is not sustainable during downturns, etc.?
DK: What I would say is, even if a marketplace lender doesn't have an owned balance sheet, every marketplace lender has a balance sheet. They have a synthetic balance sheet. They've got the borrowers, they've got this asset class, and they've got a liability, which is where the investors are coming in.
When I was the CFO of a bank I had a $70 billion balance sheet, and it was the same thing. I've got deposits on one side, I've got a capital market debt that I've got to cover, and you're obsessing about making sure you always have coverage.
A marketplace lending platform needs to have the same focus on that collective balance sheet, both the owned and then the synthetic balance sheet that's throughout the market.
CL: In my view marketplace lending becomes the tool for all institutions to source loans. I think Marcus from Goldman Sachs, and the major $5B deal you recently closed are signs of that. Would you agree, and do you see the banks partnering more in order to reduce their origination cost, while benefiting from the investment class?
DK: We started out as peer-to-peer, but our investor base expanded because there was significant interest from institutional investors. I think we’re going to continue to see companies focus on tools for institutional investors.
The peer-to-peer model and the retail investor will always play a role – we just haven't seen a proliferation of that yet. There are only two entities right now that are doing this, and it’s hard. It requires you to be SEC registered, as well as a certain amount of scale to work.
CL: I fully agree with you. I think, when I think about marketplace lending, and where people get lost is, because they say, "It's P2P and it's nothing else," saying there's no way that's sustainable over the long term. I think you're missing the point if you think of it that way, because I think it's much more than that. It's an efficient mechanism, is what it is. Marketplace lending is a broader term than P2P. P2P is a specific version of marketplace lending.
To that point, what initiatives do you think we need to undertake to get more American people comfortable with investing in this new asset class? For me I see that as one of the bigger challenges since whenever I talk to people it takes some time to really get them comfortable with this big idea?
DK: We need to educate people and make the experience easier and more intuitive than it is right now. We’re committed to making improvements that will help us grow the retail channel.
After I took this job, my wife and I went on a vacation with another couple. The whole time my friend was reading through Prosper’s Prospectus and asking questions. I remember looking at him, someone who came from the financial services industry, and realizing how hard it was for him to absorb all the information. It highlighted the fact that we've got to try make investing in this asset class more digestible so that people can make an informed decision. To me that's the biggest opportunity.
CL: One of the challenges marketplace lending has faced in recent years is high customer acquisition cost. Are there levers you think can be pulled to help reduce these cost, be it referrals, market awareness, etc.?
DK: Everybody in this space is asking themselves how they can become more efficient. When you look at this industry and the credit card industry, it's shocking that direct mail continues to be the best tool to reach customers. We’re focused on finding ways to make direct mail more efficient, while at the same time leaning into our other channels such as digital. We are also focused on using data and more small tactical moves versus the big frontal assault.
CL: Are there certain regulatory hurdles that have presented a challenge to marketplace lenders that can be improved to help this industry succeed?
DK: Over the last few years, we’ve seen regulators make a lot of strides in this arena. This is a new industry, and as a result, many of the current regulations didn't anticipate companies like ours being here. We look for regulations that can help manage the evolution of this market, while ensuring the best outcome for consumers. We really appreciate the dialogue that we have with the collective regulators both at the state and the national level, and we continue to see opportunities for them to even better understand the space, and to focus on regulations that ultimately benefit the consumers.
CL: LendingClub and Prosper are obviously two of the largest marketplace lenders currently. How many large competitors do you think this market can hold and do you think we will see consolidation of this industry moving forward?
DK: On the P2P space specifically, the scale and regulatory requirements make a fairly tough barrier to entry. But, if you look at marketplace lending as a whole, you've got regional banks, big banks, community banks, that are already in this space. Certainly, the market can deal with a lot of competitors. The real pressure on this market is going to be the continued improvement and digitization of the lending space. I think the market can absolutely sustain that, and ultimately it’s better for the consumer.
CL: To that point, LendingClub and Prosper, Coke and Pepsi, Microsoft and Google. What other big brand competition do you really like if you had to pick one?
DK: My favorite is Marvel versus DC. Wonder Woman is a phenomenal movie, but I happen to like Guardians of the Galaxy as well. It’s a great example of two brands that are competing, but can both be really successful. I'm all for that.
CL: That's a very thoughtful answer. I totally did not think of that, but I appreciate it. Well we will leave it there and pick our discussion back up in part 2 of this special series diving into marketplace lending with industry leader, David Kimball next week.