There's a disruptive force in the world of banking, in which individuals borrow money from regular people rather than go to a bank. It's called peer-to-peer lending. Think of it as an eBay (Nasdaq: EBAY) for borrowers and lenders. Just as eBay matches up buyers and sellers, websites such as Zopa.com match up borrowers with people willing to lend them money.
Business 2.0 magazine singled out Zopa as a disruptor to traditional banks in the United Kingdom. Banks serve as the middlemen between borrowers and lenders, and they are effectively cut out in peer-to-peer lending. The model seems to be working. More than 90,000 people have signed up for Zopa, according to Business 2.0, and only a very small percentage of loans go uncollected. It's no surprise that Benchmark Capital, the venture capital firm that supported eBay, is behind Zopa.
Zopa makes its debut in America next year, but Prosper.com, also backed by Benchmark Capital, is already up and running and is built on the innovative idea of allowing borrowers to form groups. The idea is that lenders will give better rates to groups that have a good reputation. Prosper.com is basically harnessing the power of community and network effects, much as MySpace does. A great article from bankstocks.com illustrates one person's lending experience with Prosper.com.
I don't see these peer-to-peer lending sites threatening Bank of America (NYSE: BAC) or Wachovia (NYSE: WB), which deal with large loans. However, someone in dire need of a small, short-term loan could find these websites an alternative to a payday lender or pawnshop. Payday lenders like Advance America (NYSE: AEA) and First Cash Financial (Nasdaq: FCFS) strive to serve the "unbanked and underbanked." With peer-to-lending, though, borrowing options are available to almost anyone. eBay has shown that you can buy anything, if the market is large enough. And even people with the worst credit may find Prosper lenders willing to take a gamble on them. Peer-to-peer lending, meanwhile, will become one more obstacle for the payday lenders, who also must battle a tough regulatory environment.
Peer-to-peer lending sounds like fun and games, but there's always risk involved with lending. Banks specialize in assessing and managing risk, and that's why they're so profitable. If you choose to lend to peers, spread your risk across different borrowers so that you aren't taking a bath if one defaults.
Related Foolishness:
Bank of America is an
Income Investor
recommendation, eBay is aStock Advisorrecommendation, and Advance America is anInside Valuerecommendation. Try out any of our newsletter services free for 30 days.
Fool sector head Joey Khattab does not own shares of any of the companies mentioned.
Terms & Conditions
RSS Headlines
Fool UK