Prosper.com & Peer-to-Peer Lending

Through the use of the World Wide Web people are able to transfer money from one account to another in a matter of seconds. This concept has already revolutionized the consumer banking industry once and it can do so again. Through a process called peer-to-peer lending, borrowers and lenders can do transactions without the presence of a bank as an intermediary. One new company that is making money with such an idea is called Prosper.com. Prosper.com makes its money by “matching people who need small loans with willing lenders and billing the borrowers.” (WSJ) To me, Prosper.com seems to have a pattern of business that we may play an important role in the future of the consumer banking industry. However there are always two sides to the same coin.

In the pros we have that:
• Peer-to-peer lending is a lower-cost alternatives to credit cards and unsecured bank loans
• It’s a market increasing in size: “About $100 million in new person-to-person loans will be issued this year, and that will increase to as much as $1 billion in new loans in 2010, according to a recent study by Online Banking Report, a research firm.” (WSJ)
• “Prosper now requires that borrowers have minimum credit scores of 520 (there was no minimum previously)” (WSJ)
• “Prosper promises to buy back any loans that are the result of identity theft” (WSJ)
• “lenders are assisted to make better investing decisions.” (WSJ)
• Prosper offers tools that can help users track the moves of other lenders (WSJ)

While in the cons we have:
• The market is small and increasingly completive: “Several firms recently bought a majority stake in CircleLending Inc., which coordinates loans and payment plans between friends and family members”. (WSJ)
• “Some investors are drawn to person-to-person lending because they expect that the loans' performance won't correlate to that of traditional investments” (WSJ) which is just a speculation.
• It is an impersonal business
• There is a high risk of default

The bottom line is that Prosper.com is introducing a new way to make business in the consumer banking industry. This means that the market may expand in the coming years and given that internet is so cheap great competition will emerge. This will probably translate into a better service and more options for the clients. However, not everyone has a computer en even fewer know how to property use this technology properly, so we must watch out for a possible bubble or overpricing of companies with similar business plans as Prosper.com.
Remember not all that glitters is gold.

Source: http://online.wsj.com/article/SB118472295685669845.html