Microcredit interest costs remain higher than those of commercial banks in spite of significant donor funds, largely owing to transaction costs relative to small loan sizes. With the rise of Web 2.0 and online social interactivity, can these transaction costs be reduced through peer to peer lending? Peer to Peer transactions and Web 2.0 have two things in common. The first common denominator is that both of them are rather newcomers in their respective fields and growing fast. The second is that they are both based on mutual and social exchanges between people instead of intermediary based relationships. The main objective of this chapter was to investigate whether peer to peer online lending transactions are integrated to support a higher level of social interactions and associations with a promise of reducing (transaction) costs through disintermediation and risk reduction. We find that “peer to peer” lending consists of diverse websites of microcredit (Kiva, Wokai, Babyloan), social investing (MicroPlace) as well as small loans at market rates (Prosper, Zopa, Lending Club), and even lending between friends and family members (Virgin Money). The chapter studies the use of web 2.0 technologies (blogs, interactivity between lenders and buyers, peers‘ reviews and comments, peers communities and chats) in seven such online lending sites. It finds that most of the so called “peer-to-peer” lenders are in fact intermediaries between the peers (lender and borrowers) and there is little direct contact between the peers. One website used none of the web 2.0 tools. None of the websites used all the web 2.0 tools. The impact on transaction costs should therefore be very little as there is neither disintermediation nor risk reduction. A discussion of difficulties in establishing platforms in this field and directions for future research are provided.
TopIntroduction
The last few years have witnessed major changes in information and communication technologies which have created disruptive and radical innovations. New companies such as Facebook, YouTube and Flickr have emerged and caught the attention of the public and financial investors and are valued in millions or billions of dollars. Existing companies such as IBM, Amazon and Google have also taken to these new technologies profitably. These companies have been able to use information technologies to encourage users to create value, providing networks to multiply effects, allowing people to build connections and companies to capitalize on competencies and using new forms of collaborative innovations.
As illustrated in Figure 1 below, Shuen (2008) explains that the new internet technologies have led to democratized innovation, crowdsourcing, eco-system platform innovation and recombinant innovation. The major change in technologies facilitating this is termed “Web 2.0”, often called “social technology”. The point of the new Web 2.0 technologies is that they harness network effects and allow people to participate and share their own questions and ideas with a company through its website. As visitors participate, thanks to these technologies, innovation is not anymore the prerogative of the companies. Moreover, with a massive democratized participation of people, the bottom line is not the sum of them, but a new mechanism of innovation.
Figure 1. Transformation of innovation models
This technology includes blogs, interactivity, peers' reviews and comments, peers communities and chats. These technologies have led to direct transactions between peers and concomitantly reduced transaction costs in a number of ways: automating the procurement process and reducing paperwork; interoperability and multi-user communications; auctions to get best prices; collaborative planning leading to reduction of inventories; and collaborative design2. The spread of these technologies has been influenced by Social Contagion3.
Our research question was whether these Web 2.0 techniques have led to a potential for reduction in interest costs or to an increase of credit availability by the lowering of transaction costs and overcoming information asymmetries in novel ways.
The main objective of this chapter is to document such sites and investigate whether the online websites have integrated the social networking tools of Web 2.0 to support the social interactions and associations of the peer-peer lending. In other words, the chapter aims to scrutinize whether the online websites make use of the social Web 2.0 tools to encourage mutual exchanges and cooperation between peers to lend and borrow money or whether, instead, they centralize the loan transactions. Is the overall performance leading to lower transaction costs and lower interest rate loans to poor people?
Directed by the above research objective, in the next section we will provide some background information on microfinance transaction costs and information asymmetry as well as an introduction to the use of web 2.0 techniques. Thereafter, we will see whether new online lending sites are using these techniques to further microfinance. In the subsequent section, we offer additional directions for further research. The final section would provide our conclusions.
TopBackground
In this section, we will provide a brief introduction to the transaction costs that create impediments to the growth of online lending and to the web 2.0 tools that are being used by online lending sites to overcome such transaction costs.