Crowd me, cloud me… regulate me?

This is a post I read and stored a few months ago because I found it interesting – in a world where businesses constantly complain about excessive regulation, it’s refreshing to see someone actively inviting it.

RateSetter is a P2P (peer-to-peer) lending site.  It allows individuals and businesses to lend and borrow money to and from each other without worrying about banks and credit unions.  This isn’t the first time I’ve blogged about the new wave of alternative investment methods based around crowd-sourcing and it won’t be the last.

(It’s a joke in our office that every other business plan we see is “a web-based market place in [cleaners / cars / sports fields / whatever]“.  But the fact it’s a joke shouldn’t get in the way of recognising the many great businesses based on the business model – starting from Craig’s List and carrying on with all the more specific verticals such as AirBnB and so on.  Sod it, what about eBay?  Amazon?  50 Shades of Gray was a P2P product.  The finance industry is not exempt from the cloud/crowd theme and there’s no reason why it should be. )

RateSetter said it’s been lobbying to be regulated and that it’s ecstatic that regulation seems to be on the way because:

We believe this is fantastic news for the peer-to-peer industry and for its customers: it is evidence that the government thinks we are a credible model which allows consumers and businesses to benefit; it is support for the self-regulatory activity that we have undertaken that sets out to ensure consumers are protected; it opens the door, in the longer term, to create regulated and tax-efficient products based on peer-to-peer lending.

Fine.  I’m sure that’s all very true and they’re really pleased the government thinks they’re on to a good thing.  But am I being a bit cynical when I suggest that the real reason they’re so keen might be that regulation is the ultimate barrier to entry – the most wonderful way to protect incumbent businesses in an industry?  To jump through all the relevant regulatory hoops is an enormous task for a new business before they can even start trading – and not one RateSetter (or other current incumbents) will have to worry about in the same way – as the new regime will be based around them and their practices.  Basically, it could allow them to pull up the ladder to this new industry behind them.

Here’s the ideal situation for an incumbent firm in a regulated industry: extremely onerous rules and impossibly high standards to enter an industry, but incredibly light touch rules once you’re there.

Exactly what we had in the CIty up to 2007, in fact.  So, unsurprisingly, I think the emphasis should be somewhat different.

I’m in favour of regulating this industry – it’s necessary, in fact.  But bad regulation sets rules which calcify an industry’s structure while reducing the competitive pressures which produce innovation.  If crowd-funding and crowd-venturing are going to be useful, the industry needs to develop.  And if it can’t do that, RateSetter may find itself crowned king of a dead industry, rather than leading the charge of a vibrant, growing one.

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4 comments
  1. Adam said:

    Probably being very ignorant here, Adrian, but in what way are they different from or better than Zopa?

    • Zopa are much better established but, as far as I’m aware, are more focused on personal loans while RateSetter does personal and business loans. Funding Circle just does business loans. So they’re all P2P lending but of different sorts.
      I didn’t mean to give the impression that RateSetter are the best, or most successful, out there. They could still benefit from locking out new competitors either way!

  2. Adam said:

    Sure, understood, cheers!

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