The Internet has been a transformative force in communications and commerce. Over the past few years, it has enabled attacks on what we used to think of as industries untouchable by small start-ups or direct consumer action: entertainment, telecommunications, education, and gambling. Here's what's next: banking.
Just as the Net allows individuals to find others who share their interests and ideas and form groups focused around them, it can help people with shared financial interests form groups and do commerce within the group. We're in the early stages of this, but a few examples show us how the Web is enabling a new kind of group commerce.
Many forms of commerce, such as investing and insurance, are forms of gambling, but it's in pure gambling--games of chance--that you see the most aggressive online activity. A United Kingdom company, BetFair
, runs the largest and most popular site for peer-to-peer betting. It enables people to bet against each other on sports events. Users control the odds. BetFair is not legal in the United States, although numerous online poker sites, of questionable legality, enable millions of people in the States to win and lose money from each other every day.
Gifts and grants
People can exercise more financial power by acting as a group than they can individually. For example, projects and charities are often funded by groups. Big gifts are often purchased by several people who chip in together. It is a trial to organize money that comes from a variety of sources, but there are new online tools
that make keeping track of funds--and deadbeats--much easier. For example, Fundable.org
is a good service for collecting money that will be paid into a project, such as funding a friend's vacation or contributing to a charity. There's also ChipIn
, which is better suited for friends who want to go in together on a big purchase, such as a specific gift.
But there's more here than just buying things and funding projects. The idea of being able to quickly set up a group fund could make a difference to the investing world. If your friend Bob is a crackerjack stock investor, tools like these can make it much easier for him to set up his own little mini mutual fund. At the moment, neither of these sites offers the tools necessary to run a fund (they're not set up for regular contributions nor do they track investment vehicles), but it's a small technical step from buying into a charity grant to buying a piece of a stock fund.
Another way financial resources can be pooled is in the creation, or tracking, of group demand. It's one thing to use the Web to arrange the purchase or funding of an item that's easy to purchase (such as a gift of a block of stocks), but how do you create a product that doesn't exist? Events database site Eventful
has a new feature, Event Demand
, that lets groups of fans aggregate votes to see their favorite performers in their home towns. This system adds a measure of democracy to event production, and it also helps performers and venues remove some of the financial risk in event planning.
One of the most potentially transformative financial businesses I've seen lately is Prosper
, a peer-to-peer borrowing and lending system. The system lets anybody make a case for why they need to borrow money. Lenders can select which cases they want to take on and easily put a little money to work in dozens or even hundreds of them, diversifying their risk.
Of course, risk is the key factor in taking on an unsecured loan, so Prosper has a rich system for helping borrowers make their case and for helping lenders make better decisions. The keys are strong identification and social shame. Getting a $1,000 loan online is not as easy as getting a date. You'll have to provide some verifiable financial info about yourself and set up your bank account to make automatic payments into your loan. However, even with those safeguards, some people will default. How do you figure out who the high-risk borrowers will be? Prosper encourages people to join groups of borrowers and lenders, with the expectation that if you are identified with a particular affinity group, you are less likely to shame the group (lowering its credit rating) than if you were unaffiliated. For this to work, group ownership must be carefully controlled, and Prosper does enable group leaders to carefully vet applicants. Prosper's value-add is the toolkit it provides to help lenders find loans they want to take on and the practicalities of collecting and distributing funds among all the participants.
Future of P2P group commerce
We are already comfortable with peer-to-peer commerce on the Web at the individual level, via eBay and PayPal. What these new tools do is leverage the power of online groups
. And what else can you do financially when you have groups? I see potential in the insurance business. There's not much of a conceptual difference between taking $1,000 and spreading it among a bunch of borrowers, $50 to each (this is exactly what Prosper does), and setting up an insurance fund with a similar profile.
There are giant challenges in creating any system involving money. Fraud is a big one, as are identity management, security, reputation, and fitting the system into complex or vague legal frameworks (it's unclear, for example, exactly how legal online poker sites are; and Prosper's maximum and minimum interest rates vary based on the location of the borrower). That makes launching a group financial product tricky and expensive. But the paybacks are big, both for the companies running the sites and for consumers, who, freed from the necessity of dealing with impersonal institutions and their one-size-fits-most financial products, are now becoming free to work within rules they, and the people they know, set for themselves.
Who would you rather deal with for insurance and a loan, your bank or your neighbor?