People-to-People Lending and Natural Selection

Posted by Tony Martello :: November 16, 2007 @ 11:59 am

Isn’t technology great! As the new “e-world” continues to grow, many revolutionary ideas are starting to take a solid form. In recent times, many industries have been turned on their heads thanks to the rapid advancement of the Internet.

Let’s have a look at the music industry. Big music is still fighting its way out of illegal distribution of its copyrighted material, largely due to the fact that the Internet makes data sharing so easy. You have to ask yourself, “But isn’t that the point of technology?” Is it that the Internet is evil for stealing from the music industry, or is it the music industry’s fault for not adapting to its new environment?

I tend to agree with the latter; in my mind it is Charles Darwin’s theory of evolution, i.e., survival of the fittest. In the end, I see the increase in a competitive environment to be a great way to force efficiency and innovation into any industry, creating better offerings to the consumers.

Let’s look at the results of the change to the music industry. Now, instead of having to buy a whole album, you can buy just the songs you want, not to mention you can do it from you own home in seconds. I still feel there’s a lot more changing yet to happen for music.

Now let’s go to the topic of dealing with your money. Shouldn’t the same thing happen for banking? Shouldn’t the way we use money improve as well, thanks to the Internet? Yes it should, and People-to-People Lending is helping to make that happen with such companies as Lending Club.

They call it “bank disintermediation.” I know, it sounds ugly, but basically it means that other entities (insurance companies, department stores, Internet companies, etc…) are providing products and services that were previously just supplied by banks, usually with the help of innovations in technology coupled with some regulation changes.

People-to-People Lending is an excellent example of bank disintermediation. Instead of the lending process being, more or less, a one choice operation (whatever traditional banking offers), we now have a People-to-People Lending alternative.

As a concept like People-to-People Lending grows, its new business model could in fact challenge that of traditional banking. You may have already seen how many People-to-People models embrace transparency by letting you see everything during the lending process, or market making via lender bidding, or by allowing the people-to-people community set the interest rates, or even the personal level of money lending by letting you see and experience the borrowers’ need.

All of these characteristics can arguably be considered as unique and solid advantages for People-to-People Lending, above that of lending via the traditional banking method. As Darwin argues in his theory of evolution, even the slightest advantage will have humongous consequences.

Why should you care? As a fairly new offering, People-to-People Lending is still in its gestation period. Who knows what interesting advantages this may spawn? All we know for sure is that an increase in competition can only make things better for us, the consumers. In the end we are going to see better rates, better service, faster transactions, more efficiency, etc…

In the near future, when you find yourself with a better money service experience, don’t forget to thank Charles!