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DEFINITION of 'Peer-to-Peer (P2P) Economy'
A Peer-to-Peer, or P2P, Economy is a decentralized model whereby two individuals interact to buy or sell goods and services directly with each other, without intermediation by a third-party, or without the use of a company of business. The buyer and the seller transact directly with each other. Because of this, the producer owns both their tools (or means of production) and their finished product.
This form of an economy is viewed as an alternative to traditional capitalism, whereby business owners own the means of production and also the finished product, hiring labor to carry out the production process. In capitalism, the workers do not own the means of production, nor do they have any rights to the finished product they have helped make. Instead, they are paid wages in return for their labor. An advantage of the capitalist system is generally increased productivity and efficiency of the production process over a P2P system, since traditional businesses have the advantages of economies of scale and mass-production techniques.
BREAKING DOWN 'Peer-to-Peer (P2P) Economy'
A Peer-to-Peer economy can exist within capitalism. Open-source software (which is P2P) co-exists with retail and commercial software. Services like Uber or Airbnb serve as alternatives to taxi and livery services or hotels and inns.
Since a third party is removed from the transaction, there is a greater risk that the provider may fail to deliver, that the product will not be of the quality expected, or that the buyer may not pay. This extra risk is often defrayed by reduced transaction costs and lower prices.
Because providers of P2P goods or services own their finished product and means of production, the peer-to-peer economy is similar to economic production of pre-industrial age when everybody was a self-producer, a system that was supplanted by more efficient economic systems that provided greater productivity and wealth. The internet and the IT revolution have made the P2P economy a much more viable system in the modern age, and have also spurred investment in service providers who, while not directly involved in the production of P2P goods or services, act to make P2P transactions more visible, safer, and efficient.
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Peer-to-Peer (P2P) Service
A Peer-to-Peer, or P2P, Service is a decentralized platform whereby two individuals interact directly with each other, without intermediation by a third-party, or without the use of a company of business selling a product or service. The buyer and the seller transact directly with each other via the P2P service. Some P2P services do not involve an economic transaction such as buying and selling, but bring together individuals to work on joint projects, share information, or communicate without intermediation.
When a third party is removed from the transaction, there is a greater risk that the provider of the service may fail to deliver, that the service will not be of the quality expected, or that the buyer may not pay. This extra risk is often defrayed by reduced transaction costs and lower prices. Often, businesses are created with the intent of facilitating P2P transactions and reducing risk for both buyer and seller. The majority of P2P services today are offered online.
BREAKING DOWN 'Peer-to-Peer (P2P) Service'
Peer-to-Peer services bring together individuals, as opposed to bringing together businesses (B2B) or a consumer to a business. Some popular examples of P2P services are:
Open-source Software – anybody can view and/or modify code for the software
BitTorrent – a popular anonymous file-sharing platform where uploaders and downloaders meet to swap media and software files.
Air BnB – allows property owners to lease all or part of their property to short-term renters.
Uber – a platform for car owners to offer livery service to people seeking a taxi ride
Spotify – uses P2P networking to efficiently stream real-time audio content on-demand
eBay – a marketplace for private sellers of goods to find interested buyers.
Etsy – producers of crafts and other homespun goods can sell them directly to the public
Path To Profitability (P2P)
A clearly defined route to profitability as described in a business plan. The Path to Profitability (P2P) concept has become a focus area for venture capitalists and early-stage investors to assess whether a start-up should receive funding, since the ultimate goal of any investment is to earn a profit on it.
Not to be confused with the other P2P i.e. Peer-to-Peer (computing or networking).
BREAKING DOWN 'Path To Profitability (P2P)'
The path to profitability is typically interwoven throughout a company's business plan, with elements of it contained in various sections such as marketing strategy, strategic planning, and financial projections. The actual numbers are contained in the projected financial statements such as the Income Statement and Statement of Cash Flows.
A critical consideration of the path to profitability is that the assumptions and forecasts contained therein should be achievable and backed by solid data and analysis, rather than wildly optimistic targets that may be impossible to meet.
The P2P timeframe will also vary significantly from one company to the next, depending on the sector to which it belongs. While an early-stage technology company may have a P2P horizon of five years, a biotechnology start-up may be in no position to achieve profitability even after a decade.
The newfound emphasis on P2P can be seen in the initial public offerings (IPOs) that have taken place in the bull market that commenced in 2009, especially in the technology sector. Technology companies that have gone public in the second tech boom have done so at a relatively advanced stage, when they had either attained profitability or were on the verge of it. This represents a marked contrast to the numerous technology start-ups that had their IPOs in the first dot-com boom of the 1990s, when business plans emphasized website traffic rather than profits. These companies burned through billions of dollars in capital before going belly-up. The new focus on P2P is a direct outcome of the 1990s dot-com boom-and-bust.
