Monday, March 26, 2007

Smava, P2P Banking, and the Overthrow of Finance...

A German website called Smava has been launched which enables direct contact between investors and applicants looking for credit. Zen Blogger has a good description of the service, but in a nutshell, Smava lets anybody loan money to anyone else at any given interest rate. Basically, if you have some money burning a hole in your savings account, you can become a small-time banker and lend the money to someone else and make some interest off of it. Conversely, if you need some extra cash for Christmas shopping, you can bypass your credit card and instead just take a small loan from a Smava lender (hopefully with less than a 20% interest rate).

Some people are hailing this as long overdue and making outrageous claims that this will overhaul the entire global financial system. It's true that to some extent this type of peer-to-peer system (think BitTorrent and internet file sharing) would indeed allow lenders and borrowers to circumvent the traditional financial institutions. But the truth is that similar services have been around for quite a while - such a microloan programs for agricultural development in Third World countries.

Smava would hardly revolutionize the financial system. For one thing, people would have to migrate to Smava away from their banks en masse, which is doubtful for the near future, and second, even if successful and widely adopted on a global scale, Smava still wouldn't be redistributing financial power in any fundamental way - it would simply exacerbate already existing economic disparities between the haves and have-nots of the world. Those with money would be at even greater advantage than those without because Smava offers them yet another means by which to increase their holdings, while simultaneously giving the disadvantaged a brand new mechanism for spiraling into debt.

So the pundits ought to take a breath and calm down. Just because a new service says "peer-to-peer" doesn't mean it's revolutionary. However, Smava does, at least, seem like a pretty cool idea for middle-class people to (maybe) get a better rate of return than the paltry interest rate their bank is offering them on their savings account (0.25%, anyone?).


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