I first heard the word “disintermediating” while listening to a CEO pitch his internet-based financial services business concept to me. The word was tossed around so much inside this particular office, that employees were actually given homework, reading a book on “distintermediation” written by some academics. The CEO wound up disintermediating himself from everyone with his babble, and the board ended up disintermediating him from their pile of money.
This doesn’t mean I don’t like the term, or see it applicability to the financial world. Securities brokerage is one place where the tide has turned – who need a broker anymore? Private markets like personal lending and angel investing are next.
By VentureWire Staff Reporters
Mixing an eBay Inc. business model with elements of social networking, Prosper Marketplace Inc. aims to connect borrowers with money lenders and leave banks out of the equation.
To fund its efforts, Prosper has closed on about $12 million in Series B financing – the company’s second venture capital round in a year. Fidelity Ventures led the up round, which closed in January and included participation from existing shareholders Accel Partners and Benchmark Capital and from new investor Omidyar Network – the investment vehicle of eBay founder Pierre Omidyar. Prosper sealed an initial $7.5 million Series A round from Accel and Benchmark in April 2005.
San Francisco-based Prosper is the brainchild of E-Loan founder and former Chief Executive Chris Larsen, who formed the company alongside Chief Technology Officer John Witchel. “We had some familiarity with the inefficiencies of the consumer lending market,” said Larsen, adding that he batted around the idea for a few years before pushing ahead.
The company’s Web site, launched two weeks ago, uses eBay-style auctions where individuals bid to fund all or part of a personal loan. With the technology, borrowers create a loan listing for up to $25,000, to be paid over three years, and set a maximum interest rate that they are willing to pay to a lender. Lenders – who have set a minimum interest rate for themselves – begin bidding on loans, investing from $50 to $25,000, and judging applicants based on credit history, income-to-debt ratios and self-written profiles.
Lenders can mitigate their risk by investing small amounts in a number of loans. Once the auction ends, Prosper takes the bids with the lowest rates and combines them into a single loan, handling all the loan administration, including loan repayment and collections. Prosper generates revenue from a one-time 1% fee on loans from borrowers, and from a 0.5% annual loan servicing fee to lenders.
Prosper isn’t the only one hitting the micro-financing market hard. Fundable.org has built a similar market, targeting small project needs with a syndication methodology. People commit to a certain level of funds for a particular deal, and if the requested amount is reached, the participants write the checks.
First a market for used iPods, now a market for quick cash to pay a hospital bill. Financial players all along the traditional food chain best watch their backs. Technology drives the NASDAQ, and it can drive their markets too.