Prosper brings Zopa to the United States

I’m excited to see the launch of person-to-person lending company Prosper, which matches individuals with money to lend to individuals who need to borrow. Although there’s some differences in functionality, this is largely the model of Zopa, an already-successful person-to-person lender based in the UK. While the idea of loaning money to strangers might sound a bit risky at first, Zopa’s able to manage that risk by spreading loaned money across multiple borrowers and giving lenders the information they need to price expected loan default rates into the interest they charge. I don’t think Prosper is quite there yet – looking at the website, I see individuals making loans directly to other individuals, which looks like an invitation for the incompetent to underdiversify. But better risk management will come in time, when a larger user base demands it. (UPDATE: And in fact Prosper already has the concept of a ‘standing order‘ which will bid automatically on multiple orders in any given credit bracket.)

Some quick thoughts:

• Since individuals are loaning directly to other individuals, and since borrowers are setting the starting rates for their auctions, is there an opportunity to arb this by borrowing money at a low rate (taking advantage of those individuals who underestimate the risk) and then relending the same money to borrowers who are a) better credit risks than their ratings indicate or b) foolish enough to accept a higher rate of interest than their credit rating warrants?
• I expect we’ll see someone trying to use Prosper to raise seed money for their start-up – but this is debt financing, not equity financing. Will there ever be a Prosper-like service that allows entrepreneurs to sell slices of new ventures in an open auction? (Entrepreneurs with a track record might do quite well here.) Or – as I suspect – is the regulation involved with the sale of equity just too much of a hassle?
• When will any one of these services start helping immigrants get loans by evaluating their credit histories in their countries of origin? Picking up shop and moving to another country is enough of a hassle without the ‘no credit history’ problem. Not that I personally would benefit by giving Americans a peek at my Canadian credit rating (eek), but surely there’s enough migrants from enough countries with reliable credit rating systems to make checking credit ratings from other nations an attractive feature.
• Speaking of things international – TechCrunch tells me that Benchmark Capital has funded both Zopa and Prosper. Am I the only one that finds this a bit strange? If I were Zopa, I’d be pissed – from my very limited perspective it looks like their own VCs are making it more difficult for them to enter the largest market out there.