In a recent interview with Lending Socially, Prosper Marketplace CEO Chris Larsen revealed that he,
favors a holistic regulator that “has the best interests of both borrowers and lenders in mind.” [...] “We also believe the enormous legal cost involved in registering with the SEC is an extraordinarily high barrier to entry. Sure Prosper benefits from this barrier given that we survived the experience of registration, but many companies didn’t; and we believe more players would further validate and help grow the industry.”
What would this holistic regulator look like if it is not the SEC? Larsen cites the California Department of Corporations as an example worth replicating for it regulates and oversees both lending and borrowing. The department also deals with licensing investment institutions which can be an extensive and expensive process. The question is whether a federal version of this department could create a license process which would be less burdensome than current SEC registration process.
While a regulatory body that takes all aspects of an industry and its activities into account would surely produce more thorough and well-rounded rules and restrictions, it is uncertain whether those rules would improve or hinder the performance and consumer benefits of the industry. It is also uncertain whether the existence such a regulatory agency is possible. Even the most well-intentioned policymaker cannot know all the aspects of an industry and the thoughts, risks, and benefits of an activity. A more thorough and holistic regulator may produce rules and restrictions that are less burdensome than the current practices of the SEC. Unfortunately, such a regulator may still fall short of encouraging and supporting the peer-to-peer lending industry.
An Associated Press story this morning by Eileen AJ Connelly provides our latest example of Regulatory Whak-A-Mole, known to scholars as “term substitution.”
Bank of America announced that it will discontinue charging overdraft fees on debit cards. This comes in response to new regulations that prohibit banks from charging overdraft fees unless the consumer has consented to the fee. Since the bank has no way of getting your consent when you walk into Starbucks and perpetrate an overdraft while buying your latte macho grande and muffin, it simply won’t let the transaction go through.
Wa-Hoo, another victory for consumers. Well, not quite. Customers who place a high value on not being embarrassed in Starbucks are arguably worse off. (How do you return a latte macho grande if you find out you don’t have enough money to pay for it after your coffee concierge has mixed it?) More seriously, customers who might want to use an overdraft for a more substantial purchase will no longer have this option.
I wonder about the argument that regulators are saving hapless, uninformed consumers. The AP article reveals that 93 percent of overdraft fees are generated by 14 percent of customers — “serial overdrafters.” That means there are a lot of folks out there who repeatedly try to use their debit cards as a source of credit, albeit an expensive one. I don’t know about you, but it would only take one or two overdraft fees before I’d realize it’s cheaper to keep a $25 balance in my account than to pay more than that in multiple overdraft fees. If most overdrafters have done this more than once, they must know they will be charged a fee and have decided that’s the lesser of multiple evils. So why take this choice away from them?
Point-of-sale overdrafts may not be the only casualty of this regulation. The article quotes banking analyst Robert Meara’s prediction that banks might curtail free checking, which many apparently offer as a loss leader to generate fee income. A smaller stream of fee income makes “free checking” less attractive for banks.
Which consumers does this ultimately hurt? I can think of one group: people with low incomes who can’t afford checking account fees and use debit cards responsibly.
Somehow I doubt that was the regulators’ intention.
I was slow to adopt broadband. So maybe it’s also appropriate that I was slow to read John Horrigan’s highly informative survey on broadband adoption released by the Federal Communications Commission on February 23. Or maybe it’s fortuitous, because the delay let me take a look to see what messages the news media took away from this survey.
Two clear messages appear in the news coverage. The first is a variant of the screaming headline the FCC put on its own press release: “93 Million Americans Disconnected from Broadband Opportunities.” You’ll find this as the headline or lead paragraph in coverage by the New York Times and AFP.
The second type of message highlights the main reasons one-third of the population does not subscribe to broadband. “FCC Survey Shows Need to Teach Broadband Basics,” notes the headline on an Associated Press story. According to the survey, the three main obstacles to broadband adoption are cost, lack of digital literacy, and non-adopters’ perception that broadband is not sufficiently relevant to their lives. (I got a chuckle when I saw that non-adopters said they would be willing to pay $25, on average, for broadband; that’s the magic price that finally induced me to give in and sign up!)
But whoa, what’s missing here? Our old friend Availability. Broadband was supposed to be some kind of noveau public works project that would take hundreds of billions of dollars to bring to fruition, because many Americans lack access to broadband. “Build it and they will come!” “Pour that concrete information superhighway!” “Stimulate the economy!”
The FCC survey tells an interesting story about availability:
Of the … non-adopters, 12 percent say they cannot get broadband where they live. This translates into a 4 percent share of Americans—on the basis of their reports on infrastructure availability in their neighborhood—who say they are unable to obtain broadband because it is not available. This means that 31 percent of all Americans can get service but do not. (p. 5)
The survey also notes that 10 percent of rural respondents say broadband is not available where they live. I don’t mean to sound insensitive, but that’s all? Heck, I’d have guessed a higher percentage than that.
