15 July 2014
Un-banking of Europe and the US
Deloitte unbankingTechnological advances, crowdfunding and reputational issues are just a few of the challenges banks are facing at the moment. According to a recent report from global consulting firm Deloitte the European banking model is under assault.
Until now, banks have been sceptical of the attacks on their industry dominance. Deloitte sees this time as being different: ‘Banks’ core competitive advantages over new entrants are being eroded by technology and regulation. This will make the fight to generate returns above the cost of capital particularly challenging.’
‘Disintermediation’, according to Deloitte, is the keyword. Peer to peer lenders and investment crowdfunding platforms are building viable models allowing individuals and businesses to bypass banks.
Although the report solely focuses on the European market, the findings are supported by a recent analysis on the American industry by Rebecca Lynn from Canvas Venture Fund. She describes how start-ups are fuelling a trend called the ‘un-banking of America’:
‘While critical to our economy, banks are generally inefficient, have high fixed costs and don’t exactly elicit happy thoughts from the average consumer.’ She foresees a majority of people in the US to start ‘banking’ with start-ups. ‘It’s been happening for some time, but the pace and volume of business taken away from banks by start-ups in the last few years have been significant — and this trend will continue to grow.’
Basically, there are three levels of disintermediation that cause this trend:
1. Disintermediation of consumer credit
One of the biggest areas for start-ups during the years of the credit crisis was in re-imagining consumer lending. Both consumers and entrepreneurs felt the need to take banks out of the equation and connect investors directly with those in need of capital. This has caused companies like Prosper and Lending Club to thrive during the recent years. ‘It took Lending Club five years to issue $1 billion in loans (2007-2012)… It then took the company only one year to top $2 billion (2013).’
According to Rebecca Lynn, peer-to-peer lending marketplaces like Lending Club and Prosper have the same balance sheet risk as other traditional lenders, which turns out to be their key differentiator.
2. Disintermediation of bill payment and processing
Credit card processing has traditionally been in the hands of banks. New platforms like Square, Intuit and PayPal are playing the ‘disintermediator’ here: ‘The growing mobility of the average consumer has allowed businesses to spring up and grow by assuming roles traditionally reserved for banks.’
3. Disintermediation of investment
Similar to Deloitte’s findings, Rebecca Lynn describes how marketplaces like Kickstarter, Indiegogo, Venmo, Crowdtilt, and Fundly are ‘giving people and businesses an easier way to test, build and fund their products, invest in businesses, pool money, pay friends and facilitate microtransactions’.
Fortunately, it is not all gloom and doom for the banks, according to Deloitte. They have concrete recommendations they advocate, including:
- Banks must begin a more radical transformation of their cost base
- They also need to use analytics to exploit their treasure clove of consumer data and match the experience provided in other industries
- The full report can be downloaded here.