A financial marketplace, like a social networking site, tends towards monopoly or oligopoly due to network effects.
A few years ago tech bloggers were inundated with news of yet another social network. We all know how that ended – Facebook dominant, with LinkedIn and Twitter in niches – and the rest in the dustbin of tech history.
In Financial markets it tends towards the same. In America there is NASDAQ and NYSE in Equities; plus one or more equities exchange in each country (which could change as we move to a more globalized world).
This implies that the plethora of lending marketplaces out there today will end badly for most of the participants and spectacularly well for one or two or three marketplaces. At the moment investors are clearly betting on Lending Club as the Facebook in this story. At about 30x revenue, this is an expensive bet, but the history of network effects dominant companies indicates that it might not be a stupid bet – only time will tell.
There are clearly niche lending marketplace players – Kabbage and Ondeck in small business lending, SoFi in high quality consumer lending. Prosper is the one potential big competitor to Lending Club, but they need to do their big branding event (aka IPO) soon or become lost in the noise.
That is bad news for all the other lending marketplaces. Many can thrive for a while within national borders protected by national regulation. However I don’t think that the dominant global marketplaces will grow globally by buying the local players. So there is no obvious exit route. It does not tend to work that way in network effects businesses. The global player appoints a team to study a national market and its regulations and how to enter in a regulated way and then comes into that national market by offering not just local loans/investors but their global network as well.
Facebook, LinkedIn and Twitter did not grow globally by buying the Facebook, LinkedIn and Twitter of (name your favorite country).
That is the bad news.
The good news is that there are lots of opportunities to build value within the ecosystem created by lending marketplaces.
Quick quiz. Which business is more valuable?
Charles Schwab or NASDAQ?
Merrill Lynch or NYSE?
To win the network effects game, you have to empower an ecosystem, even if the players in that ecosystem become more valuable than you.
So there are plenty of valuable, sustainable and lower risk opportunities within the lending marketplace ecosystem than there are in creating new marketplaces. Here are the ventures that I extracted from Fintech 1,000, but this is still very early days in this market so I am sure there are a lot more. Please tell me what I have missed.
As always, I welcome feedback (via Comments or Twitter or Email). Who have I missed? What have I got wrong?