Peer-To-Peer (Virtual Currency)
The exchange or sharing of information, data, or assets between parties without the involvement of a central authority. Peer-to-peer, or P2P, takes a decentralized approach to interactions between individuals and groups. This approach has been used in computers and networking (peer-to-peer file sharing), as well as with currency trading (virtual currencies).
BREAKING DOWN 'Peer-To-Peer (Virtual Currency)'
The evolution of money from gold, to banknotes, to fiat currencies, and finally virtual currencies like bitcoins has been developing for thousands of years. In the context of currencies, P2P refers to the exchange of currencies that are not created by a central banking authority. Currencies that are not traded through a physical exchange, such as through the use of coins and banknotes, are considered virtual currencies. Virtual currencies are transferred between parties electronically.
Peer-to-peer exchanges allow individuals to move currencies from their accounts to the account of others without having to go through a financial institution. P2P networks rely on digital transfers, which in turn rely on the availability of an internet connection. This allows individuals to use computers as well as mobile devices, such as tablets and phones.
Peer-to-peer currencies are not created or exchanged in the same manner as those created by central banks. The creation of new currency as well as the recording of transactions between parties is managed through a network of computers that is not maintained by a government authority, and is thus maintained by the collective.
While privacy advocates may appreciate how peer-to-peer currency exchanges allow individuals to conduct business without government interference, the lack of transparency in virtual currencies may allow individuals and groups engaged in illegal activities to launder money without detection or oversight.
Peer-To-Peer (P2P) Insurance
A risk sharing network where a group of associated or like-minded individuals pool their premiums together to insure against a risk. Peer-to-Peer Insurance mitigates the conflict that inherently arises between a traditional insurer and a policyholder when an insurer keeps the premiums that it doesn’t pay out in claims.
Also known as Social Insurance.
BREAKING DOWN 'Peer-To-Peer (P2P) Insurance'
The demand for more accessible and low-cost services in the financial industry has brought about a number of technology-driven tools initiated by fintech companies. The insurance sector has not been left out of the technology drive that is changing the way consumers and companies relate with each other. Insurtech, technology innovation in insurance, has introduced tools for policyholders to have easy access to insurance coverage at lower costs than traditional policies allow. The incorporation of fintech concepts like the crowdsourcing platform and social networking led to the Peer-to-Peer (P2P) Insurance movement.
The traditional insurance model pools a large number of strangers under a similar coverage. An underwriter uses the profile information provided by each of these individuals to create a risk analysis of the individual. Information such as age, hobbies, and medical history are used to determine the premium that each policyholder would pay. The premium covers the cost of insuring the individual and provides assurance to the insured that in the event of a loss, s/he will be covered. The pool covers individuals with different risk profiles, with the low risk members paying less in premiums for the same type of coverage. In the event that one or more members or policyholders experience a catastrophic event, funds from the pool are used to cover the affected party(ies). The amount of excess in the pool at the end of the coverage period is retained by the insurance company as part of its revenue. Since most insurance companies are incentivized by profits, a conflict ensues between insurers and the insured when unused premiums are not refunded.
The P2P insurance model differs from the traditional model in a number of ways.
The insurance pool is comprised of friends, family members, or individuals with similar interests who team up to contribute to each other’s losses. By selecting one’s pool members, the insured is assuming responsibility for the group’s risk profile. This selection technique would motivate an individual to initiate a pool that has a low risk outcome, and hence, low cost for the members. Also by pooling premium funds with known acquaintances, P2P insurance promotes transparency in its operations. Every member knows who is in the group, who is filing a claim, and how much money is in the pool. Finally, the P2P model solves the moral hazard associated with traditional insurance coverage. When members share the same affinity and know each other socially, there is a disincentive to file fraudulent or unnecessary claims.
Any funds available in the pool when the coverage period ends are refunded to its members. This eliminates the issue that policyholders have with traditional insurers when both parties’ incentives are not aligned. Also, a P2P pool is insured by a reinsurer so when a group experiences claims in amounts that exceed the premium paid, the reinsurer covers the excess of available premium funds.
Different P2P insurance providers operate in different ways. Some pools only cover specific types of insurance such as auto insurance. Others require that members have similar causes like a support for ovarian cancer. Some groups even implement the crowdfunding tool to insure each other’s sick leave. Some providers refund unused premiums to the individual pool members. Others give the unclaimed premiums to a charitable organization or cause that unites the policyholders. A minute number of providers use Bitcoin as their currency of payment.
The innovative nature of P2P insurance has presented some challenges for insurance regulators who consider the P2P model different from the traditional one. Similar concerns across regulatory bodies that are seeing technology disrupt the traditional norm in the financial industry have given rise to a new group of companies called Regtech. Regtech uses innovative technology to help companies and industries partaking in digital advancements efficiently comply with industry regulators.
