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I recently heard about a relatively new company called Prosper. They're in the loan business. And what they're doing is very interesting, because they're not a bank.
They earn their revenue by facilitating loans. They attract would-be creditors and would-be debtors to their website where people who want to borrow submit information about the loan they want, and people who want to lend will bid, auction-style, to be the ones to fund the loan. And they encourage lenders to diversify, being fractional lenders over many loans.
Once more, they're not a bank. They don't make money like a bank does, on the spread between interest paid to depositors and interest paid by borrowers. Prosper makes money through fees for closing and servicing the loan. Also unlike a bank — well, an FDIC member bank anyway — lenders bear default risk.
I want to stress that I'm stopping well short of endorsing this company or its services. I simply haven't done much research on it yet. I'm writing about it because I think it's a really neat idea and because I think it's cool that they're competing with banks without being regulated like one. (It should be obvious who I think is more nimble.)
The most obvious questions about this service center around the credit reports of the borrowers. Would-be lenders through Prosper have much less information about would-be borrowers than a bank's loan officer would have. Less information means greater risk, but I don't have any intuition about how much of a practical problem this would be for lenders.
I think I'll keep an eye on this. It's too intriguing to ignore.