Peer-to-peer finance sounds like a concept born to be ridiculed. Finance demands oversight and networking through peers rather than a central authority, suggests a fundamental rejection of institutional scrutiny.

Call it a cautious rebellion. In February, Prosper opened what it calls "America's first people-to-people lending marketplace." It's a site that helps users borrow and lend money among themselves without the involvement of banks. Though the company says it hasn't been around long enough to disclose its user base, it claims to host over 1,000 active loan listings and 800 active groups.

This summer, a company called Zopa will bring its British brand of peer-to-peer finance across the pond and offer it to residents of California. Zopa began operating in the U.K. in March 2005 and currently counts over 60,000 members.

Both companies are flush with venture funding. Prosper has raised about $20 million from Accel Partners, Benchmark Capital, Fidelity Ventures, and Omidyar Network. Zopa has raised about $23 million from Benchmark Capital, Bessemer Venture Partners, and Wellington Partners.

Chris Larsen, CEO and co-founder of Prosper, likens his company to eBay, except that instead of providing a forum for listing and bidding on products, Prosper lets users list and bid on loans.

"The tools and technology that are in place now for the first time allow for this sort of direct person-to-person marketplace," says Larsen.

This goes back to the way things used to be, Larsen explains, when one neighbor supported the business of another neighbor. It's a model that, he believes, has a lot to recommend it. "There was a really strong sense of obligation and accountability and reputation within a small community," he says, "which actually made repayment of debts more reliable and less risky."

Forrester analyst Cathy Graeber says bringing finance to social computing represents a promising reinvention of a commoditized financial service.

The idea advanced by these companies is that by eliminating the middleman--banks--individual lenders, or groups of them, earn a higher rate of interest than conservative investment options such as certificates of deposit, and borrowers get a lower rate of interest than would typically be available from traditional financial institutions.

Users of these sites may have ideas of their own. Many of the participants in Zopa's online forums say they're early adopters who want to participate in something new and fun. "I am fascinated by the concept, [and] hate big corporate banks..." writes one user. Such sentiment baffles the more commerce-minded forum participants, who have posted complaints about Zopa's "uncompetitive" returns to lenders.

The ardently capitalistic appear to be better represented on Prosper, which offers lenders a wider range of risk and return. Interest rates for loans funded through Prosper range from 7.32% (low risk, low amount) to 24.04% (high risk, high amount)--the sort of rate that earns credit card companies criticism for being excessive.

At the moment, Zopa offers less risk and less return, claiming an average gross return of 7%. It reduces risk by automatically spreading lenders' money across 50 different borrowers. On Prosper, lenders can form groups, but they have to manage the process themselves.

By way of comparison, home equity loans listed at BankRate.com on May 15, 2006, ranged from 6.97% to 8.14%, and certificates of deposit ranged from 3.45% to 4.72%.

Prosper makes money from fees. It charges a 1% closing cost for loans, so securing a $5,000 loan nets the borrower $4,950. It charges lenders a 0.5% annual loan-servicing fee, so a $5,000 loan maintained at 10% interest for 3 years could cost $40.40. There are also delinquency and late fees.