The digital revolution that´s unceremoniously transforming the Financial World, isn´t even close to being finished. It wasn´t just about changing the way Financial institutions interact with their customers. The plethora of Bank Apps now letting us easily access our personal finances, whether that is to send money, receive transfers or just simply to check out balances addressed that pretty well. What few people are aware of is that Crowd + Peer to Peer platforms are fundamentally changing another important aspect of banking that fuels the whole different sector: borrowing money
By now you´ve heard of Crowd Funding and Peer-to-Peer lending (P2P). These platforms are changing the financial industry very rapidly. To remind you, P2P Lending means that the lender (a private individual and not an organized institution) loans the borrower funds and that amount is reimbursed with interest. Crowdfunding is normally described as a crowd-powered project where the motivation isn´t to have the loan repaid, but instead to see the project materialize as a whole. The Crowd is instead thanked by means of t-shirts, coupons and various gifts of the same nature. One of the best examples of this type of platform is Kickstarter.com and Indiegogo.com where thousands of ideas have spawned around the world. There´s also a hybrid of the two as well, where private individuals are invited to a ‘reward funding’ option. The funding is still a loan, however at a lower than average interest rate. The funding is done through an auction-based process where the lender offering the lowest interest gains the borrower. ie. www.masscatalyst.com
These platforms are not just for start ups. They can also help refinance students loans such as the Swiss-based www.splendit.ch who we´re proud to collaborate with. Their concept has helped expensive long term university loans get auctioned to private investors and reduced interest rates. For instance as a typical example, a $20,000 loans typically at 12.9% can be refinanced down to 5% giving the student-borrower a $2500 saving pr year! Financial institutions are taking notice and are therefore having to adapt their strategies as fewer people are opting for the traditional route when it comes down to borrowing. ( Why would a borrower spend God knows how long trying to get a loan approved based on antiquated underwriting decisions?) When Crowd + Peer platforms offer simple solutions to receiving funds at manageable terms, the choice becomes more than obvious. So Banking giants are now creating their own lending platforms to compete with the many smaller start ups that are eating away at their valuable client base. An example of this is Goldman Sachs, which is considering creating its own platform for 2016. With the goal to compete with top platforms such as LendingClub.com, a recent article in the Times of London reported that Goldman Sachs “approached several top consumer finance executives about the job, which comes with the title of partner and other highly coveted positions at Goldman. The operation could have a staff of as many as 100 people by the end of the year the report mentioned.
What’s interesting is that despite the past few years proving difficult for the banking sector, banks have either been too slow or just unwilling to react and adapt to the new reality. What’s more, Goldman Sachs’ actions could finally pave the way for more banks that are perhaps too rigid and “structured” to invest in their own lending platforms.
Disruption in the banking sector is rife and is putting the traditional banking model at risk – but not for the consumers. If financial institutions want to regain clients and stay relevant when it comes down to borrowing, it’s clear that they will need to invest time and money into online lending platforms. Despite the growing market, banks will also have to act quickly if they want to catch up to their new competitors. All eyes are currently on Goldman Sachs, and it’s truly a case of “time will tell”.
As a side note, speaking of disruptive models, PayPal – now split from eBay – has really made this transformation happen. Just the other day I was able to process a $8,000 online credit line in a matter of seconds. The loan was uniquely based on my past account performance and not on any credit score or other non tangible attributes. What I found alurring about the transaction was that the terms made for the repayment were entirely based around my activity instead of a preset fix term. Hence no interest was applied but instead a percentage based fee. I like that – it tells me that they cared enough to understand my business. I hope financial institutions are able to be this nimble.
* Rescource: Times of London