Here’s how we build P2P firms that actually service the poor
Is payday lender Wonga the only alternative finance business that actually addressed credit demand among poor people?
A regulatory crackdown on the industry has pushed the most disadvantaged in this country towards hire purchase firms, where they “buy” something on credit, sell it on almost immediately to obtain ready cash, then end up paying back on something they no longer possess, despite not owning it in the first place.
An In Defence of Wonga piece is something for another time, but it leads you to wonder where P2P innovation for the UK’s poorest is. The average borrower on Zopa, the UK’s oldest P2P platform, is, for example, a home-owner with an income of between £30,000 and £40,000 – and it’s a similar story for competitors.
Of course P2P lending for home improvements, buying a car or consolidating debt is an entirely different prospect to payday lending, but it does mean that the reality of “opening up/democratising finance” just means “more choice for those already doing alright”, rather than reaching those at the bottom.
Here are a couple of ideas for businesses that could help those individuals, based on a P2P model, and without miring them in debt.
Friendly societies are still common in many parts of the developing world, but fell out of fashion in the UK due to a growing insurance industry, increasingly cheap access to credit and the rise of the welfare state.
If you think those three things are still working well, you probably won’t agree that reinventing old models via technology is a useful enterprise. But old models often demonstrate how people naturally form networks. And you can use technology to enhance those networks and further empower the individuals within them.
Imagine a friendly where members could opt into being risk profiled, use an income smoothing scheme that tops up their income when they’re earning less than usual, and which could log immutable records of transactions and asset ownership.
A criticism of friendlies is that you have to be working in order to pay anything in, and some people can’t work. Or that poorer people simply can’t save. But short-termism around saving what little you do have is easier if you have access to easy credit and a swelling welfare state. And if your concern is that there’s just not enough money within a particularly poor network, then why not look at how to use technology to help people seek charitable top-ups?
Magic of three
An easy way to improve the lives of the poorest is to give money to charity. P2P models could make this sort of giving more effective too.
Currently, most charities operate as the middleman in a two-sided market between the recipient and the funder. A new model could make this three-sided, matching recipient with a funder and a service provider directly and in real-time.
The funder could put up a certain amount of money to be used by a particular service provider which would be unlocked when a recipient says they need that provider’s service. But the fact that this is a three-sided market means that funder, provider and recipient could set or choose to accept any number of conditions in how the money is used.
The main advantage is that it creates a so-called proxy ringfencing of funds: if you’re funding, say, the rehabilitation of homeless drug addicts, you can hand the money direct to the service provider, rather than to the beneficiary. And, the beneficiary, rather than being told what they’re getting, is free to enter a marketplace for procuring a service they want. It gives each participant more visibility, and cuts out the need for a dictating middleman.
There is a risk of popularity contests, and platform developers would need to work out issues around provision funds and meeting demand in real-time. But it is possible to deal with these while creating a more efficient and accurate system.
A new security
No-one has cracked secured consumer lending for the poor borrower. This makes sense: Wonga shows that lenders who try to levy the “right” interest rate for very high-risk borrowers are rarely seen as ethical, despite extremely tight margins.
An alternative could be to tie lending to provision of a service that people genuinely value. Phone subscriptions, internet and access to TV channels could be attached to borrowing, which could be done by lean “tele-lending” firms. Effectively lending against something that’s extremely important to someone is made an awful lot easier when you’re equipped with algorithms for risk assessment, smart contracts and IoT technology.
It may not be preferable for consumers to have services tied to loan repayment – and it could well be deemed unethical to tie them into that sort of system. Could it simply encourage poorer people to take on more debt that they will struggle to repay? Many would argue that the market to date has been an example of supply feeding demand.
But this doesn’t mean new ideas aren’t worth exploring. Disruption to credit has done a lot for those of us who are already free to choose. What about everyone else?