The rise of sites like Craigslist and eBay have shown that commerce can happen without the middlemen and brokers that add costs to a transaction. Naturally, some are tempted to apply the same theory to financial services, not just with payments (like PayPal), but to borrowing and lending. One new project, Ripple, has the ambitious goal of creating a new monetary system out of IOUs. As an example they give, you could transfer the $10 a friend owes you to a third party in exchange for some service, like a haircut. The idea is that if enough people join, it becomes like a social network where people can tally and transfer personal debts. The problem is that it's hard enough to collect an IOU when it's your roommate or a friend -- what incentive does the haircutter have to take on someone else's risk? Because loan enforcement may prove difficult, it also creates a market in collections that could turn ugly. Imagine if one individual owes several people $50. A third party may step in, offer to buy up all the loans at $0.70 on the dollar, and then "drop in" on the original debtor, aggressively trying to recover the money. This may sound far-fetched, but a system like this will already appeal to people who for whatever reason, are on the margins of the traditional financial system. Ultimately, the problem with this system, or any other one that tries to apply peer-to-peer networking to finance, is that they're re-inventing the wheel; the financial system is already based on individuals and institutions lending to each other, with banks offering services like enforcement and monitoring. If anything, the need to specify to whom the loan is going seems like a major inefficiency, and will relegate these sites only to small niches.
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