WHY DOES THIS BOOK FOCUS ON ONLINE LENDING?

Non-bank online lending is an area that is complex and little understood. It has a large dis­ruptive potential for the established financial sector, even though their market share is still small.

Network effects are crucial for the value proposition of technology firms. Their value lies in the number of their users and their activity on the system. When a financial technology startup builds a platform, it has to ensure that it puts up walls that prevent competitors from encroaching on their user base. Technology firms are effective at doing this. Platform and device dependency increases switching cost, and so does the inability to transfer profiles and connections from one social network to another. Making it difficult for users to switch is what banks have been doing for decades. The only novelty is that with the democratization of technology and connectivity, every startup can attack the established players now in their own territory. Because technology is at the core of the business model of the existing credit

institutions, they are vulnerable. New startups are in effect playing a similar game like them, only with newer weapons. The investors are largely the same in banks and FinTech startups; large institutions or hedge funds provide the funds for many online lenders. Also, since online lenders are only loosely regulated, financial technology startups add to the already mushrooming shadow banking system. The larger and more fragmented these invisible pools of capital are, the less stable is the global financial system. If there were a failure of a well- known marketplace lending platform that resulted in total loss of capital for all investors, what would this do to the sector?

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