Technology is fundamentally changing the way consumers access services. The internet is connecting supply with demand more effectively than ever before, and at a fraction of the cost. From eBay to Uber to AirBnb, big marketplaces are making big improvements to people’s everyday lives, and have the potential to benefit consumers across the world.
At the end of last year, Lending Club, a marketplace which connects investors directly to borrowers in the USA, began trading on the New York Stock Exchange. When investors began to lend to consumers looking for personal loans through Lending Club in 2007, it was dismissed as too niche, unable to penetrate the wider financial services market. Seven years on, the company is worth approximately USD6 bn.
Its remarkable success is because technology is giving power to consumers that they never knew they had. The marketplace connects supply to demand with a pace, ease and transparency that was unimaginable a decade ago, giving more power to the user and less to the middle men. In another ten years the economy is likely to be heavily reliant on marketplaces, where consumers use them to access all they desire.
But this model has the potential to change financial services more drastically than in the retail or travel industries. In these sectors, online marketplaces have improved traditional models. In financial services, a marketplace model is a solution to a fundamentally flawed and broken system.
Last month, bank lending to businesses in the UK collapsed by the largest amount in more than four years, according to recent Bank of England figures.
Yet at Funding Circle we are seeing unprecedented demand from small businesses looking to access finance directly from investors through our marketplace. According to data from the Bank of England, the Funding Circle marketplace was the fifth largest net lender to small businesses in the first quarter of this year. Businesses typically access the funds they require within two weeks, and investors can earn an average 6.6% return on their money.
Marketplaces have systemic advantages over traditional banks and are better placed to meet the needs of consumers and small businesses. They are not hamstrung by legacy issues, so they can deliver the same level of credit assessment, but in a faster and more efficient way. The wider financial world is beginning to realise their potential – which is fuelling the rapid growth of marketplace lending. By 2025, the industry is predicted to be worth USD1 tn.
The marketplace model will eventually become the institutional framework of the global financial system. That will happen within 20 years. For too long small businesses have been reliant on too few options. Marketplaces can provide fundamental change by opening up small business lending to a much wider set of investors – big and small.
That is why the Lending Club’s IPO was a landmark moment. It offers a glimpse of a stronger economy, one built on marketplaces, which better serves the needs of consumers.
NEXT GENERATION FINANCE
Across developed and emerging economies accessing financial services is increasingly all about technology, notably smartphones. Though some suggest the Fintech revolution has all the hallmarks of a bubble, Simon Toms argues that new providers and traditional banks – sometimes alone, sometimes together – are making changes that will last.
If you want to check your bank balance, what’s the first port of call? It certainly won’t be a matter of waiting for a printed statement through the post. And it probably won’t be a phone call, a cashpoint machine or, even, internet banking.
In the UK, at least, the first resort these days is likely to be a smartphone. According to recent research, for the first time more people are now accessing their bank account through a simple, free-to-download smartphone app, than through any other method.
That’s a significant milestone and it helps to explain why Fintech – a word only coined a couple of years ago – has so rapidly made its mark in both the banking and insurance sectors.
In simple terms, Fintech describes the growing convergence between technology and financial services.
On the one hand it includes the work being done by traditional financial service providers to harness the power of technology – banks developing new, more user friendly and more cost–efficient online banking services, for instance, or insurance companies working with telecom companies to use big data analysis to target their products more precisely on consumers.
At the same time it describes efforts by new entrants to the market to offer innovative products that disrupt traditional financial services business models, like peer-to-peer lending, new payment services or new, more automated approaches to fund management.
Powered by smartphones and data analytics
Spotting gaps in the current market, Fintech entrepreneurs developed technology platforms to serve these customers in new and often less capital-intensive ways. And the profile of these entrepreneurs is interesting – with many coming from investment or retail banking. They are innovating from a position of real inside knowledge.
Mobile phone technology and data analytics are undoubtedly the most significant technological forces behind the Fintech revolution. The mass adoption of smartphones and internet usage, plus ever more sophisticated ways to collect and analyse big data, have all helped to unleash a wave of innovation which shows no sign of stopping.
And it’s not just in developed markets. We’ve seen significant innovation in emerging markets, notably Africa, where there is neither the capital nor, now, the incentive, to build the infrastructure that used to form the backbone of banking operations – a network of bricks and mortar branches, linked by a fixed-line telephone service.
