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Recently, I had the privilege to pick the brain of the Chief Financial Officer (CFO) of an industry leading company in the fintech space. Usama Ashraf is the CFO of Prosper, the first peer-to-peer platform in the US that connects people who want to borrow with individuals and institutions that are looking to invest in consumer credit.
A pioneering platform such as Prosper offers a wealth of unique challenges and experiences that can only be associated with a peer-to-peer business model (P2P). Ashraf talked about these challenges, what it’s like to be at the head of a growing financial technology company, and even shared his own investing strategies.
Joining a Pioneering Platform
Q: What was it like transitioning from companies like USAA and Annaly to a smaller company like Prosper?
A: USAA is a very large, diversified financial services company and is very mission-focused. One of the great things about coming to Prosper was that it is also very mission-focused, and our mission is very simple: advance financial well-being.
One thing that is very different from USAA is that Prosper is a much smaller company. This is a big benefit because we are nimble, and can adapt and make changes quickly. Also, being at a smaller company, there is an ability for each individual to make a significant impact. As we make decisions, we can look at the impact of those decisions on our investors and borrowers; whereas at a large financial services company, these impacts are not that as apparent.
Q: What was the most exciting part about Prosper’s business when you were considering the CFO role?
A: When I looked at Prosper, one of the things that was really exciting to me was that Prosper was a pioneer in the peer-to-peer lending space. Even today, there are only two platforms in the US that provide individual investors with direct access to consumer credit. To me, coming to work for a pioneer was a really exciting element of the business and opportunity.
Another element is innovation. If you look at the financial services space broadly, innovation is a key focus. But when you look at Prosper, we innovate on a daily basis. While financial institutions have innovation teams and it’s a part of their focus, our focus is really entirely on innovation and user experience. That was the most exciting part to me.
Q: What are some unique challenges that come with the job of managing the finances of Prosper?
A: If you look at our business today, we have a 10+ year track record. We launched in 2006, and we’ve done over $12 billion in cumulative loan originations. A key differentiator in this space is the ability to generate cash flow, and last year, we were cash flow positive for three consecutive quarters starting in Q2.
Another key area of focus with a peer-to-peer platform like ours is balancing both sides of the platform: the borrower side and the investor side. This is something we look at on a daily, weekly, and monthly basis. It’s a very unique element of a peer-to-peer platform versus a bank platform.
Gauging the Personal Loan Market
Q: How has the health of the personal loan market in the recent past impact Prosper’s growth?
A: 2016 was a challenging year for the overall sector as well as for Prosper. There was volatility in the overall market. There were a number of platforms that grew really quickly, and most platforms weren’t generating cash in 2016, including us.
2017 really allowed us to stabilize the business. We had stable funding. We had growth of over 30% on the platform, and as mentioned, we generated cash for three consecutive quarters. So, the business is now on a healthy footing, and we’ve returned to strong growth.
As we look at 2018 and beyond, growing the personal loan business will be a key focus for us as well as continuing to diversify our funding. We are also looking at additional products that make sense for us in the consumer credit space.
Q: Are you optimistic about the overall market in the next few years?
A: The total consumer credit market today is over $10 trillion. When you look at our originations last year, we did about $3 billion. The consumer credit space is a massive market, and it’s also a key element of growth in GDP in the US. 70 percent of GDP comes from consumer spending, so consumer credit and spending is a massive part of the US economy. Since the US economy is mostly expected to grow over the next several years, we are optimistic about the opportunities that growth presents for us.
Q: Speaking of diversifying, Prosper is relying less on individual investors in a P2P marketplace model. Over the next few years, how will Prosper depend on the peer-to-peer platform?
A: The most important thing for us is to have diversified funding sources. When the business launched in 2006, it was 100% peer-to-peer. Today, only a small portion of our funding comes through individual investors. Our goal is to continue to grow the number of individuals who invest through Prosper, and at the same time, continue to diversify our funding with institutional investors which include banks, asset managers, and dedicated investment funds. The critical aspect for us is to have diversified funding sources from both institutional and individual investors.
What It’s Like Investing With Prosper
Q: What do you think is the most enticing part of a Prosper product?
