Prosper changes suggest marketplace lending is losing investor interest

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Marketplace lender Prosper has made a significant change that could signal problems for this market.

The company has halted relationships with two loan-referral websites, LendingTree and Credit Karma, reports the Wall Street Journal. This indicates that investor interest in marketplace lending loans is starting to wither.

In the past, Prosper has advertised its loans through these two sites in exchange for a referral fee. But if investors are not buying these loans, then Prosper does not gain anything from trying to increase borrower demand through advertising.

Prosper's loan volume dropped 12% in the first quarter of 2016 due to declining investor interest. But the company is taking steps to attract investors.

At the end of May, the company raised its borrowing rates by an average of 0.29% for clients rated C or worse. This gives Prosper some room to increase the interest rates investors receive on their capital.

Prosper also published a performance update last week to include portfolio details such as expected return rates and delinquencies. Chief Risk Officer Brad Pennington also made clear that transparency is one of the company's main values. This is especially true as Prosper tries to distance itself from competitor Lending Club, which is dealing with a litany of problems amid allegations of misrepresenting loans.

The greater comparative transparency in the U.K. marketplace is likely why it has not had the same issues as the U.S. For example, all major lenders in the U.K. publish their loan books.

Fintech regulations in the U.S. have been extremely restrictive thus far, but those in Europe have proven successful and allowed the region to become a hub of financial technology innovation. The U.S. would be wise to examine the policies in place across the pond and consider how to implement similar ones within its own borders.

The fintech industry is booming, with VC-backed fintech investment growing 106% to reach £10 billion ($13.8 billion) in 2015. But the new business models fintechs are bringing to market also need to be regulated, and the old models aren't sufficient. The approach regulators take will have a significant impact on how big fintech gets and how fast it gets there.

Sarah Kocianski, senior research analyst for BI Intelligence, Business Insider's premium research service, has compiled a detailed report on fintech regulation that explains how regulators in Europe are successfully growing fintech innovation and how it's becoming a model for regulators around the world.

Here are some of the key takeaways from the report:

• The financial technology sector is booming, and Europe is a leading region for growth. VC-backed fintech companies in Europe raised £1 billion ($1.5 billion) in funding across 125 deals in 2015.
• With this boom in funding comes a need to regulate the nascent industry. There are a variety of approaches — active, passive, and restrictive — that regulators can take. The EU and the UK, in particular, have taken an active approach, in order to encourage growth.
• The regulation that will have the most impact on the European fintech market is the Second Directive on Payments Services, known as PSD2. It will force banks to open up their systems to fintechs. This will allow fintechs to act as intermediaries between banks and their customers.
• The UK regulator is actively promoting its approach to regulation as a model for other countries to follow. Some of its innovations are already being copied by other regulators around the world.

In full, the report:

• Examines the different approaches to fintech that regulators can take
• Explains the key EU laws that will affect the European financial services industry in the next two years and beyond
• Explores the potential impact of new regulations
• Details the workings of the initiative central to the UK regulator's approach to fintech
• Highlights what can be achieved when regulators, governments, and fintech companies work together

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