Peer-To-Peer Lending (P2P)
Peer-to-peer lending (P2P) is a method of debt financing that enables individuals to borrow and lend money - without the use of an official financial institution as an intermediary. Peer-to-peer lending removes the middleman from the process, but it also involves more time, effort and risk than the general brick-and-mortar lending scenarios.
Also known as "social lending".
BREAKING DOWN 'Peer-To-Peer Lending (P2P)'
The advantage to the lenders is that the loans generate income in the form of interest, which can often exceed the amount interest that can be earned by traditional means (such as from saving accounts and CDs). Plus P2P loans give borrowers access to financing that they may not have otherwise gotten approval for by standard financial intermediaries.
The method is not without its disadvantages as the lender has very little assurance that the borrower, who traditional financial intermediaries may have rejected due to a high likelihood of defaults, will repay their loan. Furthermore, depending on the lending system employed, in order to compensate lenders for the risk that they are taking, the amount of interest charged for peer to peer loans may be higher than traditional prime loans.
Sharing Economy
A sharing economy is an economic model in which individuals are able to borrow or rent assets owned by someone else. The sharing economy model is most likely to be used when the price of a particular asset is high and the asset is not fully utilized all the time.
BREAKING DOWN 'Sharing Economy'
Communities of people have shared the use of assets for thousands of years, but the advent of the Internet has made it easier for asset owners and those seeking to use those assets to find each other. This sort of lending is sometimes referred to as a peer-to-peer (P2P) rental market.
Sharing economies allow individuals and groups to make money from underused assets. In this way, physical assets are shared as services. For example, a car owner may allow someone to rent out her vehicle while she is not using it, or a condo owner may rent out his condo while he’s on vacation.
Criticism of the sharing economy often involves regulatory uncertainty. Businesses offering rental services are often regulated by federal, state or local authorities; unlicensed individuals offering rental services may not be following these regulations or paying the associated costs, giving them an "unfair" advantage that enables them to charge lower prices.
Production Efficiency
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http://www.investopedia.com/terms/p/production_efficiency.asp
Production efficiency is an economic level at which the economy can no longer produce additional amounts of a good without lowering the production level of another product. This happens when an economy is operating along its production possibility frontier. Efficient production is achieved when a product is created at its lowest average total cost; production efficiency measures whether the economy is producing as much as possible without wasting precious resources.
BREAKING DOWN 'Production Efficiency'
Theoretically, production efficiency includes all of the points along the production possibility frontier, but this is difficult to measure in practice. If the economy cannot make more of a good without sacrificing the production of another, then a maximum level of production has been reached.
Production efficiency is based on a business’ ability to produce the highest number of units of a good while using the least amount of resources possible. The aim is to find a balance between the use of resources, rate of production and quality of the goods being produced. When production efficiency has been reached, it is not possible to produce more goods without using excess resources or sacrificing product quality.
Productivity vs. Efficiency
Productivity serves as a measurement of output, normally expressed as a number of units per an amount of time, such as 100 units per hour. Efficiency relates to how well a goal is accomplished, normally by considering the amount of resources used, and waste created, in comparison to goods produced.
Evaluating Production Efficiency
To evaluate production efficiency, each phase of production must be examined. The primary focus is on maintaining acceptable quality standards while reducing waste in both materials and production times without harming another portion of the process. This is seen as a long-term process, as changing conditions may impact current methods resulting in the need for reevaluation.
True Production Efficiency
True production efficiency is only reached when it is not possible to improve performance in one area without doing harm to another. At that point, the business is seen as functioning at peak efficiency within the current system.
Production Efficiency and the Service Industry
The concepts of production efficiency can also apply to the service industry. To perform a service, resources are required, such as the use of human capital and time, even if no other supplies are required. In these cases, efficiency can be measured by the ability to complete a particular task or goal in the shortest amount of time while minimizing waste and maintaining quality.
Non-Banking Financial Company - NBFC
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Non-banking financial companies, or NBFCs, are financial institutions that provide certain types of banking services, but do not hold a banking license. Generally, these institutions are not allowed to take deposits from the public, which keeps them outside the scope of traditional oversight required under banking regulations. NBFCs can offer banking services such as loans and credit facilities, retirement planning, money markets, underwriting, and merger activities.
BREAKING DOWN 'Non-Banking Financial Company - NBFC'
NBFCs were officially classified under the Dodd-Frank Act as companies predominantly engaged in financial activity when more than 85% of their consolidated annual gross revenues or consolidated assets are financial in nature. This classification encompasses a wide range of companies offering bank-like services, including credit unions, insurance companies, money market funds, asset managers, hedge funds, private equity firms, mobile payment systems, microlenders and peer-to-peer lenders.
