Edge finance

Great post the other day on ‘You’ve been noticed’ highlighting how the traditional (centralized) banking paradigm is facing a real alternative for the first time in the modern era (notwithstanding the historical success of credit unions, especially in rural locales; of course these depended on a wholly Web 2.0 concept – community!)

How long before the price of this debt is reduced due to better “Social Ranking”, ie on Rapleaf, or eBay? I think we may be seeing the world of Micro-lending re-engineering the world of traditional lending. Instead of just “Bad Debt”, perhaps people will respond to “Bad Rep”, and pay on time? I mean who wants to look bad in the eyes of friends and colleagues?

Banking has used technology to great effect in terms of making their processes more robust and massively more efficient over the past 2 or 3 decades. Some of these gains have trickled down to the customer, but most have been absorbed by the management and the shareholders. And I’m not just talking in terms of pricing or margins. Indeed much more important in my view is the heretofore missed opportunity to pass on a truely tailored, friendly and understandable customer experience notwithstanding the fact that the technology (and business models) to do so already exist. However it is not hard to understand why such reticence (on the part of the incumbents) exists: they are making money hand over fist (ie if it ain’t broke, don’t fix it), barriers to entry are very high (but perhaps not just quite as high as they think), they have huge financial and psychological investments in the giant mass-production factories they have built (not easy admitting obsolescence) and all the usual human and behavioral impediments to change in large organisations.

Companies like Zopa and Prosper are certainly interesting and deserve to be applauded, but somehow I think they are only scratching the surface. Furthermore it becomes quickly obviously that the regulatory framework is woefully ill-adapted to allow this new paradigm to flourish. (Of course as Ms Perez so eloquently stated in her masterpiece, this is unfortunately par for the course:

…in the first decades of installation of the new industries and infrastructures, there is an increasing mismatch between the techno-economic and the socio-institutional spheres…

It is indeed intuitive when looked at from this perspective, that the (social) inertia of the existing – and previously successful – paradigm acts as the main obstacle to the diffusion of the new paradigm.)

One example (and there are far, far to many to enumerate here) is the strictly national framework imposed. To participate on Zopa, one must be a UK resident. On Prosper, a US resisdent. Whereas in many instances, trans-national communities would form much more interesting and robust markets. And wouldn’t facilitating a natural flow of capital from developed to emerging economies, leapfrogging underdeveloped financial systems to create access to millions (much as skipping fixed-line infrastructure and moving straight to mobile telephony has revolutionized access to communication for much of the developing world) be a fantastic opportunity? I’m not saying it is impossible; but the mindset and starting point of most regulatory regimes is more adapted to a 19th-century world of independent nation states than today’s reality of a massively complex global tapestry of interconnected communities.

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