You Were Partially Outbid!

Vulcan's are the wisest of Star Trek characters, and they have a equally wise farewell remark, which is, "live long and prosper."  Well, if I keep using the product from Prosper, it is certain that I won't live long.

But before I get into the sad experience I had with this company, I must say that I was a big fan, and have a lot of respect for their investors, some of which I know.  In a conference I named Prosper one of the most interesting sites on the web today.  I think microlending has the ability to change the world and democratize finance.  I would have invested in this company.  It is because of this admiration, I put some money in my Prosper account to lend and try it out.

I had a great plan.  30% of my total was allocated to higher risk borrowers, 40% to mid, and 30% to low risk borrowers.  I had a spreadsheet lined up ready to go.  Of course I was thinking, "if I can lend at 13% and borrow at 8%...maybe there is the opportunity to arbitrage".  So I wanted to test it out and figure out the origination costs and one time fees, that would eat into my hypothetical arbitrage window.  All great in theory.

The reality on the other hand is that, since there is an auction process at Prosper, you bid for the right to lend money and the one who bids the lowest interest rate wins.  Auctions worked for Ebay, it surely works here too right?  Well on Ebay you are bidding for a product, most of the time it is something you know about and you have only the price to think about.  You can set limits easily.  Intuitively, you know what a pair of shoes or tennis racket should be worth.  When you are bidding for a financial instrument, you need to calculate or at least think, whether 10% is high or low for somebody with an A credit rating.  That's not so simple. 

And because this is an auction, you may be outbid.  In this case, it is almost comical but you can be "partially outbid".  Get that?  That means if you bid $100, $56.5 was accepted at 12%, but the other $43.5 needs to be bid lower than that.  How is that for simplicity? If this happens you get the wonderful "You Have Been Partially Outbid!" message.  Oh my God!  I can live with being outbid, but partially?  I  cannot be seen in public being partially outbid. 

Jokes aside, the point is that this is not as simple as it looks, and that was the disappointment on my behalf.  There is some learning you have to do that they don't help much with.  Shortly my inbox got filled with the thrilling "You are Partially Outbid!" messages causing me to bid carelessly just to "lend the f... money and get this over with".  Since we are talking about small amounts, and I was trying to learn the system, getting 8% vs. 9% wasn't so much of a concern.  Maybe they should just show you how much you will get paid per month, and let somebody bid for that instead of interest rates.  More intuitive, one would think.

The user interface is well designed but the user experience is not.  That's the point of this article.  It needs to be fixed.  It is way too complicated, and I suspect it is because somebody made an Ebay analogy that didn't work.  I will still use it, I want to be a fan, but if I get one just one more email saying "You Were Partially Outbid!"  I am going to completely, not partially, outbid Prosper and try Zopa.

Comments

[Andrew Martinez-Fonts]

Hello, and thanks for this feedback on Prosper's bidding system. I'm the product manager for Prosper, and I wish we didn't have the partially outbid status, either, but it is necessary. And actually, eBay has it, too.

The issue is a necessity in any dutch auction (an auction with multiple buyers). On eBay, a seller could be selling 12 bowling pins in a dutch auction, and if the low bidder wants 6 and the next bidder wants 10, the next bidder inevitably must give up 4 of his desired bowling pins. Similarly on Prosper, you were the "next bidder" (we call it the "first losing bidder"), and less than your $100 bid was needed to complete the amount requested by the borrower. This happens on nearly all of our auctions, and is necessary to maximize the amount distributed to borrowers as well as the amount loaned by lenders. As I mentioned, we're open to suggestions on how to handle this better, but so far haven't come up with anything better than "partially outbid".

[Baris Karadogan]

Andrew,

Thanks for this thoughful comment. I've been thinking all this time how to help, but I can't think of anything else other than to suggest that you have a "default" option where you decide who to give the loan to within certain parameters. Kind of like the Zopa option. For some financially savvy people, this may be acceptable compared to getting partially outbid all the time.

I hope you guys find a better fix for it. It would be a shame if this became a turnoff for others besides me.

[Baris Karadogan]

How about the "non-competitive bid" option that the US Treasury uses in it's auctions. You reserve a part of the loan for non-competitive bids where a number of lenders agree a priori to take the ending percentage whatever it may be.