Uber but for consumer credit.

Uber and the Coming Disruption of Finance

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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The more I use Uber, the more I am convinced of the transformational power of recent technology innovations, especially when it is intelligently combined with behavioral science and economic principles. Indeed, it is only a matter of time until this potent mix disrupts an increasing number of industries, including certain segments of finance.

Arriving earlier this week in New York at Penn Station, I joined many others in a rather slow-moving line for taxis. I did so out of habit. But a few minutes into my wait, I realized that the smart thing to do was to pull up the Uber app on my phone. In a few seconds, Uber linked me up with a car, which picked me up four minutes later. The driver was courteous, and the vehicle was clean. And all this for a fare that was similar to what I would have paid for a traditional cab -- after a much longer wait, that is.

By finding a powerful way to improve the well-being of both passengers and drivers, Uber is transforming a mode of urban transportation that, for a long time, has seen little positive evolution in the provision of service. Passengers get more than a pleasant phone interface to order their rides and monitor their progress. We feel incredibly empowered and enabled. We like that the fare is billed directly to a credit card that the company has on record; and that our feedback is solicited immediately and in a user-friendly manner.

All this becomes even more convenient when traveling abroad and needing a taxi, especially in Europe. No longer do people need to search for those elusive taxi stands, wonder about tipping practices, fidget with local currency and find the right way to ask for a receipt. Uber takes care of all that.

These are just some ways in which Uber has combined technological innovation, mobility and behavioral science to widen and deepen how it acquires and retains clients. And such insights are also being applied to the drivers, who are also empowered and enabled.

Once drivers pass their evaluation, Uber provides them with the needed setup, including the technology for location services, billing and so on. Judging from what several drivers have told me, the company then uses a carrot-and-stick approach. It is there to solve drivers' problems, such as providing financial offsets for unanticipated service interruptions; but it is also quick to take action if the drivers' ratings provided by passengers fall below a certain threshold.

The number of drivers signing up with Uber is growing markedly, enabling the company to offer its riders an expanding option of vehicles and service levels. Moreover, through the use of the "surge reminder," which better calibrates fares with demand-supply imbalances, Uber can entice more drivers to come out at busy times. And this is only one way that the company is using basic economic principles to be more responsive in providing services.

In analytical terms, Uber is a growing P2P (peer-to-peer) platform that is dismantling barriers to entry in a comprehensive way -- so much so that even the old-style limousine services and taxis are starting to sign up with Uber as a means of supplementing their traditional business. In the process, the company is also developing impressive brand loyalty and a certain mystique that, I suspect, provide the basis for expansion beyond its current set of activities.

Elements of this model are slowly being replicated in certain parts of finance, and will probably expand in the years to come -- especially in providing more appropriate consumer credit to underserved segments of the population. (Disclosure: I have invested in Payoff, a company seeking to improve the provision of financial services to poorer households and small businesses, with the explicit aim of also helping them to get out from under crippling debt burdens and excessive debt-servicing costs.)

By reducing old-style overheads and other outmoded costs, as well as using access to broader sources of loanable funds, P2P models can pass savings on to borrowers through lower interest rates while also providing an attractive return to creditors.

And by using a broader set of data, this new group of financial intermediaries can improve on traditional credit models and better customize the provision of products to borrowers -- a process that can be further enhanced with incentives to improve the paydown of debt balances and overcome debt traps.

Finally, these models can use a modernized approach to supplement the traditional focus on client acquisition with an equally important (but often lacking) emphasis on durable partnerships and retention. Success here for both sides is that borrowers graduate from debt and engage in healthier financial practices, rather than staying stuck with ever-revolving high balances and high-cost credit cards.

Like Uber, this is a leverageable model that also delivers a strong sense of democratization to both sides of the transaction. It empowers protractedly overindebted borrowers to better understand and control their credit relationships. And through lower interest rates and incentive alignments, it provides them with a better shot at regaining prudent control of their finances and, therefore, their lives.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mohamed Aly El-Erian at melerian@bloomberg.net

To contact the editor on this story:
Katy Roberts at kroberts29@bloomberg.net