Sunday, June 8

The economics of Web 2.0 banking

A curious item came through my in-box. This was the headline sentence.

half of Facebook users would use Web 2.0 applications for online banking, while a quarter would even consider switching banks to obtain Web 2.0 services

And this

However, as Worklight encourages banks to adopt Web 2.0 technologies, a new person-to-person social lending Web site is launching today, looking to take advantage of the increasing difficulties US students face securing loans from banks in the post-credit crunch market.

The credit crisis has led to traditional lenders such as banks and credit unions declining some student borrowers who would previously have qualified for college loans. The new GreenNote site is the second P2P marketplace in the US dedicated solely to student loans to launch in the last month, following in the footsteps of rival Fynanz.

To use the service, students set up an online profile and then connect to their social networks to get loans from friends, family and communities. Students must borrow as least $1000 although lenders can offer as little as $100.

Does anybody see the resemblance to microlending? Its not new, just the distribution channel (Web 2.0) is new, this allows atomisation of lending and borrowing, but it is dependent upon having sufficient volume to make money. See this as an example of how difficult it is to make money out of this kind of business:

How much will you charge? $1 per $100 loaned? Lets run with that figure for now. You have 1 website, 20 employees, funding costs, etc. etc. and you are up to a million dollars before you can say facebook.

So to just cover your costs (and assuming you do not have any other sources of funding), you need a million users actively purchasing these loans before you break even. You can sell advertisements, you can use mashups of your records with others to sell other stuff to your customers (will be illegal in many places) etc. etc.

This is not going to be easy and this is what I am struggling with, who will pay for all these whizz bang stuff on the internet?

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