NBFCs and the Rise of Shadow Banking
In 2007, NBFCs were given the moniker of “shadow banks” by Paul McCulley, an executive of Pacific Investment Management Company LLC (PIMCO), to describe the expanding matrix of institutions contributing to the easy-money lending environment that led to the subprime mortgage meltdown. Investment bankers Lehman Brothers and Bear Stearns were two of the more notorious NBFCs at the center of the meltdown. As a result of the ensuing financial crisis, traditional banks found themselves under tighter regulatory scrutiny, which led to a prolonged contraction in lending activities. This gave rise to a number of non-bank institutions that were able to operate outside the constraints of banking regulations.
In the decade following the financial crisis of 2007-08, NBFCs have proliferated in large numbers and varying types, playing a key role in meeting the credit demand unmet by traditional banks. The fastest growing segment of the non-bank lending sector has been peer-to-peer (P2P) lending. The growth of P2P lending has been facilitated by the power of social networking, which brings like-minded people from all over the world together. P2P lending websites such as Lending Club Corp. (NYSE: LC) and Prosper.com are designed to connect prospective borrowers with investors willing to invest their money in loans that can generate high yields.
P2P borrowers tend to be individuals who could not otherwise qualify for a traditional bank loan, or who prefer to do business with non-banks. Investors have the opportunity to build a diversified portfolio of loans by investing small sums across a range of borrowers. Although P2P lending only represents a small fraction of the total loans issued in the United States, it has gotten 65 times larger since 2009, rising from $25 million to $1.7 billion in loans by March 2015.
Financial Inclusion
The pursuit of making financial services accessible at affordable costs to all individuals and businesses, irrespective of net worth and size respectively. Financial inclusion strives to address and proffer solutions to the constraints that exclude people from participating in the financial sector.
Also called Inclusive Financing.
BREAKING DOWN 'Financial Inclusion'
The financial sector is continuously coming up with new and seamless ways to provide services to the global population. The increase in the use of technology in the financial industry (fintech) seems to have filled the void of inaccessibility to financial services. The advent of fintech has created a way for all entities to have access to all financial tools and services at reasonable costs. Examples of fintech developments that have increasingly been embraced by financial users include crowdfunding, robo-advisors, digital payments, peer-to-peer (P2P) or social lending, and insurance telematics. While these innovative services have disrupted the financial world by including more participants in the money sector, there is still an untapped portion of the world population that remain unbanked or underbanked.
In 2016, the World Bank stated that around 2 billion people worldwide don’t use formal financial services and more than 50% of adults in the poorest households are unbanked. The unbanked population consists of adults who have no easy access to banks in their regions or who have developed a deep mistrust of the financial system. An initiative by the World Bank Group called Universal Financial Access 2020 is taking measures to ensure that the aforementioned unbanked community has access to traditional platforms like checking accounts by the year 2020. People who have basic transaction accounts are classified as the underbanked. The underbanked are adults that have secured the traditional tools for conducting transactions (such as a bank account), but are not privy to the digital incorporation of these transactions (such as digital payments). Because having a basic bank account is the foundation on which disruptive innovations are built, fintech offers the underbanked a ticket to financial digital inclusiveness.
With little access to banks, especially in rural geographies, underbanked users mostly carry out transactions in cash or checks making them vulnerable to theft and street frauds. Even access to bank locations for conducting transactions like cash deposit, check cashing, money order, and funds transfer may come at high costs in terms of banking fees. Fintech, telecommunication, and banking institutions are working hand-in-hand to create mobile payment and micro lending facilities for financially underbanked users. Numerous online payment and commerce systems incorporated with cell phones have been built to facilitate the ease with which this underserved population can immerse themselves in the digital economy. Examples of popular apps that have been created to foster financial inclusiveness include China’s AliPay and India’s Paytm Wallet serving 450 million and 122 million users in 2016, respectively.
There is a sizeable global market opportunity for Fintech. However, access to a lot of markets is impeded by the unbanked group who have a deep mistrust of financial institutions and choose to conduct all-cash transactions. To alleviate this challenge, Fintech companies have come up with innovations that promote transparency in their dealings with customers. Examples of these innovations include telematics insurance technologies that provide policy owners with premium rates based on number of miles used; digital currency transactions that use blockchain ledgers to reveal nature of dealings and identities of players in the online sphere; roboadvisors that openly disclose and offer low fees for customers who have limited access to traditional financial advisors due to high costs; and peer-to-peer (P2P) lending sites that promote financial transactions where individuals lend and borrow from each other. P2P lending is particularly beneficial to emerging market participants who have no way of getting loans from financial institutions due to a lack of financial history and credit record for each individual.
With the rise and rise of fintech, financial inclusion seeks to promote the betterment of the world's population through the use of financial services and tools available in an increasingly digital-based economy.
