You give your money to Zopa. Zopa divides it up into chunks and combines it with money from other 'lenders' and gives it to borrowers (which it has performed credit checks on). The borrower pays a fee, a part of which is given back to the lender. Also, if someone defaults Zopa goes after them.
You have a contract directly with the borrowers, not with the institution. If the borrowers don't pay up, you loose that money. Zopa doesn't pretend that you have money sitting in a vault somewhere that you can take out whenever you like.
To be fair to banks they don't really try to push that vault myth either, but that is the mental model people still use when interacting with banks.
The most significant feature of modern banks is fractional-reserve lending. Your bank borrows $100 from you (e.g. by letting you deposit money in it), lends $90 to your neighbor, and predicts that by the time you want your $100 back, someone else will have paid off its loan so that the bank has $100 in liquid cash sitting around. (If that prediction turns out to be false, then your bank borrows money from another bank, and if no other bank is willing to lend to it, then the government steps in.)
There's no way you can play this game without a large amount of money and a willingness to jump through the government's regulatory hoops.
It doesn't make money. Banks do that (well, prior to the recent financial crisis).
See Prosper, incidentally, which had lending peers decide which loans got funded and at what rates. If you think BoA was bad at estimating default risk, wait until you see the average Prosper portfolio.
I blame this more on the average person than Prosper. They publish historic default rates; I even wrote some quick simulation models before I put my money in. The biggest problem is that people see 20% and don't realize just -what- the C grade means.
I can't speak from the borrowing side, but the lending side seemed on par with the risk of the market to me. And for what it's worth, my Prosper portfolio did much better than my 401k.
I think the difference is that you are still the lender while a real bank just takes your money and does whatever it likes with it without even asking you.
On Zopa you decide that you actually lend 500 or 5000$.
You give your money to Zopa. Zopa divides it up into chunks and combines it with money from other 'lenders' and gives it to borrowers (which it has performed credit checks on). The borrower pays a fee, a part of which is given back to the lender. Also, if someone defaults Zopa goes after them.
How is this not a bank?