I was invited to speak at World Council for Credit Unions this week on how technology is enabling a new generation of person-to –person and crowd–driven funding, lending, currency and investment services that will decentralize and democratize finance, money and banking. Think: Funding Circle, Bitcoin, Lending Club, Kickstarter, IndieGogo, Seedrs, CircleUp, GoFundMe, CurrencyFair,Transferwise, Zopa, MPesa and hundreds more.
It is a subject I am passionate about. How can we shift banking back to being a trusted pillar of society? How can we create monetary systems where the real benefits flow back to individuals, not the big financial mega stores? How can we create financial access to underserved communities?
An interesting challenge for credit unions is the values that have typically differentiated them from traditional banks -empowerment, transparency, access and community – are at the core of many new platforms and services emerging. So maintaining relevance and growth, particularly with younger members is a pressing challenge.
I was overwhelmed by the audience response (thank you WCUC delegates!). Here are some of the key points I covered as well as resources to address many of the questions asked:
Four Disruption Drivers
I first identified the four root causes of disruption that are transforming different industries.
- It is rife with middlemen and has too many retail branches—both examples of redundancy.
- Institutional trust in the system is low.
- Many people have restricted access to bank accounts, venture funding, and loans.
- And complex fees and processes are common.
ACCESS: UNBUNDLING THE BENEFITS
I wanted to join the dots on how other sectors were experiencing similar root cause of disruption even though the external model or market manifestation looks different. Take education where limited access to learning (especially, higher education) is big problem. (click to enlarge)
Key point: Newspapers experienced massive disruption as content was unbundled from paper, its physical delivery system. Education and Finance are now going through the same journey.
- Online learning platforms from Coursera to Skillshare are unbundling the knowledge, researching and teaching from the bounds of the walls of physical academic buildings. The result is open systems where more people can contribute and access learning.
- Crowdfunding platforms such as Kickstarter to Funding Circle are unbundling financing from centralized banking institutions and removing the need to go into physical branches to get a loan/financing. Virtual currencies such as Bitcoin are unbundling value from physical notes and coins. The result is more open systems where more people can access different types of financing.
I used Clay Shirky’s brilliant quote to emphasize the point “The biggest threat those of us working in colleges and universities face isn’t video lectures or online tests. It’s the fact that we live in institutions perfectly adapted to an environment that no longer exists.” Same goes for traditional banks.
BROKEN TRUST: IRRELEVANCE & HATE
It’s no secret that the public is fed up with banks and trust is at an all–time low. I shared some highlights from a study conducted called the Millennial Disruption Index that set out to identify industries most likely to be transformed by Gen Y.
- 71% would rather go to the dentist than listen to what banks are saying
- 33% believe they won’t need a bank at all (echoes the Bill Gates quote “Banking is necessary – banks are not.”
The GFC is often rightfully pointed to for this collapse in trust but I spoke about two other big drivers:
- Control and transparency: Technology enables us to understand and control the way many things work. Think of everything from health apps revealing what our bodies are doing to being able to plot where our ride is on Uber. Immediate transparency is expected. Yet…
“A lot of banking is in a black box and consumers don’t really know what happens.” Well said, Giles Andrews, CEO of Zopa
- Shift from institutional trust to peer trust: A powerful shift is underway from a mass economy that was built on people trusting large, corporate brands (‘institutional trust’) to a personalized culture fuelled by ‘peer trust’, where people can and want to empower each other. One of the results of this shift is the rapid rise of social or person-to –person lending platforms such as Lending Club, Prosper, and Society One.
- From the audible gulps and gasps, I sensed the audience were surprised by the growth and projected size of social lending by 2025. Lending Club and Prosper, issued $2.4 billion in loans in 2013, up from $871m in 2012 (Source: The Economist)
- Here is a list of major p2p lending platforms and a list of p2p lending platforms in the UK
- I was also asked if these types of social p2p lending platforms exist in emerging markets. Yes! Here is a handful (note theses are different from platforms such as Kiva ad MyC4, MicroPlaces that focus on microloans)
Faircent(India), Lendico & RainFin(South Africa), CreditEase(China), Fairplace (Brazil)
- One delegate whose core business is personal real estate loans said “please tell me these marketplaces do not exist for residential mortgages.” Sorry, they do (see summary below).
The big point here:
Other than person-to –person marketplaces such as Airbnb and Lyft are not only important to consider in the way they are transforming industries that have been the same way for decades, accommodation and taxis, but because they are warming people up to trust ‘strangers’ differently online. If we are using the internet to do find places to stay and to get in a car with a stranger to from A to B, why not loans?
I used the rapidly growing person-to –person currency transfer platform Transferwise to show how across financial services entrepreneurs are figuring out how to removing layers of middlemen (people or processes) that do not have value to the end user.
Collaborative Finance will reinvent models when there is a broken or inefficient match between supply and demand. In the instance of Transferwise, why should people have to pay exorbitant fees and have unnecessary time delays when people who want to transfer Pounds to Euros can be directly matched with someone who has Euros to Pounds to exchange?
I asked the audience to think big, to think about platforms such as Zopa, Transferwise and Kickstarter will start to change the larger ecosystem? It looks like disruption today, but soon it will be a case of displacement.
Here were the key things I encourage the audience to think about. Interestingly, point 4, that technology is at its best when it simplifies, connects and empowers our lives was the most tweeted point from my speech.
We are the start of one of the biggest transformation in banking and the way we think about money in centuries. Crowdfunding, social lending, p2p currency, all represent the first wave of power, trust and access shifting from centralized institutions and structures to decentralized networks and communities.
The real threat is not payment apps or fancy data applications (as one delegate put it to me “they are just the cosmetic surgery and we are pretending they will save us.”) it is a deep structural and values shift that should (if left to run its natural course) cause a massive democratization of finance.
P.S Here is how I think about the waves of financial disruption and what is coming next…Insurance watch out.
Some good resources:
- Videos from the Wired Money conferences that explore the future of money, banking and finance
- Lending Club Blog has interesting articles and stats
- LendAcademy Blog for latest P2P lending news
- Top 100 crowdfunding sites and by different categories
- A Trillion Dollar Marketplace: By the People, For the People. PDF
- A great article by Amy Cortese in the NY Times that looks at the problem of institutional investors cherry picking p2p loans
- If you are interested in how Transferwise works: here is a piece I wrote after meeting the founders or you can watch this video.
- Have lots of questions about Bitcoin? Here is the piece I wrote.
View deck on Slideshare