A Peer-to-Peer, or P2P, Economy is a decentralized model whereby two individuals interact to buy or sell goods and services directly with each other, without intermediation by a third-party, or without the use of a company of business. The buyer and the seller transact directly with each other. Because of this, the producer owns both their tools (or means of production) and their finished product.
This form of an economy is viewed as an alternative to traditional capitalism, whereby business owners own the means of production and also the finished product, hiring labor to carry out the production process. In capitalism, the workers do not own the means of production, nor do they have any rights to the finished product they have helped make. Instead, they are paid wages in return for their labor. An advantage of the capitalist system is generally increased productivity and efficiency of the production process over a P2P system, since traditional businesses have the advantages of economies of scale and mass-production techniques.
BREAKING DOWN 'Peer-to-Peer (P2P) Economy'
A Peer-to-Peer economy can exist within capitalism. Open-source software (which is P2P) co-exists with retail and commercial software. Services like Uber or Airbnb serve as alternatives to taxi and livery services or hotels and inns.
Since a third party is removed from the transaction, there is a greater risk that the provider may fail to deliver, that the product will not be of the quality expected, or that the buyer may not pay. This extra risk is often defrayed by reduced transaction costs and lower prices.
Because providers of P2P goods or services own their finished product and means of production, the peer-to-peer economy is similar to economic production of pre-industrial age when everybody was a self-producer, a system that was supplanted by more efficient economic systems that provided greater productivity and wealth. The internet and the IT revolution have made the P2P economy a much more viable system in the modern age, and have also spurred investment in service providers who, while not directly involved in the production of P2P goods or services, act to make P2P transactions more visible, safer, and efficient.
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Peer-to-Peer (P2P) Service
A Peer-to-Peer, or P2P, Service is a decentralized platform whereby two individuals interact directly with each other, without intermediation by a third-party, or without the use of a company of business selling a product or service. The buyer and the seller transact directly with each other via the P2P service. Some P2P services do not involve an economic transaction such as buying and selling, but bring together individuals to work on joint projects, share information, or communicate without intermediation.
When a third party is removed from the transaction, there is a greater risk that the provider of the service may fail to deliver, that the service will not be of the quality expected, or that the buyer may not pay. This extra risk is often defrayed by reduced transaction costs and lower prices. Often, businesses are created with the intent of facilitating P2P transactions and reducing risk for both buyer and seller. The majority of P2P services today are offered online.
BREAKING DOWN 'Peer-to-Peer (P2P) Service'
Peer-to-Peer services bring together individuals, as opposed to bringing together businesses (B2B) or a consumer to a business. Some popular examples of P2P services are:
Open-source Software – anybody can view and/or modify code for the software
BitTorrent – a popular anonymous file-sharing platform where uploaders and downloaders meet to swap media and software files.
Air BnB – allows property owners to lease all or part of their property to short-term renters.
Uber – a platform for car owners to offer livery service to people seeking a taxi ride
Spotify – uses P2P networking to efficiently stream real-time audio content on-demand
eBay – a marketplace for private sellers of goods to find interested buyers.
Etsy – producers of crafts and other homespun goods can sell them directly to the public
Path To Profitability (P2P)
A clearly defined route to profitability as described in a business plan. The Path to Profitability (P2P) concept has become a focus area for venture capitalists and early-stage investors to assess whether a start-up should receive funding, since the ultimate goal of any investment is to earn a profit on it.
Not to be confused with the other P2P i.e. Peer-to-Peer (computing or networking).
BREAKING DOWN 'Path To Profitability (P2P)'
The path to profitability is typically interwoven throughout a company's business plan, with elements of it contained in various sections such as marketing strategy, strategic planning, and financial projections. The actual numbers are contained in the projected financial statements such as the Income Statement and Statement of Cash Flows.
A critical consideration of the path to profitability is that the assumptions and forecasts contained therein should be achievable and backed by solid data and analysis, rather than wildly optimistic targets that may be impossible to meet.
The P2P timeframe will also vary significantly from one company to the next, depending on the sector to which it belongs. While an early-stage technology company may have a P2P horizon of five years, a biotechnology start-up may be in no position to achieve profitability even after a decade.
The newfound emphasis on P2P can be seen in the initial public offerings (IPOs) that have taken place in the bull market that commenced in 2009, especially in the technology sector. Technology companies that have gone public in the second tech boom have done so at a relatively advanced stage, when they had either attained profitability or were on the verge of it. This represents a marked contrast to the numerous technology start-ups that had their IPOs in the first dot-com boom of the 1990s, when business plans emphasized website traffic rather than profits. These companies burned through billions of dollars in capital before going belly-up. The new focus on P2P is a direct outcome of the 1990s dot-com boom-and-bust.
