Prosper's Peer-To-Peer Lending Promises An eBay For MoneyProsper's Peer-To-Peer Lending Promises An eBay For Money

Peer-to-peer finance sounds like a concept born to be ridiculed. It involves groups of people coming together online to lend up to $25,000 to someone they don't know, eliminating the bank middleman. Call it social finance or a utopian dream. Just don't call it LoanShark.com.

In February, Prosper opened what it describes as "America's first people-to-people lending marketplace." And a company called Zopa this summer will bring its British brand of peer-to-peer finance to California residents. Zopa began operating in the United Kingdom in March and has more than 60,000 members.

Both companies are flush with venture capital. Prosper has about $20 million from Accel Partners, Benchmark Capital, Fidelity Ventures, and Omidyar Network. Zopa has $23 million from Benchmark Capital, Bessemer Venture Partners, and Wellington Partners.

Prosper is like eBay for money--except that instead of auctioning products, it lists loans people want and lets lenders bid on them, alone or in groups. On Zopa, instead of bidding, lenders' money is spread across batches of 50 borrowers to lower risk.

The model goes back to the way things used to be when one neighbor supported the business of another, says Chris Larsen, Prosper's CEO and co-founder. "There was a really strong sense of obligation and accountability and reputation within a small community," he says, "which actually made repayment of debts more reliable and less risky."

Before anyone compares this to the neighborhood loan shark, though, Prosper limits how high interest rates can go. Lenders can pursue deadbeats through conventional channels.

Prosper's rates range from 7.32% (low risk, low amount) to 24.04% (high risk, high amount). Zopa claims an average gross return of 7%. The sites make money on fees and attract a mix of ardent capitalists and wild-eyed dreamers. "I'm fascinated by the concept and hate big corporate banks," writes one user on Zopa's online forum.

Most intriguing are both companies' plans to introduce APIs so programmers can integrate social finance with social networking. Members of Yahoo Groups and MySpace would be able to participate in peer-to-peer finance through groups already established at other services. Groups could even be set up to view financial data and perform administrative functions from sites other than Prosper or Zopa.

This social aspect could be the key to whether this model expands beyond a niche--though chatty MySpace relationships could be strained if collection letters start to arrive.

Illustration by Christoph Hitz