I recall learning the real meaning of the word “disintermediation” in the mid-90’s, when I was helping mutual fund companies build systems to do exactly that: cut out the middle-man (the broker or dealer) in some of the transactions that they have with their end-customers. The primary vehicle for this disintermediation is, of course, the web, where now almost all financial services companies provide some sort of self-service, bypassing a mutual funds dealer, securities trader, bank teller or insurance broker whenever regulations allow. This trend is not restricted to financial services: travel agents, for example, have been practically disintermediated out of existence in some market segments.
The “bad guy” in this has always been the big company: by allowing their customers direct access to their services, they endanger the livelihood of the intermediary. (Having been self-employed for most of 20 years, I don’t believe in the sanctity of any job, but that’s a topic for another day.)
Now it’s the banks’ turn to be disintermediated. The Economist reports in a recent article on the launch of Zopa, a UK-based online lending and borrowing exchange: consider it peer-to-peer lending for the rest of us.
Since borrowers and lenders can get together without a bank in the middle, Zopa effectively disintermediates the bank, while providing bank-like security through credit checks, spreading each loan over multiple parties, and committing to collecting from overdue borrowers. Borrowers are classified by their risk, and lenders choose the level of risk that they want to assume when picking a market within Zopa. Zopa takes 1% of the deal, which means that borrowers get a better rate than a bank could offer them for a consumer loan, and lenders get a better rate than a bank savings account. To quote their site:
Lenders can choose what rate to lend at and, by looking at the markets, decide what sort of people to lend to and when. Borrowers can choose to take a rate offered or to wait and see whether the rates drop. Both avoid paying needless chunks of commission to Financial MegaCorp plc and can get better rates of interest as a result.
I love that dig about “Financial MegaCorp plc”.
You can be sure that the big financial institutions will fight the growth of exchanges like Zopa when it starts to impact their business, but then, all parties being disintermediated fight the trend. This style of borrowing and lending won’t be for everyone, but it will attract those who don’t want to spend the extra money just to have a bank in the middle, any more than I would pay a higher fare to have a travel agent book an airline ticket for me.