Friday, August 18, 2006

P2P financial services has a 3D Long Tail

In my post Financial products have a Long Tail I argued a little that the Long Tail model could be applied to financial services and right now is especially evident in the online brokerage accounts and tools available from the likes of E*Trade and Fidelity. I chose to focus on these types of accounts over retail banking with on a little thought or explanation. As I suggested in the post, banking is most useful to me by picking a pervasive bank with ATMs everywhere; Bank of America fits that bill. As a consumer I'm not going to head much further down from the fat-arse end of the tail to the smaller banks and credit unions because there is no real advantage to me exploring the niche options. I am not a niche customer of the banking world, so I shouldn't have used myself as the reference.

James Gardner responded in a comment that directed me to one of his posts about how the Long Tail could be applied to banking. He had identified Zopa (in the UK) and Prosper (in the US) as Long Tail contenders:

What are Prosper and Zopa doing? Democratising the production of loans: now anyone can be a bank! Selling the niche: chances are the loan terms that best suit you are going to be available where there are thousands of consumer created loan products. Zero cost distribution: the loan is matched and fulfilled automatically.

Zopa and Prosper are long tail business.

That is the key: "now anyone can be a bank", the same way as with eBay anyone can be an online retailer. That is the thinking I should have done around this!

I would also like to extend James' thought. In most of banking and credit there is a Long Tail of the population that is unbanked; for some reason they can not gain access to financial services, or at least not more than the check cashing branch on street corners.

The unbanked population does not fit the peak end of the power curve that represents customers that are likely to be appropriately profitable and of acceptable risk to many banks. James Taylor has written much about how Enterprise Decision Management can actually ensure this, enabling banks to effectively manage their customer profile during account opening. For the Wal-Mart type banks, this makes absolute sense; customer profile matches the inventory of products the bank chooses to offer. Even in an online world the banks operations are not flexible enough to offer a greater array of products (beyond an Internet only account maybe), so they target the mass of standard customers.

Looking at the new online financial services, Zopa and Prosper; they offer the ability for everyone to be a bank, offering an enormous set of credit products for a credit customer to pick from. In doing so they appeal to the different niches of customers with different needs, allowing them to gain access to credit that would otherwise be impossible.

There is another product in this new financial world, which makes this a peer-to-peer (p2p) form of trade. Looking at it from the other way round, each of these niche credit customers is like an inventory item or niche investment product for the investors. Now the guys with the cash have a Long Tail investment products with varying degrees of risk to select from, which they can select off the virtual shelf of Zopa/Prosper.

I don't believe that eBay customers can be viewed as a Long Tail of 'products' in the same way. For the new financial services, the two credit product / investment product views exist because both parties are benefiting financially from the transaction. This new wave of financial services presents a kind of 3D Long Tail of potential credit / investment product matches for both parties to benefit from. This is a powerful offering that extends beyond the 'community/social' banking brush it could be tarred with, which (if I wanted to really push my limits of credibility) could lead to a whole new form of Long Tail trade.

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Colin said...

Good discussion. I agree re Prosper and Zopa being examples of the long tail. I think its important (to traditional bankers), because those guys at the long end are doing exactly what Anderson speaks of.
- making money on the margin
- increasing the size of the overall market,eg, inclusion of unbanked (as you mentioned)

Incidentally I referenced a good Economist article on this here, back in July:

Danial Louis said...
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