The Disruption of Consumer Finance and the Banking Sector
By Darko Pepovski
Have you ever heard of financial democracy? No, me neither. But you’ve likely heard or read stories about the increasing inequality in wealth distribution. In my view, the key factor that contributed to our financial system crash was not determined by individual misbehaving, but rather by the failure of the system itself-where decision power is centralized within an array of institutions.
Due to the disturbed trust relationship between savers and the financial sector, individuals now require and expect to be more in control of their financial resources. In other words, we want to be the master of our own capital and logically so. This change in consumer preferences has deep implications for the financial sector, as individuals will favor highly-specialized service providers which can assure a higher level of transparency and decision power.
The industry is experiencing a major shift in terms of «unbundling» (as defined by Fred Wilson in this video), moving away from the centralization of old. Now, only a few companies are fully part of this movement. But they are, in my view, disrupting the industry. More interestingly, these companies are just the pioneers of the movement-and that’s why the FinTech sector is really «hot» at the moment.
Now, let’s discuss examples of these pioneers I mentioned, as they embody the movement of increased control and transparency in today’s financial climate. I purposely chose to focus on FinTech consumer-driven solution, which provides the largest impact on the banking sector today.
1) Wealth / Investment management
Investment management is a key activity for financial institutions. However, unless you are a top-tier customer with several million entrusted to the firm, it’s essentially impossible to track or control how your money is being managed. Especially after the massive shocks some institutions went through, savers are increasingly worried about their money and prefer to be more in charge of investment decisions.
That’s probably one of the reasons why companies like WealthFront in the U.S., Nutmeg in the UK and Stockpot in AUS are gaining large market consensus. These companies not only lowered the barrier to entry (as you just sign up on their website), but also assure lower transaction & management fees (thanks to a leaner structure) as well as better, real-time transparency and control of the investment strategy. Most importantly, they offer savers these benefits without requiring them to exert any effort in the decision making process. In other words, those institutions lessen the hassle of making a savvy choice by walking you through and facilitating your decisions, leaving you, the user, fully in charge.
There are many individuals and small businesses demanding micro loans. On the one hand, financial institutions face overexposure to market and default risk, and on the other hand, individuals want to maintain full control of the way their capital is being allocated. Taking this into account, it is no surprise that companies like (the now public) LendingClub in the US or Funding Circle in UK are experiencing exponential growth. It may seem like a non-overlapping market for banks, but it will actually start to take its toll on the traditional banking sector sooner rather than later.
3) Online Stock Trading
In other words: making the investment in stock-listed companies available to the masses. This is controversial, but extremely disrupting and in line with the new taste of savers for being the arbitrators of their own money. Even though it’s taking the appearance of online gaming, online investment platforms are addressing the same kind of customers that banks serve and, just like for lending, it will increasingly affect their business. A natural evolution of this movement will be the creation of an online marketplace for privately-held shares, featuring lower liquidity, lower regulatory requirements for the companies and higher intrinsic risk. Some initiatives in the EU as well as the US seem to indicate this eventuality is near.
4) Collection of savings and personal finance
How was the banking sector created in the first place? Simple: collection of capital in return for an interest rate and allocation of the same capital for a higher average interest rate.
Today, there is an entire sector of online-only banks, which are offering lower costs and overall better services to their customers, thanks to a leaner and more flexible structure. This enables them to implement new value-adding features to improve their services. EverBank is already public while Moven, Simple and Green Dot are other valid examples. These banks offer full transparency and prove to adjust their technology to the changing taste of savers.
Unfortunately, the financial sector is historically very traditional and it is arguable that its agents are unprepared for the major changes and innovation going on right now. Moreover, VC firms with expertise in FinTech are scarce as innovation has mainly touched consumer products in the last decade. To me, it’s a green field of opportunities that will come to fruition only a few years from now, and that’s what makes it so interesting and the next.
Article Source: https://EzineArticles.com/expert/Darko_Pepovski/2073122