Established banks are facing increasing competition from online platforms
In the first post we outlined the
possibility of creative destruction in the banking industry. We looked at how
allowing weak banks to fail may be viewed as some form of this principle. Although
this type of destruction appeared to have worked in some cases such as Iceland,
generally it was not a realistic option for policy makers in the case of the
2007/08 crash. However, have we really considered true creative destruction?
Bank-less Society
Imagine a world without banks. Borrowing or lending would be a labourious and costly process made worse with the risks of moral hazard.
This was a thought experiment briefly
considered in a lecture earlier in my semester and of course it instilled the
notion that banks are essential to the current system’s operation. Although we
concede that some sort of intermediacy is required, I think the banks of today
interfere too much and what society requires is a much more simple solution.
With the advances in technology and
increasing reliability on the Internet, there is a growing market for alternative
banking solutions.
Banking without Banks
Peer-to-peer (P2P)
lending platforms match borrowers to lenders directly, usually via online
auctions. Websites such as Zopa are offering
rates of up to 4.9% to lenders and charge 5.6% on personal loans (The
Economist, 2014). It is a fairly simple system that already appears to be
challenging retail banks.
Zopa and other online platforms are proving
that the traditional model can change. Maybe even well respected technology
firms could set up such banking models. After all, these firms are much more
trusted than the major banks. We must also note that this growth in P2P lending
is happening with a very low level of awareness of their existence;
PriceWaterhouseCoopers found that around only 15% of Britons have heard of the
largest P2P firms.
The Economist (2014)
Growth
of Internet Finance
China
also provides evidence of demand for a new way of banking. Some of the
country’s largest banks are facing pressure from online funds that are offering
returns up to 15 times higher than those allowed on conventional deposit
accounts at regulated banks. Large e-commerce firms such as Alibaba and Baidu
have entered the market attracting billions of Yuan.
Unsurprisingly, many are expressing disdain
over financial online platforms, especially given the recent problems that Bitcoin has faced.
However, with proper regulation and insurance in place, such innovations may
soon become mainstream.
Creative Competition
We recall that fundamentally a bank’s
main purpose was to hold deposits for savers and lend out capital for
investment opportunities. Arguably,
this can all be done by software and is somewhat proven by the footing that
online platforms have gained in the market.
Although these systems are still in
relative infancy, it evidences the fact that people are looking for
alternatives. It also hints that banks are not invincible after all; like
other industries, creative destruction could possibly advance the banking
sector. Presently, it is too early to predict the creation this insurgence will bring, yet I believe that this new form of competition is
healthy and should at least force the banks of today to seriously consider changes for tomorrow.
