Is this crisis the end of social lending? Yes and no.
Majority of the social lending services which have been shut down (Prosper and Zopa US, to name the famous ones) were actually more like traditional banks presenting themselves as new kind of financial institutions. Prosper was a bank with a core idea to
securitize loans. Zopa US facilitated their operations by being active in interbank markets. Social lending as a traditional banking business will not work.
Traditionally banks core activity has been about delegated monitoring. Banks take in deposits and guarantee to pay them back, assess loan applications, give loans and monitor borrowers. The value added of a bank is to provide liquidity and to analyze information.
Now technological development has decreased the costs to analyze information. We can collaborate to monitor. We can collaborate to provide liquidity.
In fact, social lending includes features that are familiar from co-operative banks and savings associations. In the past co-operative or saving associations operated locally in small villages where people knew each other. Similarly in social lending service
each and everyone creates a reputation for themselves. And lenders can create their association which is a group in the social lending service.
This crisis will be a starting point for social lending, since it is free of leverage. When banks give credit they take in deposits, face 8% capital adequacy requirement and can give 12,5 times the amount of deposits as loans (roughly said, see more in:
http://en.wikipedia.org/wiki/Basel_II). The banking system is highly regulated due to this money multiplier functionality or call it plain leverage.
Social lending can never substitute banks' elementary role in payments or in the implementation of monetary policy or ensuring the supply of capital for economic growth. But well considered social lending can provide a stable alternative without bank-related
systemic risk as lenders and borrowers bear the risks, not the system. Basically, social lending is about returning to the roots of banking. Now it is only taking place digitally without any other barriers than trust and security of the process.