Traditional banks are slowly waking up to the new relationship between technology and finance although many of the biggest advances in democratizing financial services continue to originate from mobile operators or technology companies.
Bitcoin is the most widely cited example of the potential of digital technology to disrupt the global financial status quo. Costless, decentralised and immediate money transfer promises a marked improvement from a costly global remittance system, seen by many as an unfair impediment to growth in developing nations. A recent Business Insider study projected global savings of 90% (US$42bn) if Bitcoin-based remittances were to be adopted on a worldwide scale. Initiatives such as Vodafone’s M-Pesa service or Mozido and Mastercard’s mobile payment partnership have already disrupted financial services for the better allowing greater and cheaper access to global money transfer.
The latest advance looks set to come from the sharing economy, which, through players such as Uber, Airbnb and BlaBlaCar, have already shaken up their own respective markets. Financial services are set to be significantly affected in 2015.
‘Peer to Peer’ or ‘Marketplace’ lending has rapidly evolved to disrupt big banks by directly connecting borrowers with lenders and offering better rates for both parties. The Peer-to-Peer Finance Association put out figures showing that, in 2014, their members had lent more than £1.2bn in the UK – more than double the previous year. High street branches and offices are now seen as a “remote” way to conduct banking and this has given way to digital-only lenders, such as Atom, one of the first in the UK. While ‘Marketplace’ lending is empowering consumers and small business borrowers by making credit cheaper and easier to obtain, internet-based platforms such as the Lending Club or Funding Circle, are also encouraging investors to offer risky financing to borrowers in exchange for high returns.
The Financial Conduct Authority (UK) is now scrutinising the clarity of the advertising of these emerging services amid concerns that some are mis-selling their products as “risk-free” savings accounts. In an attempt to protect consumers the FCA is considering whether P2P lending should fall within ISA regulations (Individual Saving Accounts). Anxiety also surrounds the fact that the P2P market has only been tested in a low interest rate environment and that P2P lenders do not yet enjoy government guarantees while having to bear the burden of already implemented banking regulations. Unsurprisingly, P2P lenders increasingly attempt to emulate or partner banking institutions in order to benefit from the regulatory framework they currently reside in.
In November last year, the UK Competition and Markets Authority (CMA) launched a full inquiry into the banking sector which could result in a major shake-up of banks’ current accounts and small business banking. The competition inquiry will take 18 months to complete. This may well be the time to improve the regulatory environment and inject some competition and disruption into the financial sector. If current regulations could be amended or relaxed so that P2P lenders aren’t scolded twice, it may well serve as a step in right direction.
It is increasingly obvious that the Marketplace lending sector has evolved beyond its original intentions. While initially aiming to block application of new FinTech products within the financial system, some of the sector’s banking sector’s biggest traditional players are now looking to co-operate with the startups they originally turned a blind eye to. Why is this the case? It is much more economically efficient to do so than putting money into their own traditional systems. P2P lenders are equally guilty in this respect as the demand for P2P finance has grown, platforms are turning to large financial services groups to provide funds and spur their growth.
Barclays has produced Pingit, a smartphone application that allows consumers to send money to someone using only their mobile phone number. French bank BPCE partnered with Twitter, letting users transfer money via the social network. RBS is teaming up with a third party operator to launch a pilot peer-to-peer financing platform. Santander UK announced a similar move in the summer, partnering with Funding Circle to refer small businesses it turns down for loans to the platform. However some banks, including HSBC, are refusing to provide these new FinTech businesses with bank accounts or loans in what could be an attempt to stifle competition from the fledgling sector.
Some argue that P2P borrowers are only attractive because traditional financial services lenders have tightened their lending criteria in the wake of the recession. As P2P lenders start to consume the market share of traditional sources of finance, they will become increasingly exposed to market forces. And while the rapid transformation of marketplace lending is proving popular, it still deserves greater examination. If anything, recent developments suggest that the P2P sector risks becoming a victim of its own success.