IT’S BACK!

16 FEATURE THURSDAY 2 MARCH 2017
CITYAM.COM
CROWDFUNDING
Why the
P2P firms
of the
future
should look
to Wonga
Harriet Green says future models
could help the poor – because present
players never can
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.
MUTUALISM
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
Imagine a friendly
where members
could opt into being
risk profiled and log
transactions and
asset ownership
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
INDUSTRY
DIARY
This week, digital-only bank Monzo
announced a second
crowdfunding round on
Crowdcube. Having
crashed the platform’s
website last time it
crowdfunded, hitting its
target in 96 seconds, this
time round, Monzo opted for a preregistration
system. Within four hours, it
had enough pledges to fulfil its £2.5m
raise. And by yesterday, it was three
times over subscribed.
Meanwhile, Funding Circle pointed out
that, while net lending to SMEs for 22 of
the UK’s largest banks combined
dropped to £500m in January (according
to Bank of England figures), Funding
Circle investors lent £50m net over the
same period.
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 highrisk
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?