Tuesday, 18 March 2014

Transformation of the Banking industry is underway

“Banking is a consumer-to-consumer business.  Consumers supply the cash for other consumers as loans through the bank.  It’s the perfect fit for the peer-to-peer model.”

After the telco, media, retail and travel sector, financial trade is in the early stage of transformation in the internet economy.  To be sure, the full impact of the transformation is yet to be felt even with the first to be touched - the telecommunications industry.


The perpetrator this time is the peer-to-peer business model.  The basis is friction in the industry.  The enabler is the internet.  By friction, I mean the viscosity of issues – low returns faced by consumers (conversely high margins for banks), poor customer service and somehow the feeling that we are lucky they are there to serve us.  As they say, any regulated industry results in lofty margins from lack of serious competition.  The financial industry is also famously opaque, profiting massively from it. 

What’s also driving this transformation is consumers becoming more ‘self-directed’ and getting comfortable online (use).  Pampered from the ease of online services, they demand it while banks remain in second gear.  It doesn’t help that bankers have blinkers on.  They look at IT mostly as a back-office tool to improve operations, not at the front for business development which internet tech now offers.  If they and the regulators are reluctant to change the status quo, the invisible hand will, now that internet mechanisation allows it.  The high margin is the motivator.

Enter the technopreneurs

The p2p model allows more direct transactions between entities when once a trade goes through layers of middlemen.  In digital form (online marketplace), there is only one, reducing costs.  Then because of the reach of the internet market, the business culture becomes highly customer sensitive with ‘competitors only a click away’ resulting in much improved service.  Trust is built upon peer reviews and feedback.  After the 2008 financial crisis, many do not unquestionably trust banks anymore anyway.

Aspects of banking, insurance, financial services and venture capital have been parlayed. Similarly for money transfer, loans, credit/debit cards, wealth management, payment system with more to come.

The p2p business model disrupts.  Any sector that acts as a middleman between consumers is fair game, friction the opportunity.

Internet economics egged it (p2p) along

In internet economics, the directness (ease of) that internet connectivity allows is the reason layers of middlemen is obliterated.

Most of all, the internet broadened the democratisation of society (people are now more self-directed), promoted the open culture (customers prefer transparency, something online firms adheres to better than the opaque financial industry) and changed the persona of consumers ‘when once consumer only consumes, they now also produces’. So they use their resources in this case, spare cash (looking for better returns) through online p2p marketplaces to supply the loans.  Trust is crowdsourced.

And so now we have

·         Funding Circle that connects small businesses with investors who fund their loans
·         CurrencyFair for transfer of money allowing participants in countries to exchange currency by agreeing to the rates themselves.  Or WorldRemit, that is tackling the antiquated consumer money wiring/remittance market.
·         Friendsurance that offers household, personal-liability and legal-expenses insurance
·         LendingClub that lends money to help consumers pay off credit-card bills, consolidate debt, etc
·         Africa’s use of mobile banking led by M-Pesa
·         Square’s point-of-sale systems
·         Digital wallets, etc

And there is PayPal for internet payment and Kickstarter that you already know of, the alternative to traditional venture capital where consumers fund start-ups.  Others are trying their hand at online currency, issued by gaming, social media and online firms.  Others are attempting to develop a de facto global digital currency.

Most intriguing of all is Bitcoin.  While most thinks it as a digital currency, I look at it more as the new gold to back up the new digital currencies perhaps.  Bitcoin or its derivative could have an impact on the future global financial system.  But it is still raw, being formed and tellingly it alone among contenders is seeing a global eco-system built around it and has captured global mindshare.

”Bitcoin shares application of internet economic laws as do the disruptors like Areo, Napster, Amazon.  In fact it aligns the most, compared to other online financial instruments.  It is also the most innovative.  This places it far ahead as the potential disruptor and points towards the future of money and of the financial industry.”

Hang on for the ride

If they quote the startup internet-only banks that failed during the dot.com burst, you know it’s on.

Unlike the telco industry which only started to fight back (nullifying Net Neutrality), the financial industry will fight this right from the beginning and hard.  The banking lobby is probably already in play.  But they will fight losing battles, delaying at best as the wave of change is like a noose around the neck, the harder you struggle the tighter it gets.

It seems inevitable the near future will see the making of global online banks, nothing like banks today with web overlays but outliers that natively integrates into the internet ecosystem.

If the financial industry thought the sacrifice of their stock trading business at the beginning of the internet revolution at the altar was it, the gods are hungrier than that.  They learned it from Goldman Sachs.


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