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Working Paper

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This Article explores why the technologies that have transformed a range of industries by facilitating a dramatic rise in direct transactions — as reflected in the rapid growth of eBay, Etsy, and Airbnb, among others — have yet to similarly transform banking and other modes of financial intermediation. Its primary focus is the evolution of peer-to-peer (“P2P”) lending from a sector that promised to bring similarly radical changes to financial intermediation to one in which the relationship between the supplier and recipient of the capital is increasingly attenuated. The analysis reveals a number of market and regulatory forces that tend to favor intermediation and work against direct finance when the exchange is purely financial. Yet the Article also considers areas where direct finance appears to be gaining more of a toehold. This examination reveals ways that technology is increasingly enabling capital raising to be bundled with other undertakings, like garnering publicity or gathering information about the demand for a potential project. The analysis suggests that when the exchange involves more than just capital, direct finance may yet thrive, as individuals can bring attributes to the table that intermediaries cannot readily replicate. The conjecture that direct finance is most likely to be viable when the provision of capital is part of a thicker bundle, while inherently speculative, has ramifications for both theory and policy. Such a development runs contrary to the prevailing wisdom that innovations will lead to ever greater specialization and result in capital raising being increasingly divorced from risk bearing and other commitments. It also presents an interesting regulatory challenge, as thicker bundles are more likely to raise policy and legal issues traditionally addressed through disparate bodies of law and often enforced by agencies with different aims and inclinations.?