This happened with Mutual Funds long before internet. That product disruption was rounded out when Banks bought up fund companies.

I think in times of disruption its normal to see layers being peeled off, loans and deposits in the case of Prosper/ Zopa, and as to the eventual outcome, we will see.

Lastly, I disagree that its because they are on the web. The basic disrupter here is the web. Prosper cannot set up an auction exchange for loans without the web. Banks cannot enter that space easily without the usual concerns for canabilism, and concern for employees jobs.

However, once the disruption has occurred, all bets are off for the next stage.

This is at the root of the problem for the big banks — their business model isn’t scaling, and isn’t aligned. The vagaries of the economy make it difficult for banks to sustain growth and profitability through the spread, so they turn to fees. And generate fees NOT necessarily through value added services, but through penalties.

For firms like Wesabe, Zopa, and Prosper, their time of reckoning will come. In fact, let’s take a look back at what happened to Mr. Larsen’s (of Prosper) last venture — oh yes, that’s right — E-LOAN sold itself to one of the big bad banks.

Zopa and Prosper prosper today (pun intended) because they fill a need — NOT because they’re on the Web, and not because they’re a social network. People need money, and can’t get it from the big banks, for whatever reason. The big banks (and credit unions) could put Prosper practically out of business tomorrow if they wanted to. But they can’t — not because they’re big and bad, but because of the constraints of their business models.

Pure negative campaigning as ones first position is disingenuous at best.

That said, I do have a strong suspicion that having a better business model doesn’t make the new players immune from the kind of corporate arrogance that makes people hate banks so much. Paypal anyone?

You have only to look at the press Zopa generates to see this. They came out in the last few weeks with a study – based on earnings reports from banks – suggesting that banks were making in the order of 500 pounds per household nationally in the UK. Theme? Banks are bad. In fact, Zopa is by far the worst of the new lot in this respect.

Imagine what would happen if a bank started a press campaign around the “unreasonable fees” of P2P companies… not a very sensible positioning strategy.

Anyway, Colin, this was a super-interesting post. Thankyou.

And congratultions on the new venture you point to. I think you indicated somewhere previously you’re consulting on it? Can’t wait to see how it all works and what insights you’ve brought to community based lending.

1) Web 2.0 companies are no different than any other type of company. If they are to survive and thrive, must fill a need. This is an UNALTERABLE law of economics. If you need proof, look at the list of dot coms that aren’t around anymore. It doesn’t matter one bit that what these firms do is on the Internet, that they utilize new emerging technologies, or that they hold hands, sing Cumbaya and create social networks. By finding and fulfilling unmet needs, they increase — not decrease — GDP. They create NEW profits.

2) Please provide concrete examples of the “innovations” that you have seen CU leading the charge in. While CU may “exhibit more Web 2.0 characteristics than banks”, so what? Not only is that not “innovation”, it might not (and so far hasn’t) made much difference in terms of market share, sales, and profitability. Which are STILL the measures of success. CUs are not-for-profit, NOT charities.

3) For me, the common thread across JetBlue, WordPress, and credit unions is SINCERITY. It’s a fundamentally human trait… and consumers want to do business with firms that exhibit this trait. Large businesses have spent the past 60 years automating, engineering and then reengineering, etc. and have lost this trait. A trait that is, for many people, a necessary condition to having a relationship — whether its a relationship with another person or a relationship with a company, product, or brand. If that’s what you’re calling “Web 2.0″ fine, but slapping a label on something doesn’t make it so (remember all those companies that added “dot com” to their name back in the ’97-’99 time frame?).

ok, Ron…. take a breath