Disintermediation

Disintermediation is one of those difficult words I have to look up every time I hear it. On the other hand, it’s fun to say and there aren’t any words that apply take its place. It means to cut out the middleman.

Disintermediation has been happening for years with the advent of the Internet, both in the for profit and not-for-profit sectors.

Two of my favorite disintermediation sites are Prosper.com and Kiva.org.

Prosper allows you to make loans directly to individuals, cutting out the bank. Interest rates are set using a Dutch auction. I’ve been making loans for about six months now. While many of the loan requests are for debt consolidation, the most interesting requests for me are from entrepreneurs. Most people starting a business will never get access to venture capital, or know angel investors who can invest in their budding enterprises. That’s why so many people fund new businesses with credit cards.

Prosper provides a new funding source. Examples of businesses I have lent to include Trust Love, started by a woman who is marketing her original character creations, a baton teacher who needed transportation to get to the after-school programs she leads, and a guy who is expanding his Internet café and video game arcade. These are high risk loans so the key is to spread small amounts among many opportunities. That’s the beauty of Prosper. Dividing a $3,000 loan among 60 lenders is the same thing Wall Street has been doing for years in securitizing and packaging credit card debt, auto loans, mortgages, etc. Only this is on a much smaller scale.

While you earn interest on loans issued through Prosper, loans made through Kiva don’t earn interest. These are microfinance loans to individuals in developing countries. Kiva partners with local microfinance organizations in various countries who screen applicants. Borrower are typically entrepreneurs needing a short-term loan to expand their businesses. It is a wonderful tool for fighting poverty.