Anyone would be weary to lend $50 to a stranger on the street, so why should you do it over the web? That’s because the numbers at Prosper.com, the first person-to-person lending marketplace in the US, have proven to be quite lucrative.

The website came to my attention after it was mentioned by commenter Drew Smith after I wrote an article on microfinance last month. The concept is sweet and simple. People seek loan amounts between $1,000 to $25,000. They then have a period of open bidding (like on eBay) where several lenders, like you, can bid in increments until their total loan need is met. Even if you have as little as $5,000 to invest, you can spread $50 increments between one hundred people with different risk levels to protect yourself from default, or not being paid back.

Borrowers post a story explaining what the money will be going towards, along with their credit score and debt to income ratio. Stories vary from paying off a house to preparing a large Thanksgiving meal for the family. Different levels of borrower risk dictate the APR, which is chosen by you as a lender.

An independent statistic website, LendingStats, gives you the skinny on how much to expect back. At the moment the true default rate is at 2.8%. That is very low, but you also have to take delinquencies, cancellations and repurchased loans into the equation, which would settle more along the lines of 12% in the red. Remember, if you spread out your money across the board one true default isn’t going to hurt you too much. Even though that $50 bill is gone, the other 99 $50 bills you sent out are coming back with interest rates as high as a consistent 20.6%.

So now that you’ve waited three years to cash in on your investment, how much are you going to make? Lets say the $5,000 initial investment was lent at 20.6% to C-credit borrowers over 36 months. The payment for them would be $187.35 x 36 = $6,744.60. Now take out your original investment, $6744.60 – $5,000 = You are walking away with $1,744.60.

Compare that to investing that money for 3 years at the average of the S&P 500 with a net profit of $978.52. One might even argue that as a long term strategy, lending money based on credit worthiness comes with less risk and more consistent returns than the stock market. Most money managers would have to agree. They have trouble even matching the S&P.

This innovative take on banking is new, as Prosper has only been operating for two years now. Bold initiatives like this humanize finance and allow us to find a way around dealing with banks for unsubsidized loans. I think it’s brilliant and will be keeping an eye on Prosper as well as other Web 2.0 startups that intend to change the face of B&M finance.

My introduction to microfinance was during my visit to India about two years ago. I heard that a banking institution was loaning low-income households and businesses amounts that ranged from $50-$500 to be paid back at 3% per year over 3 years.

My first thought was that the default rate, or unlikelihood of paying back the loan, must be fairly high. That’s when I had a rude awakening. I didn’t understand the culture. Entrepreneurs in emerging economies weren’t looking for handouts. They’ve never had the opportunity to apply for a loan. These are people that have rigorous work ethic as craftsman, artists, and tradesman who couldn’t make the move from apprentice to business owner because of their economic status.

Now don’t get me wrong, I’ve never worn a save the pandas T-shirt in my life. The idea of charity never sits well with me either. I guess that old Chinese “teach a man to fish” proverb has always been tugging at my logic. The best part of microlending is that these people have already been taught, your just the means knocking at their doorstep.

Here are some stats from CREDIT Cambodia: Borrower repayment rate: 98%, Total loan portfolio: $7,469,076, Average loan balance: $522, Operational self-sufficiency: 147%.

If you’re impressed you’re not the only one. eBay recently took notice and began their Internet investment service, MicroPlace. Their mission is to help alleviate global poverty by enabling everyday people to make investments in the world’s working poor. Similar organizations include Kiva and Globefunder.

When it comes right down to it I would much rather loan $100 to an aspiring businessman or woman in Mumbai than calling a late night hotline hosted by Sally Struthers. It’s all that talk about making an investment in someones life. I’m glad some organizations finally took it to heart.

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The USA is holding on by its fingernails as the 3rd most innovative country on earth, as The Economist Intelligence Unit study shows:

1. Japan
2. Switzerland
3. U.S.
4. Sweden
5. Finland
6. Germany
7. Denmark
8. Taiwan
9. Netherlands
10. Israel

Why would a country founded on reason and technological advancement consistently lose traction on its competitive advantage: innovation? For several reasons that are commonly misconceived in the popular media:

1. Our biggest worry should NOT be that American manufacturing and its jobs are being exported to foreign countries like China, India and Mexico.

As an example, if GM is forced to close a plant in the US due to costs and move that plant to Mexico do we really suffer? The US loses thousands of jobs and domestic capacities due to layoffs like these, yet should we worry? The answer is no, we are clearly not leaders in manufacturing and haven’t been arguably for the last 40 years. We should not compete in markets where we do not have a decided advantage. I’ve always pictured Globalization as a food chain. The people at the top create the ideas and plan for distribution, the next set of people manufacture physical goods or support the service industry.

When an American factory worker loses a job to a Mexican factory worker, they in turn produce a cheaper car for world export. The global market then distributes profits back to the Americans who’s patents, managerial and marketing skills carried the project. Thus, those Americans are now able to create more high level jobs that young, educated Americans profit from.

Quite simply, the core competency of the USA is to draw entrepreneurs to us from all around the world, implement their innovations through science and retain the royalties to support the economy.

2. Then what countries, if not China, India and Mexico are we competing against?

Our competitors are countries who foster and nurture innovative minds. They are Japan, Germany, Switzerland, Sweden, and Finland. These nations tap into our creative edge and often outshine us in several fields including management, science, and product development.

3. Is there really potential to fall further down the ladder?

You bet your ass, as Chris Money author of “The Republican War on Science” would say. Scientific American’s review of his book said,

“Thomas Jefferson would be appalled. More than two centuries after he helped to shape a government based on the idea that reason and technological advancement would propel the new United States into a glorious future, the political party that now controls that government has largely turned its back on science. Even as the country and the planet face both scientifically complex threats and remarkable technological opportunities, many Republican officeholders reject the most reliable sources of information and analysis available to guide the nation. As inconceivable as it would have been to Jefferson–and as dismaying as it is to growing legions of today’s scientists–large swaths of the government in Washington are now in the hands of people who don’t know what science is. More ominously, some of those in power may grasp how research works but nonetheless are willing to subvert science’s knowledge and expert opinion for short-term political and economic gains.”

In brief, the science that drives innovation, our core competency, is stifled. Topics like creationism send our children years backwards in their classrooms. If they are unable to excel using reasoned scientific findings how much of a chance do you think they will have when American industry leaders begin looking for the next brightest minds?

The ban on funding for embryonic stem cell research has led to a mass exodus of biotech engineers and stem cell scientists to foreign countries with grants in hand.

4. How can the USA strengthen its position as the leader in innovation?

• We need an administration who can distinguish between legitimate research and ideologically driven pseudoscience.
• Create programs that nurture the ideas of brilliant American minds.
• Grants that entice the importation of exceptional international talent; offer options that allow these candidates to stay and keep their research in the US for the benefit of the US.
• We need to fund projects that safeguard American science. Seed Magazine’s article Why the US Should Spring for a New Particle Accelerator says,

“A US-based [Accelerator] would attract thousands of talented scientists and students from around the world. As has happened in the past, when highly talented and motivated scientists from around the world come to the US to work, many will choose to remain and continue contributing to the nation’s technological leadership, which in turn will stimulate domestic economic growth through scientific and technological innovation. Moreover, some of the world’s best scientists undoubtedly will join the nation’s universities to be close to the project, thus enriching the scientific vitality of these institutions. US academic research institutions are recognized for their direct and easy access to the world’s premier research facilities and infrastructure; hosting the [Accelerator] would extend this pattern of success into the 21st century. In short, constructing and operating a world-class facility will create an unparalleled intellectual environment to stimulate innovation and creativity.”

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