Banking Fintech Mobile & Online

How peer-to-peer changes the financial world

How peer-to-peer changes the financial world. Photo: ohenze,
Written by Chris Skinner

Technology is driving the way financial services works, and peer-to-peer is in the hot seat. Can banks seize the day, asks Chris Skinner.

Another factor of reimagining finance for the internet age is the very nature of person-to-person connectivity and peer-to-peer networking. These two factors are very different, and different in the nature of how people are connecting. In the developed world, we have the viral connectivity of the smartphone; in the developing world, we have the basic connectivity of the mobile phone. Soon, both will transition into smart and mobile objects, from cars and televisions to heating systems and refrigerators. In fact, with Nest and Samsung Home, it’s already pretty much there.

The banking system, meanwhile, is still stuck in a world of debit and credit transactional structures of volume and value based on people paying for things. As we move from paying for things to consuming parts of things, and as our devices order those things on our behalf, the banking system needs to rethink.

A great example is what we saw coming out of the M-Pesa success in Kenya. Many say this hasn’t been successful in other countries, yet one in three Africans with a mobile subscription are actively using mobile wallets today, more than any other continent. This is because Africans have realised that once they’re on the network, they can do far more than just talk – they can transact, trade, text, transmit and telecommunicate. A world has opened to the billions of people who were formerly off the network, and as a result they are reinventing the network. For Africans, airtime is a value store.

In fact, the M-Pesa system created something interesting: financial inclusion. When the system launched almost a decade ago, only 2.5 million Kenyans had bank accounts. Now, 15 million Kenyans are banked. This is because mobile transactions create mobile credit histories, create bankability. More than this, when banks such as Equity Bank in Kenya saw the success of M-Pesa, it woke up to the opportunity and eventually competed with it. From a service originally scorned as opening up fraud and theft opportunities, M-Pesa has led to a rethinking of financial services.

Add to this the work of charitable trusts such as the Bill & Melinda Gates Foundation and the World Bank, Unesco and more, and we see other focus on mobile financial inclusion coming through. For example, how come there are so many malnourished children in Africa? Live Aid and other big fundraising events have scourged into our brains the idea that Africans are regularly experiencing drought and famine. Why?

Sure, because there’s crop failure, but how come they couldn’t insure themselves against crop failure? Because the system wasn’t set up to provide insurance to people who lived on a dollar a day. So let’s imagine that people living on the poverty line could bank half a cent a day as an insurance against crop failure. Just half a cent a day would be enough. Would they insure themselves?

Well, the bet is that most would, so now project forward: a crop failure in 2020 in large parts of Central Africa, where millions of people with mobile telephones have taken out micro-insurances against crop failure by saving half a cent a day to cover themselves against famine. No more famine in Africa.

That’s the dream, and dreams are becoming realities.

Africa is just one example where peer-to-peer connectivity is driving massive change in how we think about traditional financial services. It’s financial services reinvented for the peer-to-peer age.

Peer-to-peer lending

Bitcoin is another such invention, with the blockchain based on network systems authenticating transactions. We obviously have peer-to-peer lending, where investors can get better returns on their savings by lending, and borrowers can get lower interest rates as a result. Based on software algorithms that minimise credit risk, peer-to-peer connectivity flattens the market.

Now apply this to machine-to-machine structures. There was an idea the other day of self-driving cars forming their own value network and investing a little from each ride they provide to invest in future cars. Soon, Uber becomes a self-driving network of cars owned by cars, paying and transacting and insuring themselves. It sounds ludicrous, but ludicrous ideas become reality. After all, when peer-to-peer lending was launched, it sounded ludicrous. An eBay for loans? This cannot be taken seriously. Well, you bet it’s taken seriously now that this seed of an idea has grown into a multibillion dollar global marketplace.

And soon, this marketplace starts connecting. Alibaba does a deal with Lending Club so that SMEs can buy goods from China in America using a seamless line of credit. SMEs can borrow money via PayPal for free. No interest loans are provided on the basis of driving more transactions from merchants on the PayPal network. Money is made through transacting, not through loans, and PayPal knows who is transacting what through its merchant wallets.

In fact, peer-to-peer structures change the game. It’s why Square, Venmo, Stripe and more exist: because they can create real-time peer-to-peer value exchange through apps, APIs and analytics. By focusing on the platform and the user experience and engagement, the rethinking of value exchange and transactions can be made through simply reimagining what the user is trying to do and working out new ways of doing it.

This is the age of seven billion people being able to transact and connect in real-time for near-free. Are banks imaginative enough to seize the day?

– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Photo: ohenze,

About the author

Chris Skinner

Chris Skinner is an independent commentator on the financial markets through the Finanser, and chair of the European networking forum the Financial Services Club, which he founded in 2004. He is an author of numerous books covering everything from European regulations in banking through to the credit crisis, to the future of banking.

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