Peer-To-Peer (Virtual Currency)
The exchange or sharing of information, data, or assets between parties without the involvement of a central authority. Peer-to-peer, or P2P, takes a decentralized approach to interactions between individuals and groups. This approach has been used in computers and networking (peer-to-peer file sharing), as well as with currency trading (virtual currencies).
BREAKING DOWN 'Peer-To-Peer (Virtual Currency)'
The evolution of money from gold, to banknotes, to fiat currencies, and finally virtual currencies like bitcoins has been developing for thousands of years. In the context of currencies, P2P refers to the exchange of currencies that are not created by a central banking authority. Currencies that are not traded through a physical exchange, such as through the use of coins and banknotes, are considered virtual currencies. Virtual currencies are transferred between parties electronically.
Peer-to-peer exchanges allow individuals to move currencies from their accounts to the account of others without having to go through a financial institution. P2P networks rely on digital transfers, which in turn rely on the availability of an internet connection. This allows individuals to use computers as well as mobile devices, such as tablets and phones.
Peer-to-peer currencies are not created or exchanged in the same manner as those created by central banks. The creation of new currency as well as the recording of transactions between parties is managed through a network of computers that is not maintained by a government authority, and is thus maintained by the collective.
While privacy advocates may appreciate how peer-to-peer currency exchanges allow individuals to conduct business without government interference, the lack of transparency in virtual currencies may allow individuals and groups engaged in illegal activities to launder money without detection or oversight.
Peer-To-Peer (P2P) Insurance
A risk sharing network where a group of associated or like-minded individuals pool their premiums together to insure against a risk. Peer-to-Peer Insurance mitigates the conflict that inherently arises between a traditional insurer and a policyholder when an insurer keeps the premiums that it doesn’t pay out in claims.
Also known as Social Insurance.
BREAKING DOWN 'Peer-To-Peer (P2P) Insurance'
The demand for more accessible and low-cost services in the financial industry has brought about a number of technology-driven tools initiated by fintech companies. The insurance sector has not been left out of the technology drive that is changing the way consumers and companies relate with each other. Insurtech, technology innovation in insurance, has introduced tools for policyholders to have easy access to insurance coverage at lower costs than traditional policies allow. The incorporation of fintech concepts like the crowdsourcing platform and social networking led to the Peer-to-Peer (P2P) Insurance movement.
The traditional insurance model pools a large number of strangers under a similar coverage. An underwriter uses the profile information provided by each of these individuals to create a risk analysis of the individual. Information such as age, hobbies, and medical history are used to determine the premium that each policyholder would pay. The premium covers the cost of insuring the individual and provides assurance to the insured that in the event of a loss, s/he will be covered. The pool covers individuals with different risk profiles, with the low risk members paying less in premiums for the same type of coverage. In the event that one or more members or policyholders experience a catastrophic event, funds from the pool are used to cover the affected party(ies). The amount of excess in the pool at the end of the coverage period is retained by the insurance company as part of its revenue. Since most insurance companies are incentivized by profits, a conflict ensues between insurers and the insured when unused premiums are not refunded.
The P2P insurance model differs from the traditional model in a number of ways.
The insurance pool is comprised of friends, family members, or individuals with similar interests who team up to contribute to each other’s losses. By selecting one’s pool members, the insured is assuming responsibility for the group’s risk profile. This selection technique would motivate an individual to initiate a pool that has a low risk outcome, and hence, low cost for the members. Also by pooling premium funds with known acquaintances, P2P insurance promotes transparency in its operations. Every member knows who is in the group, who is filing a claim, and how much money is in the pool. Finally, the P2P model solves the moral hazard associated with traditional insurance coverage. When members share the same affinity and know each other socially, there is a disincentive to file fraudulent or unnecessary claims.
Any funds available in the pool when the coverage period ends are refunded to its members. This eliminates the issue that policyholders have with traditional insurers when both parties’ incentives are not aligned. Also, a P2P pool is insured by a reinsurer so when a group experiences claims in amounts that exceed the premium paid, the reinsurer covers the excess of available premium funds.
Different P2P insurance providers operate in different ways. Some pools only cover specific types of insurance such as auto insurance. Others require that members have similar causes like a support for ovarian cancer. Some groups even implement the crowdfunding tool to insure each other’s sick leave. Some providers refund unused premiums to the individual pool members. Others give the unclaimed premiums to a charitable organization or cause that unites the policyholders. A minute number of providers use Bitcoin as their currency of payment.
The innovative nature of P2P insurance has presented some challenges for insurance regulators who consider the P2P model different from the traditional one. Similar concerns across regulatory bodies that are seeing technology disrupt the traditional norm in the financial industry have given rise to a new group of companies called Regtech. Regtech uses innovative technology to help companies and industries partaking in digital advancements efficiently comply with industry regulators.
