In part two of this two part series (see part one here), Jason Jones asked John Donovan to consider Maker’s first key element, Elected Paid Contributors and Domain Teams*. Specifically, Jason asked him what type of Domain Teams he would nominate if he were to launch a decentralized lending operation (DLO). John is a co-founder and former Lending Club COO and Board Member, ex-MasterCard VP, and Fintech advisor, Board member and consultant.
*Domain Teams are specialized teams that produce products and services for the MakerDAO community. Domain teams are granted special authority in the MakerDAO governance system to oversee critical processes and mitigate risk.
When Jason asked my thoughts in terms of how I would build the appropriate teams to support a Decentralized Lending Operation (DLO), I looked at it within the light of past experiences I have had at MasterCard and Lending Club. Money is always looking for yield, globally. With money and yield comes lots of regulations and requirements. And, satisfying existing regulations within existing frameworks is faster than working with governments on a new regulatory framework, such as when Lending Club registered with the SEC positioning it to eventually becoming the dominant P2P lender in the US. There is a huge opportunity for a DLO to connect great asset originators with interested investors globally, in a safe and secure way.
The credit card industry is certainly one of, if not the, largest money lending platforms in the world, and is a truly distributed global model. Prior to credit cards, consumers typically had charge accounts at restaurants and stores. Those merchants would underwrite their customers and handle collections. Some did it well, some not so much, but it certainly wasn’t a core strength for most merchants. Accepting credit cards was a more efficient way for merchants to sell more without taking on that underwriting and collections risk. MasterCard and Visa provide the rails which are used to pay the acquiring bank and their merchant, and an assortment of data enabling that transaction. Issuing banks would underwrite their consumers, and lend them funds as necessary to continue making purchases. Universal acceptance meant that a Japanese consumer could travel to NYC with her MasterCard and find that most places she wanted to shop accepted that card. Initially, the issuing banks relied on retail deposits to fund their growth but over time accessed the securitization market for more efficient and scalable institutional funds. Over the past 60 years, this system has grown exponentially to now represent $trillions in purchases (and revolving debt) globally.
While the payments networks are critical for global commerce, they are terrible systems for consumers to borrow money. The majority of credit card revolving debt is concentrated in a few big banks typically at higher interest rates than comparable installment loans. Installment debt is a more responsible product for consumers as they understand exactly what they owe and exactly how long it will take for them to pay it back. While revolving debt continues to grow, the smaller installment debt market is taking market share and is being driven by Fintechs. According to the St. Louis Fed, Banks/CUs represented 71% of installment loans in 2013 with Fintechs representing 5%. 5 years later, Fintechs grew share by almost 8x to 38% and now represent more volume than either Banks or CUs. [Read more…]