Source: Bouman, F.A.J., "ROSCA: On the Origin of the Species" Savings and Development Volume XIX, No.2, 1995, pp. 129. and ROSCAs: What's in a Name?
Can you guess when people-to-people lending was invented? Would you believe 300 A.D. in China? But not just in China, in fact, for centuries small groups of people all over the world have been coming together to lend each other money. The names may be different, but the idea is the same. In China it’s called Lun-hui, in Egypt it’s called Gameya, and in Mexico the Spanish word is Tanda.
Why not use a bank or a credit card?
Well, banks as we know them are a relatively new thing. The world's oldest central bank, Sveriges Riksbank (AKA the Swedish National Bank), wasn't founded until 1668—almost 1,400 years after the first recorded Lun-hui!
And the first plastic credit card wasn't issued until 1950. Can you guess which one? Here's a hint: American Express and Visa didn't come along until 1958. It was Diners Club.
Ultimately, banks and credit cards are just a convenient way for people to lend money to each other.
In the movie It's a Wonderful Life, Jimmy Stewart explained it best: "It's not as if I have the money back in a safe. The money's not here... Your money's in Joe's house… and in the Kennedy House, and Mrs. Macklin's house, and a hundred others."
Today's banks are bigger but really not much different than Jimmy Stewart's bank. People make deposits in accounts and the bank uses some of that money to fund loans. In fact if you have a savings account and a loan, in a very roundabout way you are actually lending money to yourself.
How come my credit card rate is so much higher than my savings rate?
The truth is your bank doesn't usually hold on to your loan while you repay it. They sell it to folks like Warren Buffett who buy thousands of loans from banks all over the country, who in turn sell these baskets of loans to even bigger players.
And every time money changes hands someone profits and the cost goes up a little. That cost gets passed on to you. You add up all that profit plus the cost to keep the whole system running smoothly and it equals the difference between the interest rate of your savings account and your loan.
Yes, the modern banking system can be expensive but it also has some real benefit. Its size allows lenders to "diversify", which means to spread their money around. By diversifying, Warren Buffett loans his money all across the country, across all types of loans, so if disaster hits one community where he owns loans, he won't be wiped out completely.
So what if you’re not Warren Buffett?
The system works well if you're a big institution taking those fat margins. But what about you and me? Enter the Prosper marketplace.
Prosper allows anyone to participate in hundreds of loans to people all across the country, which allows them to create their own diversified loan basket just like Warren Buffett.
Prosper also gives people looking for a loan access to those people looking to make loans. So, it seems we've come full circle. People started by lending money directly to each other directly. Now we can again thanks to Prosper. Lend, Borrow … Prosper.
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