The rise of the Internet means big questions over the so called value of middlemen.

Music, books, technology and marketing have been transformed - today the customer holds the balance of buying power, and that's a good thing.

However financial services isn't buying into that idea- and remains stubbornly rooted in its old ways. From mobile money to venture capital the market is still driven by the middlemen who continue to profit from an industry that is riddled with inefficiency.

Take the book industry of five years ago. This is how it looked then:

1. The middleman had all the power -which also happens to be the bookstore -had all the power. There was only a limited amount of shelf space, and there are more books (far more books) than there was ever going to be room for. The one reason books were published with the economically bankrupt model of 100% returns from bookstores was that huge stores were able to carry thousands of books and return them if they didn’t sell. In fact the large bookshops got to dictate what was on the cover, what the title was, and then get compensated for shelf displays.

2. Know your customer.

In short the publisher, and as a result, the author didn’t know very much about their customers i.e. their readers.  The middlemen wanted to keep ‘their’ customers as far away from the author as possible in order to maximise their profits. The Internet has made that concept is as outdated as the industrial revolution.

3. Pricing and products are fixed.

In the publishing world once a book was published, the price was set forever. That was compounded by those outdated `buy one get one half price’ offers that you find in bookstores up and down the country which unfairly influenced the customer’s `choice’ of book. Who lost out? The customer of course.

4. Middlemen made it difficult for customers to share experiences.

Before Amazon and other review sites you had to depend on the back cover of the book to get any idea if it was any good. And those reviews were often on the payroll of the publisher so were hardly independent.

Fast forward five years and here’s how the industry has changed- for the better.

1. Now there is no middleman. On Amazon because there is infinite shelf space, the publisher has more control over what the reader sees and how. In addition, the Amazon platform allows a tiny organization to have huge reach without taking any inventory risk. Amazon also handles printing, logistics and the platform for connection.

2. The reader is seamlessly connected with the publisher and the author.

3. Pricing can vary based on volume, on timing, on format. So the consumer gets the best deal and the publisher isn`t financially disadvantaged. Win - win all round

Middlemen, by their very nature, represent a temporary plug for an inefficiency in the market. Most times they become obsolete when two things happen, 1. They are replaced with technology that does they same job they used to do and 2. Both parties on either side of the middleman have access to the same information that only the middleman once did.

Now take financial services- especially accessing credit in developed economies and basic banking services in developing economies.

Up until 2 years ago financial services sector on the web was seen as the next obvious business model that was going to transform itself.

It clearly hasn't.

Today there is still layer upon layer of unnecessary costs associated with both. Whether that is Western Union ripping off migrant workers in South America to send money home, or credit brokers in countries like the UK who charge everything from administration and arrangement fees for doing precisely not a lot , everything is still stacked against the consumer.

Internet Entrepreneurs have tried to varying degrees of success. Take Zopa in the UK who cut out the banks by linking borrowers to lenders. Then there is M-Pesa in Africa that have transformed the way in which poor people are able to access basis financial services to the extent that 10 to 20% of Kenya`s GDP now flows through its mobile money system.

But these stories are the exception not the rule. And in a global economy that was brought to its knees by the inequalities of its financial system it’s almost inconceivable that there has not been the impact that there has in other markets.

The regulation of financial services in countries varies from the onerous to anything goes. The US and the UK are cases in point. For example in the UK you do not need to be regulated to offer personal loans over the Internet.

And that`s why we are seeing the inexorable rise of pay day loans - instant credit that can be found online seconds.

Pay day lenders have seen how the music and book industry has been transformed- the problem is they are not doing anything to help the long term financial health of their customers. They are opportunists, like garage forecourts that simply inflate their prices when there is a petrol crisis.

The Internet gives them a readymade market to abuse- and that`s exactly what they do. They think short term, immediate turn, and see customers as expendable.

We all know that lenders of the last resort have been offering the financially disadvantaged eye watering APRs since the beginning of time, unfortunately what the Internet has done is spawned a whole new generation of lenders who use the web in a destructive profiteering way.

Here are some ways in which financial services should be made better-

1. Offer customers better rates as a reward for trust they build up online
2. Offer customers better choice of lenders that actually match their credit profiles
3. Offer customers - particularly small businesses - small loans that can have highly flexible repayment terms and can be extended more easily once credit history has been earned.
4. Ensure lending institutions are much more transparent in the way that their loan portfolio is monitored
5. Make more lending decisions based on social impact - again particularly in the case of small businesses.

The new plague of lenders, fuelled by the ease of the Internet- and worse their investors fall back on the same old excuse 'it’s a market and we are simply fulfilling a market need'.

That's a highly dubious and thin principle- I'm not sure what's worse; the lenders, or the predators who bankroll them

Tags: Financial Services

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