On January 2008, the cover story of Credit Union Magazine was on P2P Lending. While nascent, P2P Lending or Social Lending presents a disruptive business model. According to Kiplinger.com it will grow from $300M in 2006 to $5B in 2010.
Rather than spending time on proving market validation, it’s equally interesting to understand how these disruptive technologies work in other industries — and are sometimes simply manifestations of consumers using the new Web to exploit arbitrage opportunities — and many times these disruptions begin outside the United States.
Clayton Christensen, famed Harvard Business School Professor, and author “Innovator’s Dilemma” and “Disruptive Innovation” — is one of the leading authorities on the subject of disruption. Earlier this year, I was honored to have Clayton as a Guest Host, for a Web 2.0 Executive Seminar Series I manage, at a company I co-founded — if you haven’t read his books, I would highly recommend it!!
Among his hypothesis is that a firm has a difficult time justifying business models outside of its core business — for many reasons — among which is sometimes it means changing or putting existing business process or models into inevitable obsolescence.
Additionally, the shareholders and stakeholders of the co. — can’t be presented these opportunities in way that justify immediate resource allocation and investment. Another reason, is that sometimes these innovations are outside of the core competence of the people managing and leading the firm.
Also, sometimes such ideas and business models can be a distraction — and many co’s establish Innovation Centers or designated a committee or group of people to do feasibility studies and opportunity assessment.
P2P lending, as many people are aware are truly the way banking and credit unions lended money when credit markets were first formed - so called character-based lending. More recently, Muhammad Yunus, won a Nobel Prize for creating a system of character-based micro lending model in Jobra, India.This was the foundation that later became Grameen Bank, now a world model for micro-lending.
As you recall, P2P was the first nibble that occurred in the music industry’s business model (ala Napster); and also the one of the first disruptions that occurred in the telecom business model (ala Skype).
Ironically the people who were behind Skype — had in their prior company founded KaZaa, a Napster-like peer-to-peer file/media sharing network. It was created by entrepreneurs Niklas Zennström, Janus Friis, and a team of software developers based in Tallinn, Estonia. (^ Skype - A Baltic Success Story. credit-suisse.com. Retrieved on 2008-02-24).
All this of course was the pre-cursor to the ubiquitous, iTunes. Who would of thought that physical CDs would start to give away to digital downloads, ringtones, ringtunes, streaming, etc.
A lesson to be learned is to scrutinize whether the reaction of the music industry and its governing association, RIAA, was the best way to respond. Among their bets on the notion of Digital Rights Management (DRM) — and tried all types of ways to encrypt and code — and even resorted to lawsuits of consumers. Note that DRM is no longer required in any songs sold via downloads.
I think what consumers were telling the record labels is that CD prices were too high ($15.99) and that they were dissatisfied with buying a full album to get 1 or 2 good songs. They also wanted more intimate relationship with artists — and return that would return loyalty in terms of attending live performances, buying merchandise. They also wanted to have more instant gratification — in terms of knowing about a song or seeing a live artist performance (hence YouTube). In essence the Jimmy Bufett and Grateful Dead + the Internet business models — seem to be the model that consumers are migrating towards — and the record labels have transformed their modern business models with something called the “360 Deals“
So back to the P2P Lending and Credit Unions — what is driving consumers? I think they see an arbitrage opportunity — & maybe an “unfair” amount of money is being made on the interest rate “spread.”
They’re asking why does a financial institution pay me 5% of my money and than lend out up to 15% interest? Why would I borrow at 15% when I can borrow from a network at 7%? Why would i save at 5% when I can earn 7% from a network?
Thus, you can got to Zopa, Prosper.com, Virgin Money (formerly Circle Lending) and LendingClub.com — to get sense that this is really happening with formidable number of transactions. And I know that people will say how about default risk? how about the monies are they insured (FDIC, NCUA)? These answers will be solved over time — as these organizations are run by people who “get it” and have investors who understand what has to be done to make these entities sustainable and able to pass federal scrutiny. In terms of default — theoretically since the Internet can do micro-transactions — to allocate monies — the diversification should be better — thus providing equal if not better default rates.
This is a good time for Credit Unions to examine their business models beyond “interest spread” income; and determine where consumers are willing to pay for value — and this has to be done with careful market segmentation — as a retiree is likely willing to pay for certain services that a GenY may not be willing to pay for; and an immigrant from Colombia (Latino) would prize certain offerings — that perhaps would not be of value to mid 40’s professional sending children to college.
I think if the record labels truly saw P2P as a precursor to all the subsequent trials and tribulations — perhaps there was a way for them to embrace it and capitalize on some of the platforms and technologies that are now entire new industries.
The growth of Internet music services and portable audio players has been nothing short of staggering. Over 52 million iPods have been sold in the past 12 months. In February 2008, the iTunes Music Service announced its 4 billionth download. The New York Times has reported that 12% of all iTunes downloads are of the classical genre; this is four times the 3% penetration seen in CD sales.
Mobile music services that let subscribers download songs directly to their cell phones could surpass online digital music retailers like iTunes by 2010. Wireless music services will count half the number of customers using online digital music services by the end of this year. By 2010, when 60% of all phones shipped in the U.S. will be music-enabled, wireless music services are projected to claim more than 50 million users and generate over $1 billion in revenue. (source: D. McSweeney, TenorTech)