To put the numbers in perspective: 4 percent of Americans say they don’t have broadband because it isn’t available, while almost three times as many – 10 percent – lack broadband because they think the Internet is irrelevant to their lives.
Is availability a problem in some places? Sure. But the FCC survey shows it isn’t nearly the size of problem we’d been led to believe. So let’s hope the National Broadband Plan’s discussion of availability is similary circumscribed and appropriately targeted.
With NASA preparing to outsource much of its space program to the private sector, some may remember the 2004 flight of SpaceShipOne, the first privately funded and flown craft to reach outer space. Far from being the product of a government research grant, this project grew out of the privately funded Ansari X Prize, which gave $10 million to the first team to reach space. Given all the technological problems in the public consciousness, future X Prizes may serve as a viable alternative to government funding.
In a recent interview, X Prize foundation founder and CEO Peter Diamandis announced that the group will be looking at new problems and under-researched areas that are worthy of awards for the first team that has a major breakthrough. For example, the areas of artificially intelligent physicians and mapping of the ocean floor are high priorities on the foundation’s list. There are already X Prizes for teams that can build a super-efficient car, put a robotic probe on the moon, and develop a device to sequence human genomes at unprecedented speeds.
The X Prizes are based on awards given for technological feats in the early part of last century – for example, Charles Lindbergh’s historic solo transatlantic flight was done to capture a $25,000 prize offered by a French hotelier. It seems as if these prizes do the best work when private firms are on the fence about undertaking new research and projects. By providing additional financial incentives, the prize generates the incentives for private research and development in previously under-explored areas. The added prestige of winning the award, along with the competition among various teams for the prize, further motivate research and development.
The growth and expansion of various X Prizes provide an interesting alternative to government research grants and awards. For such prizes, private investors put up the money, increasing the likelihood that such undertakings are value-added or socially efficient. Private competitions also mitigate public choice incentives to allocate funding on political lines rather than economic ones.
Of course, there are problems too – investors may be solely interested in publicity and not be aware of what research is most urgently needed. To be sure, it does not appear as if private human spaceflight is on par with disease research or environmental cleanup in terms of importance. Furthermore, the X Prize is a unique award, and this model for scientific research does not appear to have widespread traction.
Nonetheless, it will be interesting to see what sort of innovations future X Prizes lead to, and whether private prizes can serve as a viable alternative to government grants in overcoming certain technological challenges.
White House cybersecurity chief Mike McConnell had a 1,400-word piece in the Washington Post on Sunday in which he stressed a public-private partnership as the key to a robust cyber-defense. One paragraph caught my attention, though:
We need to develop an early-warning system to monitor cyberspace, identify intrusions and locate the source of attacks with a trail of evidence that can support diplomatic, military and legal options — and we must be able to do this in milliseconds. More specifically, we need to reengineer the Internet to make attribution, geolocation, intelligence analysis and impact assessment — who did it, from where, why and what was the result — more manageable. The technologies are already available from public and private sources and can be further developed if we have the will to build them into our systems and to work with our allies and trading partners so they will do the same.
I’m not sure what he’s talking about, and I’d love if a knowledgeable reader would chime in. I’m not sure how such a spoof-proof geolocation system would work without a complete overhaul of how the internet works.
On Wednesday, a Milan court convicted three Google executives to suspended six-month sentences for violating the privacy of an autistic boy. (The three, and a fourth Google employee, were acquitted on a concurrent criminal defamation charge.) In September 2006 the boy was bullied by four schoolmates, and a recording of the episode was uploaded to Google Video. The footage was promptly removed from the server, as soon as a user flagged it as offensive and the Police issued a take-down request, some two months later.
The ruling called for heated reactions from all over the world. And rightly so, as far as we can tell (the judge reserved up to 90 days for releasing his motivations). Google’s staff were not aware of the video until the request came in, and they certainly didn’t play a role in recording or uploading it. In other words, they’re being held responsible for someone else’s actions.
Although the verdict involves some technicalities related with Italy’s privacy law, it raises very important questions about the liability of internet service providers. EU’s E-commerce Directive provides a safe harbor for hosting, caching and mere conduit services, much like Section 230 of the Communications Decency Act in the US–although the latter might in fact have a wider scope.
Yet, the decision might be a relevant precedent. It is important to understand that this is not only about Google–and not only about Italy. Similar legal cases took place in other countries, involving companies such as Ebay or Yahoo. Not surprisingly, providers are now trying to cope with uncertainty in the only available way: through censorship. Wordpress, just to name an example, has been reported with deleting blog posts or entire blogs for allegedly defamatory comments.
