Monday, December 18, 2006
have an inkling?
According to Chris Anderson, one of the driving forces behind the Long Tail is democratization of the tools of production. For lovers of video, it is possible to use cheap tools to make what was once the domain of the studios. Print on demand does the same for books. Ebay makes anyone a retail shop front. In the Long Tail thesis, when you have democratization of production, you get markets with a lot of choice - an explosion of niche products. When you add in zero or low cost distribution and declining information asymmetries, all those niches sell.
What are Prosper and Zopa doing? Democratising the production of loans: now anyone can be a bank! Selling the niche: chances are the loan terms that best suit you are going to be available where there are thousands of consumer created loan products. Zero cost distribution: the loan is matched and fulfilled automatically.
Zopa and Prosper are long tail business.
I wonder how many banks actually know of the existence of these businesses though?
Or if they know them, have an inkling of what it might mean for them?
Banks have always had a special (and very profitable) position in society because of their unique relationship with the economy, their ability to manage risk collectively, and most of all, their leverage of information asymmetries to make them the best place to match the needs of investors and borrowers. For the unsecured personal loan (an admittedly simple banking product) the long tail nature of Zopa and Prosper completely unhinges the value proposition of traditional banking.
It is only a matter of time before clever people find a way to make a long tail business work for a mortgage. And that, frankly, has the potential to do some very nasty things indeed to the results of incumbents in the banking industry.
The beauty of this model is that it competes with the very things that Banks cannot replicate:
* its cheap(er) for the borrower, and higher rate for the lender
* a lender who cares, cares enough to seek out the borrower, and understand the borrowers personal story
* processing costs are eliminated - replaced by people who care
I am trying to think of how Banks can compete. This is the ultimate in disintermediation. For now, Banks are watching and privately hoping it won’t work, but I am afraid that is unlikely. It may evolve but it will work. We know that because eBay had the same questions asked in 1999 - no-one is asking now.
tarted by ---gallizio
at the peers-brosnan time