By Neil Edwards on Monday 15 September 2014
Financial services are undergoing their biggest revolution since the coffee house conversations of the 17th Century. Once considered the exclusive domain of highly capitalised institutions, it is now being democratised by SMEs and technology. New players are appearing every day, using technical prowess and the internet to disintermediate the traditional players.
To date, many of the large banks have looked on with a mixture of curiosity and disdain. The figures are still small and no more than a gnat bite on the backside of their trillion dollar income streams, but everything starts small and it is the rapid growth of this new sector that they can't afford to ignore.
The role of the institution is becoming obsolete
When you drill right down to it, the role of the financial institution is to bring lender and borrower, insurer and insured, and buyer and seller together. By planting themselves in the middle of transactions, financial institutions historically have made huge amounts of money on both sides of the deal.
New players were once prevented from entering the market by the monolithic infrastructures needed to run the accounts and record the transactions. Vast amounts of capital where needed to underwrite the deals and the regulators protected those who were already in the club.
Now, with the advent of the internet, it is legitimate to ask what the role of the institution is. Low cost and rapidly developing technology brings the parties together online, the capital is provided by the crowd and the regulators want to see more, rather than less, competition.
Is the role of the institution advisory? OK, there is some value in that, but how much advice do you really need when taking out a loan or buying some currency, and does that advice have to come exclusively from the institution that is selling it?
Is it in providing security through scale? There is something to be said for the guarantees provided to depositors and their money not being set against specific transactions. On the other hand, we've already seen that 'too big to fail' is a flawed concept in banking and the regulators are looking increasingly closely at how investors should be protected in crowdfunding. This will surely resolve itself in the very near future.
Is it in being a one-stop shop? Most of the alternative finance providers are concentrating on a specific product set, be it loans, invoice finance, asset finance, currency exchange or something else. There is much to be said for 'sticking to your knitting' and we have seen the problems that can arise from being a Jack-of-all-trades. Finding and blending specialist product providers is not difficult online, equally it surely won't be long before we start to see aggregators appear, which will make the process even easier.
In an increasingly connected world, people want to operate 24/7 online
There might be a lack of originality in the observation, but you'd think there wasn't from the way that some financial services continue to be delivered.
If a business wants to finance an invoice, invest some surplus balances, buy some currency or raise a loan, the managers want to be able to press a few buttons in the comfort of their own homes or offices and at a time that suits them. Form-filling and processing delays are an anathema.
Of course, we have to be respectful of the need to protect us all from money laundering, identity theft and attacks on data, but the reality is that new players are proving more wiling and able to develop processes that are quick, compliant and online than the banks that will still want to send you a form in the post. Legacy systems might be partly to blame, but so too are attitudes.
New providers won't be taking the weakest customers
Arguably, it is still the case that a large proportion of businesses and individuals that choose alternative finance products are those that the financial institutions might say they couldn't help themselves.
But the status quo is changing before our eyes. One imagines that if Funding Circle was to open up its books, there would be millions of pounds of business that the banks would happily write. The institutions should remember too that FinTech isn't solely about risk products. Non-capital transactions are being taken out of the banking system daily by businesses that can deliver them faster and more cost effectively than the banks can.
As awareness and confidence grows, astute finance directors in the very best businesses will have no qualms about placing their business with providers that offer their stakeholders best value. Indeed, it is their job to do so.
We're only at the beginning
The financial services market is overdue a revolution in delivering what customers really want and technology has only just started to show the revolutions that it can cause. Costs of delivery will plummet and costs of acquisition will plummet too as the new players reach critical mass.
One thing is clear, no aspect of traditional financial services is safe. Established brands will have to start reacting to the disruption in their traditional markets with new products and technologies of their own if they are to survive another hundred years. The smart ones are already starting with partnerships (e.g. Santander and Funding Circle), what will the rest do?