Over the past several years, marketplace lending has garnered an unprecedented level of attention and excitement, with many different entrepreneurs pioneering new models for funding loans. Why, all of a sudden, are so many people interested in lending? We believe the surge in interest is due to the fact that technology is allowing us to enter a new phase in our economic history, and marketplace lending is a manifestation of this shift.
Thousands of years ago, we humans were hunter-gatherers. It was every man for himself, fighting for survival over finite resources with zero or little trade.
Then came the rise of villages and towns. Every town needed a butcher, a cobbler, and a builder, and local commerce became very personal and tangible. If you needed a loan, you would borrow money from someone you knew very well – all lending was peer to peer! So, we had the beginnings of economic differentiation but at a very local scale.
Next came the industrial revolution and the rise of global mega-corporations driving rapid economic growth. Highly standardized processes allowed for vast efficiency and scale, but at the cost of becoming increasingly impersonal. If you needed a loan, you would apply to one of a handful of very large banks offering highly standardized products.
Now, only in the past 5 to 10 years, have we been entering a new phase, one where technology allows us to be highly personal, but at a global scale. We live in a time where large consumer brands have teams that actively engage with customers on twitter, where algorithms predict what songs you will like, what wine you will drink, and who you might want to marry, and where you can go online to get a loan not from four or five large institutions but from a diverse marketplace of investors. Technology has finally allowed us to advance economic progress without having to eliminate the diversity that makes us human. Marketplace lending is an example of how technology allows humanity to scale.
As humans, we are distinguished from other animals by our ability not just to adapt to our environment, but to change it. Between the very first human and today, we have developed innovations, both social and technological, that have allowed us to change the way we live and actively evolve our civilization.
Is technology anti-humanity? The popular culture of the 3rd “industrial/global” period was rife with dystopian visions of a bleak future, where humans would become more like machines than the other way around. Many depictions of the future conceived of throngs of people wearing uniform, unisex jumpsuits, a convergence to some image of ultra-efficient uniformity. This, of course, was an artifact of that earlier period’s level of technology, when the only way to achieve scale was to eliminate difference, to standardize the variations, even at times to discard what makes people unique. Thankfully, that vision has not come to pass. Our brave new world consists not of legions of undifferentiated citizens in identical garb, referring to each other by serial number and getting their nutrition from a single pill. Rather, a rapid and miraculous increase in computing power has allowed us to reject the tempting efficiency of homogeneity. Technology allows today’s human to communicate and interact with more people than ever before, to express one’s individuality for the world to see, and to acquire knowledge digitally from all corners of the earth. This is scale by parallelization vs. standardization. In a way, the anthropological trend mirrors the trend in computing, as distributed systems surpass the power of “the biggest box”.
Speaking of the biggest box, let’s discuss retail and the notion of customer service. In the “towns/villages” era of civilization, we knew that “the customer is always right”. Is this because the assumption of one’s role as “customer” automatically makes that person all-knowing? Of course not! Rather, in a highly personal era of commerce, business people and shopkeepers have no choice but to be keenly conscious of the needs of their patrons. If you didn’t like the quality of a loaf of bread, for example, you could go straight to the baker and complain, as he was someone you knew. He couldn’t ignore or dismiss your complaint, lest he risk his reputation in a tight-knit community.
As a greater portion of consumers’ needs began to be filled by very large corporations, “the customer is always right” lost its meaning. If your small business loan application took several months and reams of paper, and you still got declined, there wasn’t much you could do. The competing bank across the street had the exact same product and nearly identical process, and you as an individual had little power.
In the past several years, this has begun to change. The rapid discovery mechanisms of the internet have driven switching costs to essentially zero, making it easier for consumers and businesses to evaluate alternatives and making it more important for companies to maintain high levels of service to retain clientele. In addition, individuals have a greater voice than ever before, the ability to register their happiness or lack thereof in seconds with a tweet, yelp rating, or facebook post. Uber’s bidirectional rating system has led drivers to maintain clean cars – often stocked with water, candy, and phone chargers – and led passengers to be courteous and tidy. The trust mechanisms of the internet have ushered in a golden age of customer service.
Implications for Lending
The forces we have discussed – growth by parallelization, near-zero switching costs, and amplified customer voice – are now causing massive changes to lending, a multi-trillion dollar global industry.
With the rise of marketplace lending, consumers and businesses are not at the mercy of a handful of institutions offering highly similar products, as lending is not restricted to those who could build a branch, take deposits, and issue debt in the capital markets. A wide variety of new lenders has emerged, each offering more specific, more highly-tailored products to would-be borrowers. Because the technology now exists to rapidly fund these loans with a diverse pool of institutional and retail investors, a wider population of borrowers can obtain credit for a wider variety of needs.
As people and businesses have more diverse options, financial service providers, whether bank or non-bank, will have to work harder to demonstrate their value and offer a great customer experience. Because computers have gotten so good at things that are repeatable and standard, humans can now focus on things that are uniquely human. The more efficient allocation of capital enabled by marketplace lending will help millions of consumers and businesses improve their financial lives. It will lead to the creation of more small businesses, more new products, and more jobs. Marketplace lending has captured our attention not just for its big headlines and rapid growth, but for the promise of allowing our economy to scale with humanity.