Instead the availability of increasingly affordable mobile handsets has allowed providers to leapfrog old distribution models and reach a mass market at a rapid rate. Not only that, but the use of mobile phones provides operators with invaluable data that can help identify customers who are bankable and probably in need of other products like loans, mortgages and insurance.
It’s led to an explosion of new services. Take, for example, Vodafone’s M-Pesa, which offers a simple way to transfer money by mobile. It started in Kenya in 2007 and now has operations in nine other countries, including Tanzania, Fiji, South Africa, India, Egypt and Romania.
Important Fintech hubs are emerging across the world, not least on the U.S. West Coast and New York, and in Hong Kong and Singapore. But it is fair to say the UK, and London in particular, is emerging as a true global hub.
London has stolen a march, trading on its importance as a leading global financial centre. It has also benefited from targeted government support and an effort by regulators, particularly the Financial Conduct Authority, to offer active help and advice start-ups on the significant regulatory hurdles they might face.
Close public and private collaboration in building the UK’s Fintech sector is exemplified by Innovate Finance, a government-backed trade body. It has set up offices in the main tower of London’s Canary Wharf with the express purpose of bringing tech entrepreneurs together with the established investment banks sited there.
Another tech bubble?
Some worry that the Fintech revolution has all the hallmarks of a classic bubble here. The sky-high valuations that some of the most successful start-ups, so-called Tech Unicorns, are attracting has led some to suggest we are witnessing a re-run of the dot-com crisis of 2000.
But there are good reasons to believe that this trend is far more sustainable. Indeed, we tend to agree with a recent World Economic Forum (WEF) report that concluded -“disruption will not be a one-time event, rather a continuous pressure to innovate that will shape customer behaviours, business models and the long-term structure of the financial services industry.”
Despite reaching valuations in excess of USD1billion in a very short time, most successful unicorn businesses look different to typical bubble companies in one key respect – they are trading successfully and making money. The peer-to-peer business loan company, Funding Circle, and the currency exchange platform, Transferwise, are not only highly scalable businesses but are already actually lending money or exchanging currency on a significant scale.
Fintech is also not simply a case of the disruptors taking on the disrupted. Traditional financial institutions are also increasingly seizing the opportunities offered by Fintech in a variety of ways. Many banks have set up innovation or accelerator-type programmes to spot and invest in promising products or platforms.
Some of the most successful new brands are choosing to work closely with existing banks. For example, the mobile payments service Zapp is offering consumers the chance to make payments through their smartphones. It is one of the new so-called digital wallet services, which, like ApplePay, has led some to speculate that cash will soon become redundant. Why carry bank notes when you can use that powerful computer in your pocket and simply pay by phone?
And the logic for this collaboration is clear, from both sides. Building a multi-million strong customer base is an expensive and lengthy business for any start-up business. Working in collaboration with banks, which already have that base, makes good sense in terms of building scale and gaining access to vast amounts of customer data.
Collaboration makes sense for existing players too. We’ve seen Santander refer business to alternative loan provider Funding Circle. It’s the same logic that has seen Metro Bank, one of the UK’s new challenger banks, forge a partnership to offer consumer loans through Zopa.
The WEF identified six key segments of the financial services market that were ripe for Fintech applications – insurance, deposits and lending, capital raising, investment management, market provisioning and payments. Another key area of interest for existing banks is so-called blockchain technology, the cloud ledger system that lies behind cryptocurrencies, like bitcoin. Some have estimated that the transparent verification process inherent to blockchain could save banks billions in the cost of cross-border payments, securities trading and regulatory compliance in the coming years.
Any of these markets are open to the sort of disruption that could leave traditional players struggling to keep up and compete. It has, after all, always been a maxim of seasoned tech entrepreneurs to “move fast and break things”.
But there is very good reason to believe that collaboration between existing players and new entrants will be just as big a feature of the Fintech market as a dog fight to shape the future of financial services.
Certainly that’s the view of A&O’s Fintech team from working with players on both sides of the fence. We are advising incumbents looking to buy into or collaborate with start-ups. We are also supporting a number of Fintech start-ups seeking funding. Other key areas where we’re supporting these growing businesses include regulatory, data security and protecting their brand.
As the industry matures and develops, we’re expecting to see further innovation. It is exciting for us to be part of this rapidly evolving market and the new challenges and opportunities it brings. For now this is a market in the midst of significant transition – and the disruptors and the disrupted are both playing their part.