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When the supply side of a market place is the demand side

As the digital ecosystem evolves and the ways startups can monetise evolves, it gets murkier trying to figure out how value flows.

I was recently speaking with a company where some members believed that the lenders where the supply side, meaning that to help this business we needed to have an excess of lenders for potential borrowers to chose from. 

On the surface, this seems like it makes sense. Ultimately lenders generate revenue from borrowers via borrowers repaying loans. But I think for finance in particular, the dynamics are not as clear cut.

Looking at the supply/demand side mechanics in this way, makes the assumption that borrowers are in the position of power, they have the luxury of choice and being able to walk away from the limited selection of options… but lets not forget, these are borrowers, and in this case, sub-prime borrowers, on an economic level, they don’t have choice, they need money, in fact, the power dynamics are reversed, what was assumed to be the supply-side (lenders) is actually the demand-side. 

We can view the lenders as the demand-side since there’s no shortage of subprime individuals looking fro loans, the flow of money is from the lender to the individual, even if longer term the individual repays, at least as far as the transaction is concerned the lender is taking the risk to allow an individual borrower into their loan-pool.

What this means for the start up, is that there’s a risk that by focusing on the lenders first, they may struggle to convince lenders to participate in their platform, given there’s limited supply of what lenders are willing to pay for (i.e. borrowers).

Looking at the other side of the market place we have the borrowers, on the surface its easy to view these borrowers as customers, after all, the are ’shopping’ for a loan.. but the reality is that they are borrowing, the power dynamics are that lenders don’t need to lend to them, and in the subprime case, most lenders refuse them, meaning their options are limited and the need for a loan tends to increase as bills mount. Because of these, we can consider that borrowers are actually the supply, we can further substantiate this since the market will always have an excess of borrowers to lenders.

If we focus on the lenders first, even if we got more lenders into the ecosystem, you may attract more borrowers, but it doesn’t guarantee a better loan-client result for the lenders.

A third thing to consider for this business, is that since they are a borrower aggregator collecting the contact information of borrowers, being rejected from one lender doesn’t stop the borrower from continuing to see out loan opportunities, in contrast, if a lender rejects an individual borrower, they won’t continually review that individual, but the individual will likely repeatedly  try to apply, even to the same lender. This clearly illustrates the power dynamics and therefore the supply and demand-side relationships. For the startup, this means that since they are data collecting on borrowers, they can continually push loan opportunities to the borrowers until the borrower no longer needs to borrow. 

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