Peer-To-Peer Lending (P2P)
Peer-to-peer lending (P2P) is a method of debt financing that enables individuals to borrow and lend money - without the use of an official financial institution as an intermediary. Peer-to-peer lending removes the middleman from the process, but it also involves more time, effort and risk than the general brick-and-mortar lending scenarios.
Also known as "social lending".
BREAKING DOWN 'Peer-To-Peer Lending (P2P)'
The advantage to the lenders is that the loans generate income in the form of interest, which can often exceed the amount interest that can be earned by traditional means (such as from saving accounts and CDs). Plus P2P loans give borrowers access to financing that they may not have otherwise gotten approval for by standard financial intermediaries.
The method is not without its disadvantages as the lender has very little assurance that the borrower, who traditional financial intermediaries may have rejected due to a high likelihood of defaults, will repay their loan. Furthermore, depending on the lending system employed, in order to compensate lenders for the risk that they are taking, the amount of interest charged for peer to peer loans may be higher than traditional prime loans.
Sharing Economy
A sharing economy is an economic model in which individuals are able to borrow or rent assets owned by someone else. The sharing economy model is most likely to be used when the price of a particular asset is high and the asset is not fully utilized all the time.
BREAKING DOWN 'Sharing Economy'
Communities of people have shared the use of assets for thousands of years, but the advent of the Internet has made it easier for asset owners and those seeking to use those assets to find each other. This sort of lending is sometimes referred to as a peer-to-peer (P2P) rental market.
Sharing economies allow individuals and groups to make money from underused assets. In this way, physical assets are shared as services. For example, a car owner may allow someone to rent out her vehicle while she is not using it, or a condo owner may rent out his condo while he’s on vacation.
Criticism of the sharing economy often involves regulatory uncertainty. Businesses offering rental services are often regulated by federal, state or local authorities; unlicensed individuals offering rental services may not be following these regulations or paying the associated costs, giving them an "unfair" advantage that enables them to charge lower prices.
Production Efficiency
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Production efficiency is an economic level at which the economy can no longer produce additional amounts of a good without lowering the production level of another product. This happens when an economy is operating along its production possibility frontier. Efficient production is achieved when a product is created at its lowest average total cost; production efficiency measures whether the economy is producing as much as possible without wasting precious resources.
BREAKING DOWN 'Production Efficiency'
Theoretically, production efficiency includes all of the points along the production possibility frontier, but this is difficult to measure in practice. If the economy cannot make more of a good without sacrificing the production of another, then a maximum level of production has been reached.
Production efficiency is based on a business’ ability to produce the highest number of units of a good while using the least amount of resources possible. The aim is to find a balance between the use of resources, rate of production and quality of the goods being produced. When production efficiency has been reached, it is not possible to produce more goods without using excess resources or sacrificing product quality.
Productivity vs. Efficiency
Productivity serves as a measurement of output, normally expressed as a number of units per an amount of time, such as 100 units per hour. Efficiency relates to how well a goal is accomplished, normally by considering the amount of resources used, and waste created, in comparison to goods produced.
Evaluating Production Efficiency
To evaluate production efficiency, each phase of production must be examined. The primary focus is on maintaining acceptable quality standards while reducing waste in both materials and production times without harming another portion of the process. This is seen as a long-term process, as changing conditions may impact current methods resulting in the need for reevaluation.
True Production Efficiency
True production efficiency is only reached when it is not possible to improve performance in one area without doing harm to another. At that point, the business is seen as functioning at peak efficiency within the current system.
Production Efficiency and the Service Industry
The concepts of production efficiency can also apply to the service industry. To perform a service, resources are required, such as the use of human capital and time, even if no other supplies are required. In these cases, efficiency can be measured by the ability to complete a particular task or goal in the shortest amount of time while minimizing waste and maintaining quality.
Non-Banking Financial Company - NBFC
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Non-banking financial companies, or NBFCs, are financial institutions that provide certain types of banking services, but do not hold a banking license. Generally, these institutions are not allowed to take deposits from the public, which keeps them outside the scope of traditional oversight required under banking regulations. NBFCs can offer banking services such as loans and credit facilities, retirement planning, money markets, underwriting, and merger activities.
BREAKING DOWN 'Non-Banking Financial Company - NBFC'
NBFCs were officially classified under the Dodd-Frank Act as companies predominantly engaged in financial activity when more than 85% of their consolidated annual gross revenues or consolidated assets are financial in nature. This classification encompasses a wide range of companies offering bank-like services, including credit unions, insurance companies, money market funds, asset managers, hedge funds, private equity firms, mobile payment systems, microlenders and peer-to-peer lenders.
