Credit is older than money (and fintech)

“Nothing can be so amusingly arrogant as a young man who has just discovered an old idea and thinks it is his own.” (Sidney J. Harris)

And this is why I am so amused by the non-stop fintech chatter.

Credit is older than money. The money you see in your pocket is less than a few hundred years old. The Euro is just 16 years old while the US dollar is just 170 years old.

World history is nothing but a story of debtors and creditors.

The roots of credit and lending can be traced back to the origins of civilization itself. Written loan contracts from Mesopotamia which are more than 3,000 years old showed the development of a credit system that included the concept of interest. But the earliest records go all the way back to Assyria and Babylonia where merchants of the time made grain loans to farmers and traders. The mechanisms in place were pretty sophisticated, even by modern standards, with lenders accepting both deposits and acting a little like a bureau de change. More about it here.

In 1780 BC, the Code of Hammurabi defined a framework for lending in prehistoric times.

Only the tools and medium have changed

What has changed over thousands of years are the tools and medium of credit transactions – the means to acquire, deliver, assess and contain risk. Risk-based pricing is not new. Since the days of Guarantor-based loan to Collateral-based lending (house, gold, ornaments), the lenders have always figured out a way of risk assessment. Even though 4000 years old, the Code of Hammurabi talks about rate caps to prohibit usurious and predatory lending.

Are the new digital lenders more efficient at allocating capital and selecting risks than banks?

We are now in an age of new tools — with the internet, mobile, big data stacks, and machine learning. These new tools are for creating operational efficiency and data gathering. They do not change the risk, but only help in better risk selection. The new risk models have to be subjected to various credit cycles to test their robustness. More data is not equal to more insights.

Modern day banks were created for the purpose of better risk selection and capital allocation. So the question is, are the new digital lenders more efficient at allocating capital and selecting risks than banks?

It is to be noted that much has changed within the banking landscape — with regulation, changing customer expectations, technology, demographics, greater competition, legacy businesses and operating models.

Lending and risk are linked, but are two very different things

Credit fuels commerce

The lending cycle exacerbates business cycles

Money supply and leverage in the world

Step out of the frame to see the picture