A: When you look at our vision as a company, it is to create a category defining experience for our borrowers and their investors. That means making sure both borrowers and investors understand exactly what the product is and how they can benefit and advance their financial wellness.
For borrowers, we offer a 3-year or 5-year personal loan at a fixed rate, and fully amortizing. Making sure they’re fully educated on the characteristics of that debt is important. For investors, they have the ability to invest in those personal loans, and they can choose the credit quality of those borrowers. We also strive to educate them and provide information that helps them understand how the asset may perform.
Q: Is there anything else about Prosper’s platform that you would like to highlight?
A: One of the areas that we are spending more time on is educating the investor base in terms of ultimate return as well as the best way to invest.
There are two elements that I think are important for investors to know. One is the tax treatment of the asset class. From my perspective, the best vehicle to invest through is a non-taxable vehicle, and I actually invest in loans through Prosper via an IRA account. The other element is that there will be charge-offs. When somebody invests in consumer loans, in the first several months, they typically get the full rate of return based on the interest rate of the loans, but when the charge-offs come in, the yield on that asset comes down. Making sure that investors understand that upfront before making an investment decision is really important.
Q: Prosper has its own risk rating for investors to use. Is that an important aspect of your push for investor education?
A: Absolutely, depending on your risk appetite, you could choose to invest in a lower risk asset. For example, you could invest in a AA loan, which typically will come with a lower return. Alternately, you can invest in the highest risk asset that we offer which is HR. This will provide a higher interest rate, but there’s also higher risk. That’s the balance that investors have to deal with – the risk-reward trade off.
Q: Which risk rating do you align with the most?
A: Typically, I’ll invest in small increments through a diversified portfolio across several risk ratings. One of the things that is great about Prosper’s platform is that you don’t need to invest in the entire loan. You can invest in $25 increments and spread your risk across a diversified portfolio. I think that investors shouldn’t be too concentrated in the risk of a handful of loans defaulting; they should be looking at a diversified investment portfolio.
What’s Up With Blockchain?
Q: Do you see an application for blockchain technology in any part of Prosper’s business?
A: When you look at blockchain technology right now, it’s in the proof of concept phase. That being said, there’s a lot of focus on looking at various applications, and there are certainly applications that could make sense for Prosper.
One area that could make sense for us would be verification. We verify the majority of our borrowers, and the ability to use distributed ledger technology for verification would be an interesting business case for us.
There are a lot of people investigating and researching blockchain, but there are also legal, regulatory, and security questions. It has to be something that is scalable as well. So, I believe blockchain applications will take some time to go mainstream.
What’s in Store for Prosper
Q: Could you talk about Prosper’s growth expectations into 2018? How do your 2017 results factor into these expectations?
A: 2017 was a really successful year for us. We had over 30% growth in originations, and our transaction revenue was up 37% year-over-year. We also generated cash for the full year and had positive adjusted EBITDA.
As we look into 2018, we expect to have solid growth in our personal loan business and are also evaluating opportunities for new products.
Q: You mentioned different product verticals in the consumer credit space a couple times. What products are Prosper considering?
A: Right now, we are exploring are number of different opportunities. The key will be something that leverages our expertise on the consumer credit side and that’s adjacent to what we do today.
Prosper started up in 2006 as a pioneer in peer-to-peer personal loan marketplace lending. It allowed individual investors to invest in consumer credit in an online setting for the first time. Since then, Prosper has grown considerably, originating over $12 billion in loans through diversified funding sources. Today, you can get a Prosper personal loan with a 3 to 5-year term at an APR as low as 5.99%.
About Usama Ashraf
Before taking on his role as CFO at Prosper in 2017, Usama Ashraf worked extensively in finance for nearly 20 years. He first stepped into a leadership role with CIT. Starting in 2000, he fulfilled various roles in the Corporate M&A and Treasury Departments, eventually serving as CIT’s Deputy Treasurer. In 2014, he joined USAA as Assistant Corporate Treasurer and was appointed Corporate Treasurer later that year. In 2016, he became Deputy CFO and Treasurer at Annaly.
Author: Andrew Rombach