Banks could be an endangered species unless they adapt to transformations in the sharing economy, writes Bjorn Cumps
If the sharing economy were a dish, then here is today’s recipe: take two groups of users – people owning certain assets and people who need them. Add a ‘reduced need for ownership’ and spice it up with a platform. Done!
People can now share goods or services with other people (peer-to-peer or P2P) and the platform attracts, matches, connects users and enables the transaction between them. Through the Uber, Lyft and BlaBlaCar platform we can share our cars, while Airbnb enables us to share our rooms. There you go. Bon Appétit!
The platforms that enable us to ‘share’ do not produce or own any of the shared assets themselves. They merely information-enable them and wrap a network/ecosystem around it. Sharing cars, rooms, home appliances, food, and even financial services are all based on the idea that we under-use these assets and so value can be created by offering access to them via an online community of interested users.
Sharing money?
Like many other sectors, the financial services sector is impacted by the rise of the sharing economy. Once small and limited, some platforms today have become quite sizeable and can no longer be ignored by the traditional financial institutions; especially since they provide alternatives to the very core activities of the incumbents: payments, lending, funding and insurance.
Most solutions are based on online platforms, enabling P2P interaction, at lower transaction costs. Zopa is the UK’s largest P2P marketplace lending service. Lending Club, Prosper and Funding Circle are other examples of platforms connecting lenders to borrowers for either consumer or small-to-medium-sized loans. Why use a bank if a platform can connect people who have excess savings with people who need money?
Platform power
These platforms offers access to a large group of clients, lowering the barriers to take a loan with different risk assessments, cheaper financing rates for borrowers and higher investment rates for lenders. The platforms are more technology driven, less regulated with lower capital requirements and operating costs (no branches, automated processes) compared to the traditional banks.
Furthermore, they offer a broader range of possibilities for investors with a greater risk appetite. Traditional financial players often look to connect low-risk investors with low-risk borrowers. P2P marketplaces offer the possibilities to invest in more riskier loans in return for higher interest. The access is simply much broader.
The new kid on the block
So, P2P lending platforms try to connect people to interact directly. Great, yet the problem is that, in turn, these platforms tend to become powerful intermediaries – centralised marketplaces – capturing much of the value created by the users and providers. The intermediary has changed from bank to platform. The platform model has given us direct connections and transactions but it is still very much a centralised, value-capturing model.
Can the sharing economy be organised as a decentralised marketplace? Yes: enter the new kid on the block: blockchain. Distributed ledger technology can be used to replace the value-capturing centralised platform company. According to many blockchain enthusiasts, this will lead to a true sharing economy without intermediaries.
Data is encrypted, validated and stored on a distributed ledger. Smart contracts (programmable contracts that self-execute based on triggers) can be used to handle more complex transactions in an automated way. Users and producers get rewarded for their contribution, often through specifically designed tokens. In essence, the role of the platform intermediary is taken over by decentralised software which follows specific rules.
Consider it the shift from rulers to rules. It is still early days for decentralised electronic marketplaces but we already see start-ups: BeeToken and WeHome for homesharing, SnagRide and LaZooz for ridesharing, WeTrust and Bright for financial services.
Bye bye banks?
P2P financial services have all of the characteristics of a disruptive innovation. However, contrary to some other sectors, financial services is not a straightforward sector for wide-scale adoption of new and innovative services. The sector is heavily regulated and users are quite inert when it comes to changing to new players.
Furthermore, there is more risk involved and trust plays a more important role for the client. Transferring money, taking out a loan, insuring a risk or investing in a business bears more risk and requires more trust in the platform than booking a room with Airbnb or a taxi ride with Uber. Will we trust blockchain technology and smart contracts to deal with our savings?
Over the long term, we see three possible scenarios of future development for these P2P financial services.
The end of banks: This would imply that the traditional players do nothing or are too slow to respond to the threat of the new marketplaces which can move upstream, create trust and convince clients to shift entirely to the new model.
Reinforcement of each other: Traditional players partner with the new platforms and each cater a different part of the market. This means both players look to complemnt one another and play to their own strengths, trying to bring the best total solution to the client.
Banks win: This entails a fast and strong transformation of traditional players, which become a platform themselves and create their own alternative capabilities.
Much indicates that, in developed and mature financial markets, the second scenario is the most likely one. A strong partnership between the traditional players who bring their strengths to the table (a large existing customer base, reach on both sides of the platform, business and regulatory expertise, capital) and combine them with the strengths of the P2P financial services platforms (strong user experiences, no legacy, simplicity, transparency, focus, speed) could be the winning combination.
The shape of the sharing economy is clearly shifting. First, traditional companies were challenged by platform-based marketplace models. Today, these platforms themselves are challenged and the mantra is blockchain-based decentralisation. Yet, trust and regulation are two ingredients which make sharing money just that tad more difficult than sharing a ride or a room. Banks are not dead yet – but only if they manage to adapt and transform to the fast-changing environment.
Bjorn Cumps, Professor of Financial Services Innovation and FinTech, Vlerick Business School.
