A Spot Exchange World

PayPal, Venmo, Google Wallet, Square Cash, and Chase QuickPay are a few of the many applications emerging to make transferring money a click of a button.  In the book Managerial Economics and Business Strategy by Baye and Prince it states that in spot exchange the “buyers and sellers essentially are ‘anonymous’; the parties may make an exchange without even knowing each other's names, and there is no formal (legal) relationship between buyer and seller.”  I believe our world is moving away from long formal contracts toward a world filled with instantaneous spot exchanges.

Zachary Karabell recently wrote an article in the Wall Street Journal entitled, The Uberization of Money.  In this article, he discusses how companies such as Uber and GetAround are changing the way we do business.  These companies are taking advantage of idle assets such as houses, cars, time, money, etc. that individuals are willing to lend at a price.

GetAround, for example, is a business that allows you to borrow a vehicle from a regular individual for a fee.  Uber is a service that allows regular individuals to get certified as individual contractors to perform driving services.  It appears our business world is shifting away from big institutions and towards individuals.

I think one of the biggest emerging markets is that of peer-to-peer lending.  Instead of taking weeks to analyze your financial history, earnings potential, and credit score, it will only take moments with the help of big data.  Then individuals will be able to borrow money from banks, businesses, or even other individuals.  This advantage of borrowing from ordinary individuals will take idol cash that people may not be using efficiently and put it to good use.  We are surely part of a spot exchange world.


Dave Tufte said...

SpencerM: 88/100 (a spellchecker is not going to catch "idle" vs. "idol" very well), and I think you mean "emerging" not "immerging").

I read the Karabell article after dinner this evening, and then came down to my office to find you'd read it too :)

Coase won a Nobel Prize for working out why firms exist: that transactions costs can be lowered when they are brought inside the firm. The whole idea of the sharing economy (which has been topic of posts on this blog for a couple of years now) is that new technologies are reducing the transactions costs on the outside of firms enough that it makes sense to move some transactions back into the open market.

Gosh I hope this works out. But I have my doubts. I'm not at all sure the internet has worked out the way we thought it would even ten years ago.

FWIW: I heard a great quote the other day for teaching principles students the value and utility of markets: "Free markets are like Uber ... for everything".

CChilds said...

Ok so I must live under a rock (or a small town in Utah) because I didn’t know about Uber until I read the two posts on this blog that mention it.
This article seems very optimistic about the possibilities available through technology in the realm of peer-to-peer lending. The thought that came to mind while reading this article is that lending hadn’t changed much over the years and that might be because it was working. But more recently we’ve seen major failures within that industry that were powerful enough to break national and world economies. I know there are many reasons for those failures but a big one was because the business of lending changed, people were able to get financing really easily but could not pay it back as easily. This failure led to more strict regulations to lending and investment. It appears new law has eased some of this regulation allowing fundraising up to “$1 million with less regulatory and reporting requirements”, but is this a good idea? Could it lead to some of the same problems we just “recovered” from because investors don’t really understand the risks?

Dr. Tufte said...

CChilds: 50/50

Yes, you live under a rock. ;-D

I think if any of you are MBA students who are unfamiliar with Uber, you should pay attention when you hear the name. That won't be hard, because it really is discussed in the business press all the time. And, it's one of the biggest general business phenomena of the last 10 years. For kicks, I just did a search of The Wall Street Journal and found 20 hits that mention Uber just this week.

So anyway, you can (and should) walk away from the class thinking "the blogging was cool, it helped me learn about Uber". That's kind of the idea of doing this sort of thing.

Anyway, I think you're right; there's an awful lot of optimism about Uber and similar services. It's probably overblown because these are new ideas creating unusual dynamics.

The post itself is more about cloudfunding. What that shares with Uber is massive decentralization of an existing supply chain that (yes) had been working pretty well. But that doens't mean we can't do better. No one thought the music industry was inefficient in 1998 ... and then we had Napster.

I worry about cloudfunding too. Mostly I'm concerned about how those loans unwind when things go bad. That was really the problem of the financial crisis of 2008-9: everything was working just fine until it wasn't working anymore. And no one understood why until it was too late. With cloudfunding, I wonder if there's enough information being kept around to match up the assets and liabilities when someone needs to get liquid quickly. If there isn't, maybe these cloudfunding things are more like convertible debt where the option to convert to equity is with the borrower rather than the lender. But I really don't know.

Brigham Kindell said...

Uber has peaked my curiosity as of late and I find it an interesting and convenient model.

Peer-to-Peer funding is something that worries me. It already seems to be easy for someone to get loans in someone else's name and now they seem to be expediting the process. Hopefully they figure out how to negate identity theft.

I hadn't heard of GetAround until this article so I had to look into it. GetAround seems to insure the car for the peer who lends their car. I wonder how they have worked this with insurance companies. Do you know? Is this a whole new market for insurance?

Brett Bodily said...

