A short while ago, a software glitch at Knight Capital sent many stocks into free fall. That fritz lost it hundreds of millions of dollars in a half hour—a capital loss that almost destroyed the company. And it’s not the only disaster of recent memory. Remember that the trading debacle at JPMorgan? The Libor-fixing scandal? The Facebook initial public offering? The customer restitution that Capital One is paying for what the Consumer Financial Protection Bureau said was deceptive credit card marketing? Or UBS’s “rogue trader’s” $2 billion loss?
The common refrain from the average investor tends to be the same: Wall Street has no consequences, it’s a casino, and they rig it for their own gain.
Luckily, in the process of life, as one system fails on a regular basis, new, different system emerges.
Peer-to-peer lending is one such system. P2P lending is financial transaction (primarily lending and borrowing, though other more complicated transactions can be facilitated) which occurs directly between individuals without the intermediation of a traditional financial institution. It is for the most part a for-profit activity and is, therefore, distinguished from charity, philanthropy, and crowdfunding. Though no always, this type of investment focuses on local economy activity—or “localvesting.”
I’ve been a fan of this for a while but lately its seems that this alternate system is finally getting the respect it deserves. Ron Leiber, who was against P2P lending as recently as a year ago, wrote the piece, ”A Financial Plan for the Truly Fed Up.” In it, he advocates including P2P lending as part of your investment strategy.
The other legit proponent is Fred Wilson, VC and Partner at Union Square Ventures who wrote on his blog,
“Our firm is a big fan of these [P2p Lending] markets, having invested in two of them and looking at others.”
Such P2P lending companies are a great example of how, over time, the Internet is (and will) decentralize and distribute all institutions that are centralized and hierarchical. The financial sector has long been considered a hard nut to crack in this respect. However, a hard nut to crack still means it can be cracked. The bodes well for any P2P entrepreneur and is a call to change for brands who still believe in controlling the message and the product.
(If you like the idea of the internet decentralizing/distributing everything, read Philip J. Windley’s post about the inevitable decline of Facebook—and all centralized systems.)
