Please excuse the poor grammar :]
Very interesting questions Patrick.
From the perspective of the low credit score, high risk prospective borrower, Prosper’s lending rates generate value to these consumers, as they are lower than the rates offered by credit cards. In effect, for the customers who pass the most coarse applicant screen, the eligible consumer saves on interest payments.
I am not too familiar with the traditional lending model and subsidization. How/does this still exist? Could you describe more? Is this not what caused the financial system collapse a few years ago – excessive risk taking by industry, and a systematic turning of blind eye by industry to credit-worthiness of individuals?
As an aside, as my family originates from the Eastern side of the Iron Curtain. I therefore have a strong distrust of subsidies, socialist overreach, which in the case of Bulgaria are tied to oligarch cronyism. The majority of industrial outfits which were subsidized by government during socialism practically collapsed after the fall of the communist system, leaving a handful of well-connected oligarchs scooping up industrial companies in rough shape for pennies on the dollar, optimizing a bit and selling/liquidating or operating for a profit.
As another anecdote, subsidies caused a half billion dollar loss for the US government’s sponsoring of an inefficient and economically unsustainable outfit – Solyndra.
Jack’s post mentions a solid write-up of the disaster of AMTRAK for a business/finance perspective, at an annual taxpayer cost of $1B. Is there social utility beyond financial metrics – of course! How much a subsidy worth and are there better ways to achieve the desired impacts of the subsidy should be the question being asked.
I agree that from a temporary perspective, subsidies may make sense in certain situations. For example, the case of transition of centrally planned economies (e.g. former Eastern Bloc) to free market economies. For example, European Union aids newer EU members by providing in effect subsidies or payments, in exchange for structural reforms in judicial, financial areas etc.
Regarding the Affordable Care Act, my personal position is that right to healthcare access is a fundamental human right. That being said, the aforementioned group of patients who you mentioned were not able to afford healthcare prior to the passing of the ACA, did receive healthcare, albeit at the latest and costliest stage of treatment – the emergency room. This bill was likely not collectible, and was ultimately passed to all paying insurers, at a cost far more significant, had these patients received ACA/similar subsidies in the first place.
Regarding your question of subsidies in the private loan industry, I think it is an excellent question to which I do not have the answer.
I am not sure what the root cause of the problem of individual credit is, and whether addressing the issue in the private marketplace is the most efficient idea.
I would argue that this question is bigger than government taking a socialist functions and providing for ‘cheaper money’ to borrowers with poor credit ratings. I would hypothesize that a government subsidy for loans without any requirements (e.g. take a financial course, obtain education/job training etc.) is not a meaningful and/or long-term solution to individuals credit issues. I see a net negative here.
I would argue that financial literacy education, investment in and reform of the education system towards producing jobs that are in high demand and make a nation more competitive and steering a significant amount of college graduates towards vocation schools that are needed (e.g. any degree or certification less than a bachelor’s – e.g. associates degree for professions such as mechanic, heavy equipment operator, web developer) would be a better way to reduce Americans indebtedness.
Thanks Stevon, looks like we both agree that it will be interesting to track Prosper’s acquisitions that will expand financial service offerings.
From the customer acquisition perspective, a lower interest rate and timeliness of loan receipt would be my two criteria, given that credibility and usability are not an issue. I think Prosper is seeking ways of expanding past the revolving credit card debt market.
Agreed – coming up with and testing a new risk rating mechanism, in light of the financial crisis generated a few interesting conversations, I’m sure.
Good questions Sudip. I am a bit skeptical about more capital available leading to lower interest rates. My reaction would be that that Prosper’s proprietary risk rating mechanism does not provide lower rates, as a function of how much capital is available. I do not have the history of how capital supplied and demanded has balanced out over Prosper’s short existence. I don’t think it has mattered too much with a significant amount of users present, as there are a finite level of risk rankings, and nothing else that significantly differentiates loan-seekers in the lenders view.
