I was recently invited onto Evan Davis’ BBC radio and TV show ‘The Bottom Line’ for a discussion on alternative finance. Alongside me was Giles Andrews, the founder of Zopa – a UK peer-to-peer lending platform, and Michael Joseph, the former CEO of Safaricom, which set up M-Pesa, a mobile payment system, in Kenya.
The response since from businesses and the public in general proves that we have all heard more than enough about the failures of the banks in the last few years, but not enough about the positive changes that are happening in finance.
This question is especially important as commentators are beginning to talk seriously about a change in the role of banks. George Osborne told an audience of JP Morgan traders recently, ‘I want upstart challengers offering new and better services that shake up the established players’.
In recent years the finance industry has seen various new players, with some offering a full range of financial services and others aiming to compete with banks only in the provision of certain products. Many of these challengers are growing, and while 2012 saw their emergence, 2013 might see a move into the mainstream.
The day-to-day of banking is changing worldwide, and banks are not the ones driving the innovation. For instance, by some measures, Starbucks is among the 200 largest banks by deposits in the US, having $3 billion on their in-store card in 2012.
Both Google and Amazon are also talking about providing finance to users of their marketplaces. At the other end of the economic spectrum, 31 per cent of Kenyan GDP now flows through M-Pesa, which is so simple it can be operated on a very modest Nokia phone and has no physical bank branch presence.
The development of networked technologies has played a big part in the development of these new finance providers. A number of new firms have harnessed the power of crowds to provide finance to businesses and individuals, with peer-to-peer lending and crowdfunding both emerging as important new models. Individuals walking down the street are using their smartphones to instantly fund loans that would once have been managed (or indeed rejected) by the banks.
Banks and their dominance in the lending market
In this country, four banks still control around 85 per cent of the business lending. However, their tendency to innovate is limited – in my particular sector of the market, working capital finance, there had been no innovation to speak of for 50 years. Yet new firms are popping up every month, offering a better way to run finance through the internet.
They are raising and using capital in ways that hadn’t been thought up ten years ago, such as Zopa or Ratesetter’s peer-to-peer lending models. They focus on a single area of finance, aiming to provide faster and more efficient service than the banks can.
On the other hand, ‘challenger banks’ such as Metro Bank have appeared, aiming to beat the big banks through their attitude to customer service. Aspects of what they provide are common sense; for example, they can issue new cards on the spot with in-branch printers and their branches are open every day with long hours, solving two common consumer bugbears.
For this higher level of service, these banks will offer lower returns and less cheap loans, but for some this is a price that is worth paying. Other banks, like Handelsbanken, aim to recreate the old, fondly-remembered, decentralised system of banking, where decision-making is delegated to individual branch managers.
Innovative crowdfunding options
In terms of business finance, a number of new firms are offering innovative new products. My firm, MarketInvoice, offers an online marketplace for invoice discounting for small businesses, allowing SMEs to borrow money from a collection of professional online investors (hedge funds and family offices), using their invoices from blue-chip debtors as security.
While there is a long way to go before businesses like ours are operating at the scale of the incumbents in the banking sector, there is no doubt that those businesses already using us are enjoying the benefits of the next generation of finance.
These new forms of finance, while appearing technology-driven, are driven by a simple premise – that in a newly connected world, there’s less need for intermediaries. Businesses need better access to capital and credit, while lenders want to know where their money is going, and that’s what the new players are letting them do.
Even the old guard is now facing up to the new reality. Sir David Walker, recently appointed chairman of Barclays, has said, ‘We want to move away from the significance of banks’. While the banks are clearly not disappearing any time soon, it does seem like technology and social networks, driven by non-bank institutions and start-ups, are increasingly going to shape the future of finance.