The Bankwatch

Tracking the consumer evolution of financial services

The promise of social lending – one that stretches the known financial framework

This has been a weird week for social lending, but an email conversation with the always clear thinking Ron brought it into perspective.  Ron asked if the new model is in fact simpler – brilliant question.

New Approach Puts Secondary Market to Work in P-to-P | American Banker [note:  access to full story requires registration]

Edward Woods, a senior analyst for Celent, a Boston market research unit of Marsh & McLennan Cos., said the model Lending Club and Prosper have chosen is the one most likely to thrive as this market matures.

“You’ll see fewer experiments” along the lines of what Zopa tried in the United States, he said. “I think the simpler, the better.”

Simpler is usually better, but hardly ever happens.  The original concept  of everyone lending to everyone is not going to happen.  The reason though is not what everyone expected. 

Internet allows lots of things to happen easily, but once you get into finance, you are dealing with peoples money, and that automatically fall within some type of regulatory framework.  The reason is simple – anarchistic finance will always fail because it will automatically re-centre within a small group that can trust each other.  But we want social lending to be relatively freely available.  This tension between the simplistic desires of the masses – “why can’t we just do it, because internet makes it possible” – conflicts with the other simplistic desire for protection of ones money – ‘how can the government allow my money to be at risk?”.

Ron also asked if the new model as we see it evolve, and it will evolve, is even p2p anymore.  Sensible securities law and regulation requires that investors are protected from unscrupulous and criminal offers.  Going back to an anarchist model, the unfortunate reality is that without a proper framework confidence will be eliminated as the extent of the bad will always overweigh the good.  The current credit crisis is proof of that concept.

We need the tension between business and regulation.  Management of that tension is a joint responsibility of government with their regulation powers, and business to continually open up new possibilities that people want.  If we leave it to one or the other we gain nothing.  What we are seeing with LendingClub, Prosper, and CommunityLend are examples of business working with the regulatory powers to extend the thinking into the possibilities that internet provides.

Relevance to Bankwatch:

Internet offers such potential and possibility by connecting people in a trusted yet open framework that surely something better can exist. 

This is the promise of social lending – one that stretches the known financial framework, yet offers the protections and knowledge that informed users of financial services deserve.


Written by Colin Henderson

October 17, 2008 at 00:30

Posted in Canada, Social Lending, US

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