I agree that the search of users in the beginning must have been interesting and what kept the founders and investors awake at night. Not being able to gather a critical mass user base would have spelled an early end to this business.
From sources, I gathered that initially direct mail was used to gather customers (likely targeting those with revolving credit card debt) and now Prosper is trying to secure partnerships, which generate leads. http://www.lendingmemo.com/prosper-ceo-aaron-vermut-on-growing-350/
Per Prosper’s prospectus, Prosper relies heavily on an automated verification process to reduce the amount of time required to make a decision on loan. Applicants are accordingly screened for against anti-laundering and other regulations.
On how Prosper gained trust, that’s a good question, maybe not unique to Prosper. How did Paypal, Venmo, Amazon, and other e-businesses/applications gain trust? I would speculate through a good design, a highly efficient website, and response to customer feedback.
Excellent write-up Jack. I am a huge fan of trains and railroads. I used to ask my grandfather to take me to the train station so I could watch trains. I’d highly recommend checking out Railroad Tycoon II:Platinum – a classic strategy video game, which places you the shoes of railroad magnates around the world.
It is sad that AMTRAK’s “business” model does not include generating superior returns for its’ shareholders – the taxpayers. I am seeing a lot of parallels with Bulgarian’s state owned railway enterprise. This is not a company that any other should want to be compared to.
I am curious how you think AMTRAK can move away from a losing socialist scheme to a company that can operate successfully without government subsidy, providing superior service and competitive with other modes of transport. Do you think profitability can ever be achieved? Does the government propose sale controlling packet of shares to industry, perhaps with some conditions of sale (e.g. maintain service between cities x and y)? Does the government liquidate and provide and allow passenger transport license to private railroad companies along currently AMTRAK monopoly routes?
Francisco, as you know I have been a Barca fan since the Van Gaal days in the 90s.
Barcelona’s style of play, youth program, coaching selection and player acquisitions have set it apart from competitors. What I am struggling to understand is why a club with such a storied history, millions of young fans, an gigantic business puts so much at stake by acquiring star players such as Neymar in a fraudulent manner. With a reported $73.5M sale figure, and a price much higher actually paid, I understand that former club Santos is seeking further compensation from FC Barcelona, and the Spanish taxman is also keen on redeeming lost revenues. One of the biggest soccer scandals of recent time points to large contradiction in Barca’s operational and business models. It is sad for me to say this, but “Mes que un Club”, could not be further from the truth on account of recent stories.
Then again, in a multibillion dollar industry, where the entire top management of industry, FIFA, are being investigated, indicted and detained on corruption charges, perhaps there is a lot more to the story than one storied club.
Roger – your post makes me want to potentially consider consulting at Bain full-time in 2017. The story portrays Bain in a very positive light, and I would like to believe it is. In particular, I strongly relate to empathy and teamwork in the workplace. A few questions for you:
As a management consulting industry outsider, where can Bain stand to improve relative to its’ traditional competitors (Deloitte, BCG etc.).
Do you/Bain consider ad-hoc start-ups such as HourlyNerd to be competition? If so, what is Bain’s plan/response?
If you could change one thing at Bain, what would it be?
Good stuff, now I know better why experience a great grocery purchasing experience at TJ’s, if there ever were one.
Anecdotal life experience affirms Trader Joe’s dedication to quality and competitive pricing. While Whole Foods may not be the best benchmark for any other everyday person grocery food chain due to sky-high price tags, I wonder how Trader Joe’s compares to low-cost outfits such as Wal-Mart.
I love the low-inventory and private-label offerings, which allow for high quality foods, in line with my experience. Interactions with employees has been a humanizing experience.
Excellent stuff Yuta. Your post leaves me well prepared to experience, or perhaps not experience, OMOTENASHI when flying to Japan.
I like the juxtaposition of management view and reality on the flight deck. I am curious if there any ways ANA management can improve their understanding of customer’s needs.
Are you aware of any airlines, Japanese or other, who have managed to secure the OMOTENASHI alignment with business objectives?