What would a Social Psychologist Say to Marketplace Lenders?

What would a Social Psychologist Say to Marketplace Lenders?

The world is awash in social. Social media, social networks, social finance, and on and on. What would happen if the word ‘social’ was dropped from each of these subjects? Probably nothing. But by putting social in front of almost everything, we drive a level of expectation of performance across all fields touched by its connotation that in the end we are bound to be disappointed. Socially disappointed, not economically (that is the hope). Somewhere along the line social became synonymous with all aspects of the “sharing economy” from sharing cars to sharing money. Unfortunately, the psychological payoff profiles of every social product class is not the same.

Aristotle wrote: 

“It is of the nature of desire not to be satisfied, and most men live only for the gratification of it.” 

Unbeknownst to him, he was on the leading edge of 21st Century social marketing and social science…and gulp, social finance.

Let’s start with wanting and liking (or the more pleasant sounding correlates of desire and pleasure). The biological model through the mid-80’s was that dopamine was the mechanism to create pleasure. In fact, most people still believe this today. The reality, based on 30 years of research, is that dopamine is associated with desire and may or may not produce or come with pleasure. This explains why addicts (i.e., social media or drugs) seem never to be satisfied, even if they know the activity they are taking part in is not going to give them pleasure.

Life’s intense pleasures/likings are less frequent than wants or desires because the biological mechanisms for each are completely different—wanting and desire mechanisms are big and powerful, pleasure and liking are anatomically small. Gives you pause when contemplating this in the context of the ever present “Like” icon. What people are doing through their “Liking” is signaling they want/desire to be inclusive and be part of the group and be seen in a certain light. Everybody is wired this way. Everybody is now contributing to the phenomenon of friendships and connections becoming more measurable and thus being processed into instruments of financial power.

So, how does any of this apply to marketplace lenders? Well, it applies directly. What better way to make money than to combine an unsatiable want with a biological system?

People can be satisfied with enough sex or food. But people are never satisfied with money. There never seems to be enough. People seem to not be able to make enough, save enough, and in this consumer world, spend enough. Marketplace lenders deal in money so this fact begs the question, can marketplace lenders leverage the dopamine cycle to create a never ending cycle of wants? Apple has done this brilliantly and so has Facebook. People line up in queues outside Apple stores for the latest electronic gadget, but after a few days of showing it to their friends they seem to sink back into the range of pleasure or satisfaction they got out of their last device (the psychological term for this is hedonic treadmill). The odd, but ever more common, occurrence is when a new Apple gadget is shown on Facebook. Victory to social marketing! If only financial products can be shown on Facebook. “Look friends, here is a copy of my new consumer loan note.” It doesn’t quite carry the same cache. But, to the company that ever gets their product to that marketing inflection point, they will dominate and earn most of the spoils. The world really is geared towards ‘winner-take-all’.

Since financial products can never give pleasure unto themselves, nor can they really ever satisfy the want or desire for more money, the logical outcome for marketplace lenders is to not tie itself too much to the “tech” component of fintech. What gives Apple and Facebook its dopamine generating qualities is technology. The technology within fintech will never increase the dopamine of a customer (outside of an electronically delivered loan approval, whose spike in satisfaction is probably more of a relief that the experience was less painful than they expected. And true, there are plenty of VC’s investing in fintech whose dopamine levels are constantly being raised—e.g., the backers of Lending Club). I will also grant that technology, when used effectively, can reduce some costs, but quite a bit of time it seems to drive up other costs which offset some or most of the savings. Maybe this explains sluggish productivity growth in the economy even though we are as a society deploying more and more technology.

If we are to move from Fintech 1.0 to Fintech 2.0, we will need to focus more on the Fin(ancial) and less on the tech. A lot of marketplace lenders, outside of unsecured consumer loans, have spent a lot of money and hired a lot of people around their platforms, but have spent less resources on the most important part--Fin. Very few have given serious consideration to all the financial aspects around their operations—from customer acquisition, long term product development, credit infrastructure, and back-end loan sales and financial products for investors—at best this will hobble their growth, at worst they will run out of capital and disappear. The motto should be “Focus on Fin to Win.”

Social science has a few insights which we might be able to apply to marketplace lenders:

1) Give things away free. This builds up an audience and a reputation.

2) There is big potential in non-monetary relationships. What was external to economics and finance, such as friendships, is discretely being brought into it.

3) Businesses that say they want to be social are really saying they want to exploit social networks for profit. Nothing has changed. What has changed is that everyone is now an instrument with which to exploit our relationships on behalf of a company.

4) Networks follow power laws wherein those with influence tend to gain more power with which to wield more influence (i.e., Facebook, Amazon).

5) Neuromarketers are now not focusing on individuals, but on how images and messages spread within groups.

This is pretty heady stuff; where does one begin? Let’s jump right in. Number 1 is very powerful. For marketplace lenders to thrive long term, they will be like any other financial concern (i.e., bank). Some products will have to be given away free in order to create stickiness. Imagine the ramifications to the industry from the first marketplace lender who gives away a financial product to establish a reputation? Imagine if somebody figured out how to make the first free product an unsecured consumer loan? You get the idea.

Numbers 2 and 3 make an interesting couple. What would happen if an enterprising financial firm said, heck, why shouldn’t we sell financial products using a multilevel marketing approach. Each time a borrower brings a qualified borrower underneath them their interest rate drops. Herbalife could be the next big financial company.

Number four is very powerful, very obvious, and the one with which the industry has to be very careful. Small p2p lenders are cute like puppies. Larger marketplace lenders are teenagers trying to make a break to freedom and become self-sustaining and to fit in. We admire teenagers for their energy and verve. Large dominant financial institutions rank up there with congress on the likeability scale and thus draw the attention of government because “something has to be done.” There really is no answer to this conundrum. I suppose more lobbying.

Number 5 is very interesting. The logical conclusion of this is that marketers will be targeting influential members within groups and not every group member. The influencers will have an outsize impact on their groups and thus groups can be monitored easier than monitoring all individuals. How this applies to marketplace lenders will need a lot of work to figure out. But instead of today’s frontline battles of the current marketplace lender incumbents where mailings, radio and television ads are becoming more prevalent (so last century and expensive), if a marketplace lender can crack the code to making financial products cool to discuss between friends, then targeting influencers within groups will be very difficult to resist (don’t forget about your pesky privacy policies). An insight from behavorial economics is useful for context: to control humans, it is more effective to appeal to their sense of moral and social identity—leading to the ability to appeal to individuals’ sense of altruism and thus having them align with agendas not of their making (i.e., profitable lending). This dovetails with numbers 2 and 3 above.

In closing, what a social psychologist would say to marketplace lenders is that you are farther away from “disrupting” the world than you believe (like artificial intelligence prognosticators always being 10 years from changing our life), but given enough time, capital, and creativity, there is hope that viable relationships can be established with ever more fickle and not so loyal borrowers. The question is will the disruptors of 1.0 be disrupted by 2.0 firms. Long live Joseph Schumpeter!