The Booming Business Model of Peer-to-Peer

One snowy Paris evening in 2008, Travis Kalanick and Garrett Camp had a spot of trouble hailing a cab. I’m sure you can relate.

You might have been out late in the city, maybe you’d had one too many, and public transport had stopped for the night.

The taxi was your only option, but there was no taxi in sight. And when one did eventually pass by, it had no intention of stopping.

I doubt many of us would take this experience and create a multi-billion dollar business. But that’s exactly what Travis and Garrett did. Out of their miserable experience on the snowy streets of Paris, they came up with a simple idea.

Why not just press a button on your smartphone and have a car come to you?

Years later their simple idea become Uber, the billion dollar peer-to-peer (P2P) taxi service company.

Travis and Garrett have helped millions of people get to their destinations. But what I think is more impressive is the hundreds of thousands of jobs Uber has created. At the 2014 TechCrunch Disrupt Conference, Travis claimed that Uber creates around 50,000 new jobs each month globally.  All you need is a reliable car and a smartphone to earn an income. It’s a win-win scenario.

If you were thinking about investing in Uber, though, you’re out of luck. The company has not yet listed. An initial public offering (IPO) could happen this year. However Travis Kalanick, CEO and co-founder of Uber, hopes ‘to make sure [an IPO] happens as late as possible’.

Regardless of when it happens, an IPO for Uber would be huge. The company is currently valued at US$68 billion. At this value Uber would already make it into the S&P 500, the top 500 companies by market capitalisation in the US.

You might think I’m eagerly waiting to invest in Uber. However, it’s not Uber’s service that excites me. It’s Uber’s business model.

The fact that drivers and passengers transact directly with each other rather than through a company playing middleman is why Uber is so successful. And it’s given many more small P2P businesses the confidence to take on the ‘big boys’.

David taking on Goliath

Historically, banks have been large, wealthy institutions — like the Big Four here in Australia. How else can they afford to lend and secure millions, if not billions, of dollars?

However, that’s all changing — quickly. When you give them collective power, small companies can have some serious weight behind them.

Take SocietyOne, the P2P lending company, as an example.

SocietyOne matches borrowers with lenders. By eliminating the corporate middleman, borrowers and lenders now have more freedom to negotiate rates.

Not only does it benefit borrowers, investors with excess cash can now become lenders. Instead of earning a pittance on a savings account, you can get far higher returns by lending.

Some P2P platforms advertise that you can earn up to 10% on your money. However, for that kind of return you can expect to take on greater risks. If a loan fails then you, the lender, could lose your entire investment.

Some P2P companies do refund the investor in the above case. But it’s far from free. Just like banks pay insurance to help offset bad loans, you could be paying for this ‘insurance’ by the way of a lower interest rate or fixed management fees.

Yet many lenders are willing to take the risk to secure higher returns.

And it’s not just the taxi and banking services. The P2P business model is working its way into almost every industry — travel, retail, gambling, education and car sharing, to name a few.

The income opportunities this is opening up are truly revolutionary.

You don’t have to buy a hotel to run your own bed and breakfast business. Instead just jump on Airbnb and rent out the spare room in your house. You don’t have to go through an existing fashion label to sell your clothing line. Instead you can jump on Rent The Runway.

My personal favourite, though, is the burgeoning real estate P2P marketplace.

Homeowners saving thousands

British company, Purplebricks Group PLC [LON:PURP], has created a P2P marketplace for property. For a flat fee of $4,500, homeowners can become their own real estate agents.

If you’re unfamiliar with the process of selling a house, this price is dirt cheap.

Usually if you want to sell your home, you go to a real estate agent. But going down this route comes at a hefty cost.  Some agents charge a flat fee, but most ask for a percentage of the sale price, generally around 2% to 3.5%. That means if your home sells for $500,000 the agent pockets $10,000 to $17,500 right off the top.

Purplebricks says they save homeowners around $11,500 on average in commission and marketing costs. And their platform is now available in Melbourne, Brisbane, the Gold Coast and the Sunshine Coast.

From their track record in Britain, Purplebricks might gobble up market share in Australia. However, the challenge ahead is to reassure homeowners. They’ll need to constantly prove that the service actually saves sellers money.

I believe we will see a lot more companies using the P2P business model in 2017. Silicon Valley is now filled with P2P start-ups. In 2015 there were 114 hopeful P2P lenders alone seeking authorisation from regulators, according to the Financial Times.

They’ve become so popular that regulators’ expectations have been dramatically exceeded. The US Financial Conduct Authority (FCA) has had to set up a regime just to process all the new P2P start-ups. The regime should be in place by 2017.

The P2P business model could be the next evolutionary stage of businesses spanning almost every sector. And here at Money Morning, we’ll be keeping a sharp eye out on the best ways to profit from this fast moving trend.


Harje Ronngard,
Contributing Editor, Money Morning

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