Think Flat

by Balaji Yellavalli 

After my previous blog, many people asked me why I think “peer to peer” lending models are the harbinger of the Flat World in consumer Finance and Investing.

Well for one, this is financial democracy and micro-credit at its best, where borrowers and lenders share information free of cost rather than pay for it! Relevant borrower information content is “pushed” by the borrower herself (albeit vetted by an intermediary, but they do not charge the lender or borrower, instead make money off the completed transaction) to the lender and the lender, in turn, gets to pick and choose the jig-saw of data elements relevant to her risk profile.

While disintermediation was brought to us by the internet, business models like peer-to-peer lending have broken down traditional barriers to entry into lending and investing, flattened hierarchies of decision making by simplifying the rules of the game through intelligent configuration and eliminated knowledge and information asymmetries (In the US, another prominent Insurance Company has popularized such e-simplification through its “Even a caveman can do it” series of ads!).

I do not have to be a qualified banker or a credit analyst at a credit card issuer to make a decision on whether I want to lend money or not, sitting right in my living room! Sure, I am risking my money, but I am risking that at my terms! One could also call this web 2.0 for a Flat World – more about that in a later blog.

Secondly, this is all about building loyalty through innovation as opposed to the traditional “stick-with-us-because-we-offer-superior-service compared to the competitor round the block.” Business model innovation is attracting a distinct category of borrowers and investors, who keep returning, based on their positive experience. I talked about the borrower who wants money to re-invest in Prosper – that to my mind is a great example of loyalty harnessed through innovation!

Bank of America conceived a unique “Keep the change” program , based on matching the spend from a checking account upto a certain limit in the first year and adding that to the customers balance – a cool way to pay back the customer and promote new checking accounts rather than offering “free checking” or “free ATM access” which its competitors do.  ING Direct is another example of harnessing Flat World innovation to grab market share in a lugubrious market for Time-Deposits.

And finally, peer-to-peer lending is a Flat World story, because it offers a great way to race ahead of competition when the industry is down, essentially enabling the Financial Institution to win while its competition copes with industry downturns.