When Banks Aren’t Needed

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I’ve been arguing for awhile that social media is changing everything and peer to peer lending is an example of this.

Peer to peer lending sites like Prosper pair people looking for a loan with people looking to lend.

Prosper in its own words:

Peer to Peer Lending—Rewarding for Borrowers and Lenders

* Peer to Peer lending is a financial community made up of individual people seeking lower rate loans and investment opportunities with higher returns.
* Borrowers apply online for a loan. Lenders bid on loan listings. Registered lenders have access to the borrower’s credit information. They can view the purpose of the loan, the borrower’s Prosper Rating, and more.
* If the loan gets enough bids, funds are placed in the borrower’s bank account. Payments are automatically deducted from their bank account.
* Lenders enjoy the rewards of this alternative investment: they receive monthly payments of principal and interest.
* The high costs of banks are removed because we connect people directly: everyone benefits.

I dig this concept. In many ways banks are no different than any other type of “agent.” They are middlemen. They loan our deposits to others and make money on our money. I like the idea of cutting out banks.

Prosper creates a more personal component to lending. I can see how loans could be evaluated by the people who know the space in which the money is being used. Rather than have a “loan officer” determine if the 10 grand you’re asking for to start a hair salon, people who know something about starting hair salon’s etc decide if the loan is worth giving.

I can also see people incorporating their social profiles or their online presence which could increase the comfort level and relationship component of the transaction. Just like the relationship bankers have with their clients but deeper.

To the extent that the Prosper network can grow to million of users it could can have a huge effect on the access of capital. It spreads capital, rather than it being aggregated in an industry.

I’m also intrigued with the lending component. Prosper has the ability to provide an alternative asset class to a portfolio. They currently tout returns of 6 to 14 percent. Micro-lending or peer to peer lending is a unique way to add debt beyond bonds to a portfolio.

The downside to prosper as I can see it is on the lending side. What concerns me is those looking for a loan. Why are they choosing Prosper? Why aren’t they going a traditional route, if they have good credit? Why are they willing to accept a higher interest rate? I do think Prosper and other Peer to Peer lending companies will attract a higher risk clientele. Felix Salmon has a good post on the downside. I especially like his “adverse selection” assessment.

I haven’t tried Prosper yet. But I am curious. I’m intrigued by the peer to peer lending concept.

What about you. Would you loan someone money this way? Would you borrow money in this fashion?

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