The sharing economy is defined as an economic model that leverages peer-based social and commercial activities to increase the utility of goods and services. Famous examples of the sharing economy include Uber and Airbnb. However, these examples only provide but a glimpse into the massive tectonic shift that is underway and that will impact every industry on the planet. While discussing this impact across the breadth of all industries is beyond the scope of this article, it is crucial to understand the underlying trends that are fueling this shift.
Called the Uberization of Everything, the sharing economy has its roots in basic organizational theory that identifies capital utilization (also known as capacity utilization) as a central tenet of market efficiency. Prior to the current trend, capital utilization was difficult due to analog supply chains and tenuous routes to market. However, digital technologies have changed this. Today, a simple web or mobile app can represent the entirety of a route to market. Platforms like Uber sit on top of complex supply chains (where the value is) and provide an interface to a massive market (where the money is.) This definition of the sharing economy lays the framework for a brief discussion on how the sharing economy will impact the future of retail banking. Here, we cover four key innovation trends in retail banking:
- Peer-to-peer lending
- Social Payments
LendingClub is a FinTech company based in San Francisco, California that has built a billion-dollar “bank” without “owning” any core lending capital. According to the company’s homepage, over $38 billion has been borrowed through the platform. While LendingClub may not fit the definition of a traditional bank, it perhaps is the definition of the bank of the future. So, what makes LendingClub an interesting study that traditional banks should pay attention to?
The first thing is it shows the extent to which lending or credit has become commoditized. In the past, borrowers had to approach an individual lender to seek credit. With LendingClub, borrowers do not care who the money is from. Instead, all they care about is the accessibility of credit and the cost of credit. What is interesting about LendingClub is that 40% of funds disbursed on the platform are from banks. This shows that forward-thinking banks can partner with disruptive startups to leverage new and emerging trends without having to make significant changes to their core business.
Crowdfunding started as an edge-case where groups of netizens banded together to fund novel concepts. Today, crowdfunding is poised to become one of the largest sources of alternative funding, having grown from $2.7 billion in 2012 to over $30 billion in 2015. Anchored on the sharing economy, crowdfunding cuts out the middleman and allows transacting parties to participate in a financial market directly. By taking a small percentage of cash raised, intermediaries are reaping huge rewards, rewards that would typically have been the reserve of traditional banks.
How can traditional banks participate in this movement? By partnering with crowdfunding platforms and technology providers, banks can tap into this massive market of people willing to invest directly in businesses and other individuals. As banks are traditionally and remain the custodians of trust and regulatory integrity, they can partner with such tech companies to offer crowdfunding participants a layer of trust and integrity while participating on these platforms.
Social payments, also known as peer-to-peer payments, are a textbook example of how the sharing economy is disintermediating banks. By enabling direct payments between peers, such platforms deny banks a key source of revenue in the form of transactional fees. What’s more, when coupled with cryptocurrency technologies like Bitcoin, they have the potential to remove money entirely from the coffers of banks. However, social payments also provide an opportunity for growth for forward-thinking banks.
In the same way Internet Service Providers have become infrastructure utilities that operate in the background, banks too can become infrastructure owners behind social payments. For instance, by underwriting P2P transactions, or ensuring the security of such transactions, banks can charge a small toll on such transactions. It will, however, require banks to rethink whether they want to continue owning the entire value chain of products, technology and client relations, or if they want to become financial utilities that use a Lego-approach, allowing partners to build product and service stacks on top of their infrastructure.
Imagine the ability to pay for everything on a per-use basis. Uber is doing this for cars, Airbnb for short stays, Trov for property insurance, Udemy for learning, and a host of others. By investing in the fixed costs and leveraging digital technologies to lower marginal costs, these companies have managed to lower fees and increase convenience and ease-of-use, making their offerings far superior to those offered by current providers. This approach can also work for retail banking but only if banks embrace the reality of paying for utility and not for ownership.
One key area banks can leverage this trend is in payments for goods and services, an area that is tightly integrated with core banking services. Consider when you sign up to Uber or Airbnb, you add your card once and that’s it. Utilizing the service henceforth becomes integrated with payments. By providing this level of integration through partnerships with other businesses, banks can enable micropayments for almost anything, tracking back to the infrastructure argument we laid out earlier. Coupled with the emerging IoT revolution, it is possible that banks could be the backbone of micropayments not just between humans and business entities, but between machines (Machine2Machine/M2M) as well.
Sharing is the Future
As retail banking becomes increasingly commoditized, banks should be wary of the impact the sharing economy and attendant technologies like blockchain will have on their core business. By partnering with digital intermediaries like LendingClub, traditional banks can pivot their efforts to better align with this new reality. Silicon Valley, home to some of the most innovative FinTech startups and companies, is the best place to start looking for opportunities to build, buy, leverage or partner to help your financial organization take advantage of the booming sharing economy.
Navigating Fintech Disruption
At Silicon Valley Innovation Center, our Navigating Fintech Disruption Program helps senior executives from banks and other organizations discover and experience advances such as those in the sharing economy and learn how such advances will impact their businesses and industries. During the program, participants visit disruptive Silicon Valley fintech startups and big tech companies like Google and Apple to learn more about disruptive technologies, business models, trends and more and how to turn this knowledge into an effective digital transformation roadmap. To find out more about our Navigating Fintech Disruption Program and how you can apply to attend, click the button below.