A peer-to-peer future for money and markets?

Dec 09, 2009

As the recession grinds on, the question of “what to do about the banks” remains on the agenda. Today the government announced their latest maneouvre, a ‘windfall’ tax on bonuses paid to banking staff based in Britain. The BBC’s Robert Peston looks at the possible effects of this move, including the possibility that by discouraging bonuses, the government will cause the banks to instead build up their capital and, as a result, be in a better position to lend and kick-start economic growth. I don’t know enough about economics to know if this is right, but I’m skeptical.

As the “great financial crisis” has worn on, I’ve become ever less interested in how to 'fix’ the banks, at least by using any of the measures that our politicians will entertain. Taxing bonuses does nothing to address the underlying problems and it does nothing to deal with the fact that banks, despite banking being a mature and, in theory, competitive industry, are still generating huge (though very volatile) profits, against what economic theory tells us should happen. If the banks can be fixed then I’ll have to hope that one day, the people with the right ideas to do so take over, but I’m not holding my breath waiting.

So, what’s an ordinary person to do? For me, a far more attractive proposition than hand-wringing over someone else’s bonus payments is to look at alternatives to traditional banking. One such option is peer-to-peer lending, which operates on the simple basis of people lending their savings to other people who need to borrow. The interest rates are generally profitable enough to make it worth the lender’s risk, but also generally cheaper than borrowing an equivalent amount on the same terms from a bank. The lack of middlemen taking bonus payments helps!

I suspect that the future will involve a lot more of this kind of thing. The continuing reduction in the costs of communication and the increasing ease of financial transfers means that we don’t really need banks for many of the things that they have traditionally monopolised. I’m reminded of this post by Sean Park which suggests that the business models that some banks have relied upon simply don’t work any more. Banks as great central clearing-houses of money, able to control who gets it, when, and for what price, may soon be a thing of the past.

Another interesting contribution to this debate came from Melody Hildebrant, in her O'Reilly Ignite talk entitled “Web capitalism doesn’t need a bailout”, which covers peer-to-peer ecommerce and lending, prediction markets and crowdsourcing (all some of my favourite things; if she had covered VRM too then it would have been perfect!). It’s worth watching as an introduction to the idea that the future world might involve fewer “too big to fail” institutions and corporations, and more peer-to-peer interaction. On a more personal note, having just bought a house and with a need to spend some cash on home improvements, I’ll probably be looking at Zopa for my borrowing needs rather than a bank.