As Jeff Jarvis writes: «in the global, interconnected web, we live in constant danger of the lowest common denominator, of one court, legislature, or regime opening up liability that affects risk and behavior everywhere». The pressure towards a stricter responsibility for internet operators is certainly growing among politicians worldwide. A draft of the Anti-Counterfeiting Trade Agreement that has been under discussion for the last two years was leaked last week, and ISP liability for illegal content is part of it.
The trend we are facing is clearly putting at risk the future of the internet as we know it. User generated content, the key element of the so-called web 2.0, requires that the infrastructure stay free. This is not to say, as critics seem to fear, that the internet should be an anomic nightmare. Rules exist in real life and apply just as easily to the web. Instead of asking for an ever increasing liability, we should give responsibility where responsibility is due.
Rob Frieden, Pioneers Chair and Professor of Telecommunication and Law at Penn State University, discusses internet applications, content providers, and net neutrality. The discussion also turns to the history of telecom regulation, the Comcast/BitTorrent controversy, and the limits of the FCC’s regulatory authority.
Further Readings
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Many of my recent posts have focused on alternative lending, specifically the online peer-to-peer lending of Prosper and Kiva. In general, alternative lending refers to systems structured outside the traditional banking and credit industry. Such lending has been practiced since there has been trade. Many systems have evolved over time but their personal, individual and often informal characteristics remain. It is this flexibility that provides a successful structure for alternative lending.
For instance, the sytem of hawala remittance network was originated in the 11th century in South Asia and is practiced still today. The primarily Islamic network began as a way to transfer money across distances while avoiding the payment of bribes and fees to corrupt government regimes. People use hawala to send money to their family, pay down debts and make loans through the connections of tradesmen in different areas. The system works today as a popular avenue for migrant workers in America to send money back to India. It is a simple system built on informal traditions that offers transaction fees that are lower than those of formal banking institutions. Tradesmen transfer money by collecting and dispersing funds among one another and keeping track of the imbalances which they settle on a regular basis. This system encourages trustworthy behavior through reputation and continued interaction. More information on hawala can be found here and here.
A more modern form of alternative lending is online peer-to-peer lending. Companies and organizations, like Propser, Lending Club and Kiva, engage in this form of lending. Borrowers create online profiles describing their lending needs and their means and ability of repayment. Then potential lenders browse individual profiles or groups of loans for which to participate in. Different organizations have varying structures, such as Kiva, as covered in a previous post, which does not pay interest to lenders. Some, for instance, Prosper, have faced regulatory setbacks and bad management decisions which have led to legal claims and reduced business by lenders. Yet, business has continued as well as grown over the past year and interest rates for borrowers are often competitive to other providers of unsecured loans.
While the fate of online peer-to-peer lending may not be sealed, alternative lending, in general, is and has been sustainable and successful. For most people, traditional loans and credit are feasible and appropriate ways to lend and borrow. Yet, others may not fit into this traditional model. For such people, alternative forms of lending offer individualized and often personal avenues for receiving and distributing funds.
While airfare prices may be rising from the lows of last year, Internet technologies are giving customers the power to find even more elusive travel deals. For example, last week, Yapta.com, a Web site that tracks prices and predicts future fares, partnered with travel search provider Kayak.com to give users more price information while booking. The service is similar to Farecast – a former independent service now partnered with Microsoft’s Bing travel search – that predicts with varying confidence levels whether airfares will rise, fall, or remain the same.
For travelers, having some peek into the future is a welcome tool in what many see as the opaque world of airline pricing. After all, few things can be more frustrating than booking a ticket, only to have the same itinerary drop by $100 the following week. The real issue, however, is whether these services will actually make it more difficult to find deals.
In any market, there are usually some participants with insider information that give them some sort of better information about when to purchase. The same is true in travel industry – there are travel nerds, airline employees, and other gurus. The key however is that these groups constitute a concentrated population with a better shot at systematically finding deals.
Farecast and Yapta essentially extend some of this insider knowledge to a larger group. If the efficient markets hypothesis holds, then fares will reflect all available information, and arbitrage opportunities will be eliminated. In this case, arbitrage comes from waiting until the lowest price is manifested. Thus, if all (or a large number) of travellers know when prices will rise, the deals will quickly disappear.
If sufficiently few individuals use fare predictors, if the predictors are wrong, or if the efficient markets hypothesis does not hold, however, then deals are likely to still be around and available. In this case, users of prediction programs will have a significant advantage over other buyers of airline tickets.
Of course, these services are now being partnered with larger travel search engines, giving price information to more people. It will be interesting to see what the actual effects will be – namely, whether airfares begin to smooth out over time and whether deals become more scarce. Of course, more information available to more people promotes market efficiency, but I’m sure that’s not much consolation to the insiders whose advantage may be slipping away.
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