NBFCs and the Rise of Shadow Banking
In 2007, NBFCs were given the moniker of “shadow banks” by Paul McCulley, an executive of Pacific Investment Management Company LLC (PIMCO), to describe the expanding matrix of institutions contributing to the easy-money lending environment that led to the subprime mortgage meltdown. Investment bankers Lehman Brothers and Bear Stearns were two of the more notorious NBFCs at the center of the meltdown. As a result of the ensuing financial crisis, traditional banks found themselves under tighter regulatory scrutiny, which led to a prolonged contraction in lending activities. This gave rise to a number of non-bank institutions that were able to operate outside the constraints of banking regulations.
In the decade following the financial crisis of 2007-08, NBFCs have proliferated in large numbers and varying types, playing a key role in meeting the credit demand unmet by traditional banks. The fastest growing segment of the non-bank lending sector has been peer-to-peer (P2P) lending. The growth of P2P lending has been facilitated by the power of social networking, which brings like-minded people from all over the world together. P2P lending websites such as Lending Club Corp. (NYSE: LC) and Prosper.com are designed to connect prospective borrowers with investors willing to invest their money in loans that can generate high yields.
P2P borrowers tend to be individuals who could not otherwise qualify for a traditional bank loan, or who prefer to do business with non-banks. Investors have the opportunity to build a diversified portfolio of loans by investing small sums across a range of borrowers. Although P2P lending only represents a small fraction of the total loans issued in the United States, it has gotten 65 times larger since 2009, rising from $25 million to $1.7 billion in loans by March 2015.
Financial Inclusion
The pursuit of making financial services accessible at affordable costs to all individuals and businesses, irrespective of net worth and size respectively. Financial inclusion strives to address and proffer solutions to the constraints that exclude people from participating in the financial sector.
Also called Inclusive Financing.
BREAKING DOWN 'Financial Inclusion'
The financial sector is continuously coming up with new and seamless ways to provide services to the global population. The increase in the use of technology in the financial industry (fintech) seems to have filled the void of inaccessibility to financial services. The advent of fintech has created a way for all entities to have access to all financial tools and services at reasonable costs. Examples of fintech developments that have increasingly been embraced by financial users include crowdfunding, robo-advisors, digital payments, peer-to-peer (P2P) or social lending, and insurance telematics. While these innovative services have disrupted the financial world by including more participants in the money sector, there is still an untapped portion of the world population that remain unbanked or underbanked.
In 2016, the World Bank stated that around 2 billion people worldwide don’t use formal financial services and more than 50% of adults in the poorest households are unbanked. The unbanked population consists of adults who have no easy access to banks in their regions or who have developed a deep mistrust of the financial system. An initiative by the World Bank Group called Universal Financial Access 2020 is taking measures to ensure that the aforementioned unbanked community has access to traditional platforms like checking accounts by the year 2020. People who have basic transaction accounts are classified as the underbanked. The underbanked are adults that have secured the traditional tools for conducting transactions (such as a bank account), but are not privy to the digital incorporation of these transactions (such as digital payments). Because having a basic bank account is the foundation on which disruptive innovations are built, fintech offers the underbanked a ticket to financial digital inclusiveness.
With little access to banks, especially in rural geographies, underbanked users mostly carry out transactions in cash or checks making them vulnerable to theft and street frauds. Even access to bank locations for conducting transactions like cash deposit, check cashing, money order, and funds transfer may come at high costs in terms of banking fees. Fintech, telecommunication, and banking institutions are working hand-in-hand to create mobile payment and micro lending facilities for financially underbanked users. Numerous online payment and commerce systems incorporated with cell phones have been built to facilitate the ease with which this underserved population can immerse themselves in the digital economy. Examples of popular apps that have been created to foster financial inclusiveness include China’s AliPay and India’s Paytm Wallet serving 450 million and 122 million users in 2016, respectively.
There is a sizeable global market opportunity for Fintech. However, access to a lot of markets is impeded by the unbanked group who have a deep mistrust of financial institutions and choose to conduct all-cash transactions. To alleviate this challenge, Fintech companies have come up with innovations that promote transparency in their dealings with customers. Examples of these innovations include telematics insurance technologies that provide policy owners with premium rates based on number of miles used; digital currency transactions that use blockchain ledgers to reveal nature of dealings and identities of players in the online sphere; roboadvisors that openly disclose and offer low fees for customers who have limited access to traditional financial advisors due to high costs; and peer-to-peer (P2P) lending sites that promote financial transactions where individuals lend and borrow from each other. P2P lending is particularly beneficial to emerging market participants who have no way of getting loans from financial institutions due to a lack of financial history and credit record for each individual.
With the rise and rise of fintech, financial inclusion seeks to promote the betterment of the world's population through the use of financial services and tools available in an increasingly digital-based economy.