For the most part I’m all for the technological innovations that are happening, but there is also a very real concern of security. What about keeping our personal data secure? It seems to me that with all this new technology it opens us up to having our personal information stolen and used, which can lead to our credit being ruined and other disastrous consequences. It can take years to come back from that.

On a positive note, as a result of all the technology and our personal data being out in the cloud, it is a great environment for companies that are in business to provide security for our personal information (for a fee of course!). A great example is the new chips on credit cards which provide another level of security.

There have been great strides in keeping our personal data safe, but there will always be people that find the way to crack the security barriers in place.

Maybe I'm just used to the old inconvenient ways.

Jim Craig said...
This comment has been removed by the author.
Jim Craig said...

I found this article to be an interesting and enlightening read. A few thoughts emerged as I read through the article. First, from the line in the article, "Imagine instead a simple online interface that could generate a tailored credit score for you, taking into account your future earning potential based on your education and location." This sentence caused me to think of the concept of signaling we are currently learning about in Chapter 12 of our Managerial Economics textbook. Imagine being able to increase your credit score, and decrease your interest rate, based on signals about your education, job security, the future outlook for your field of work, spending habits, and economic health of the city or state you live in. All instantaneously accessible via an online profile that collects and sends out all this information about you to potential lenders.

The second thought I had has to do with tax revenue. Internet based companies like Amazon, Ebay, Uber, ect... are decreasing the amount of tax revenue a state is able to collect. If one our models for collecting state tax is going to continue to be based on the taxation of purchased goods then there needs to be uniformity, and a model created for taxing online purchases and nontraditional business transactions. Take couch surfing for example. This issue has recently been addressed in St George; which generates a decent amount of tax revenue for the state from the hotel and travel industry. If websites such as couchsurfing.com and others are allowed to provide a service, without generating tax revenue, then how and where will states recover the loss in tax revenue?

As online purchases this Thanksgiving weekend are expected once again to increase, the result will be less tax revenue collected for states. As online purchasing continues to increase and as traditional business models are being rethought and redesigned, thanks to startups like Uber, perhaps it's also time to rethink the old consumption based tax revenue model.

Dr. Tufte said...

Brigham Kindell: 50/50
Brett Bodily: 50/50
Jim Craig: 50/50

Brigham: I have similar concerns about P2P funding. I have been exposed to a little research on this, and my impression is that the privacy and identity concerns seem to be no worse than in conventional lending.

I hadn't heard of GetAround either. Cedar City only gets stuff like that before places like Beaver ;-) So I know nothing of how they've worked out the details with the insurance companies.

Brett: security concerns are an issue. Honestly, I have to say I'm baffled by the economics of this. Most people seem to be simultaneously giving valuable personal information away (through social media), and maniacally protecting it (with security software, and secure websites).†

Jim: don't you think we're almost at that signalling state, discussed in your first paragraph, right now? I mean, this is why some people get more credit card offers in the mail than others.

As to Jim's discussion about problems collecting taxes, as primarily a macroeconomist, let me make this perfectly clear: governments around the world are completely freaking out about this problem. They get that their meal ticket is being eaten away, but they haven't figured out what they can do about it. Unfortunately, most of their ideas for confronting new problems are old ones based on command and control. It's not at all clear these are going to work. This is why there are discussions all over the world about offshore tax havens, privacy in banking, firms relocating headquarters to other countries for tax considerations, and repatriation of profits.

And I think the problems are broader and more problematic than Jim makes them out to be. Jim asserts that taxation is about consumption, when I think it's really about location. Our governments have drawn these imaginary pink lines on maps to demarcate where they are free to enforce their dictates, like paying taxes. But now, we all log on to virtual communities from wherever we happen to be. And how much difference is there between a state taking money from us through taxes to return it as public goods like a road improvement, and Facebook taking it from us through advertising, and returning it to us the form of better service? The upshot of this is that in some sense all of us are less "in Utah", or "in Cedar City" than we used to be. That makes the tax collection issue into a much bigger thing with no clear solution.

† As an economist I do see the issues of security with personal information (mentioned by Brett) to be somewhat like sexual promiscuity. I don't have any insights into that behavior either. But I think there are similarities, in that most of the time most people don't engage in sexual behavior that's remotely risky. And, while not everyone makes mistakes or transgressions or whatever we want to call them ... a lot of people do, and when they do no one does it halfway. I'm not condoning that, just describing it. People even use an economic term for it when they say their own behavior makes them feel cheap. I think it's analogous to how people deal with personal financial information: we think up killer passwords that no one will guess because it's the name of our hamster that died when we were 9, and then we go and put photos of the hamster on Facebook with the name shown prominently. Why are humans weird enough to do stuff like that? Anyway, I don't understand how or why we do that. But the analogy I drew to sexual promiscuity makes me think that it's some basic Jekyll and Hyde flaw in our natures. What this means is that I'm not sure I understand how to set up new financial arrangements in a way that deals with both parts of our behavior.