Banking on one another: Can the crowd save itself from the banks?January 26th, 2012 by Ville Miettinen
First they lend too much, cause a financial meltdown and need bailing out. Now they don’t lend enough (unless share-options and fat bonuses count as lending). As any former Wall St inhabitant, election-year politician or self-respecting Hollywood celebrity will tell you: banks are pure evil.
Personally, I quite like the banking system as a whole. Swiping a little plastic card in exchange for a pile of food is my favorite magic trick. Still, there’s no doubt the current system could be improved. And, you guessed it, crowdsourcing may be able to help, by offering an alternative way for people to borrow and lend money.
Models for (spare) change
A variety of crowd-based alternatives now provide ways for people to lend money to each other for profit, sidestepping the banks. As banks continue to clamp down on lending, these companies are seeing enormous growth.
The exchange begins with borrowers proposing an amount they want to borrow. Then, much like crowdfunding, lenders contribute to the loan until it reaches its goal and the borrower gets their money. Some companies like RateSetter automatically link lenders and borrowers by the rates they want. Others like Funding Circle, which specializes in funding for small businesses, allow lenders greater control.
Despite their growth, peer-to-peer (P2P) lending only accounts for around $270 million of lending in the US. Such a measly amount is nowhere near sufficient to meet demand caused by banks’ current unwillingness to lend.
The reasons for the small numbers (when did 270 million become a small number?) are numerous. There’s understandable reluctance from customers to manage their own lending. Crowdbanking (or maybe “distributed lending” anyone?) must also overcome unfriendly regulation, vested interests and an entrenched banking system that we still depend on even if it does go a little crazy now and then.
Law of the lever(age)
Ultimately, traditional banking has a key advantage over distributed lending: leverage. Because of its P2P model, the distributed lenders only lend as much money as their members put in. Corporations and banks can leverage capital to effectively create money out of thin air. Of course, this may be a good thing: the absence of leverage means P2P lenders can’t inflate themselves into oblivion and cause economic meltdowns.
So, are we on the cusp of a banking revolution, or is it just a flash in the pan? Assuming the hurdles mentioned above can be overcome, the question, I think, will come down to convenience and reliability. If P2P lending and borrowing is more economic than using a bank, and becomes as easy as bidding on eBay, why wouldn’t it catch on? With Google and Facebook already tinkering about with transaction services and even their own currencies, the stage is set for the shift in thinking that may enable this change. And we know that big things can happen when people tap the power of the crowd.
Of course, if it all collapses, we can always fall back on a system of barter. Which will be good for plumbers and carpenters, but not so good for us at Microtask (you try bartering microtasks in exchange for a cheeseburger at 1am).