I read a great article in The Wall Street Journal titled The Uberization of Money. The title is obviously derived from the leading ride sharing company, Uber. According to the article, the title was chosen because the trends in money and investing are similar to car riders and drivers, in that it is trending away from middlemen and using vast amounts of data to make connections between demand and supply. I applaud this innovation. Finding new ways to get capital to business owners who can create new things, add new jobs to the economy, and ultimately create new wealth, is a belief Evolution Capital Partners was founded on.
However, I am more concerned about making the leap from eliminating the middlemen in finance, than I am concerned about eliminating the middlemen in a ride sharing service. Driving a car from point A to point B safely certainly requires skill, but intelligently underwriting new investments and loans is a whole new ballgame, and I believe tough to compare. And as noted by the author of this WSJ article, one huge source of this shift is of course technology, but the other driver is legislation, in particular the JOBS Act of 2012, which I have previously commented on. I am very supportive of streamlining underwriting and reducing costs associated with getting capital to small business owners, but what seems to be overlooked in many of the models described in the article is the necessary effort to understand an investment’s risks and merits. This is underwriting, which adds a very important layer of accountability to the process. Certainly spreading a little bit of money into a lot of investments reduces the risk through diversification, but given the lack of understanding and accountability, one can easily lose a lot of money a little bit at a time.
I recognize I sound old fashioned, but I have also seen many “new shiny things” crash and burn with a lot of investors caught up in the original euphoria, but ultimately left empty handed. For example, the article refers to the elimination of bank tellers, replacing them with smart phones for basic banking and deposit transactions. Great idea! On the other hand, peer to peer lending is troubling to me. This process requires loan agreements or purchase agreements, depending on the investment, that describes the transaction, what each party’s rights and responsibilities are, etc…, which if done right requires some real effort that might seem like a “bottle neck” to those pushing new models to eliminate the boring bottleneck of accountability. It is possible that many good investments can be made, but at what cost? I believe innovation will continue in this area, and for good reason, but leaving out key elements of underwriting to any exchange of money between lender and investor to borrow or investee can lead to many hard feelings, law suits and lost wealth.
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