“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.
Friction
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.
Comments?
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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