Sharing economy: the end of the bank?
Sharing is hot. The sharing economy is expanding to include ever more activities. Who will become the Uber or Airbnb of the financial sector? After all, we will soon see the end of banks as we know them today. Belfius, BNP Paribas Fortis, ING and KBC will be wiped out by digital disruption, their place taken by P2P platforms designed by fintech businesses such as TransferWise, Lending Club and Crowd Cube. Right? According to Professor Bjorn Cumps, that is not a very likely scenario.
You share on a platform
Sharing is the new having. Why should you buy an electric drill if you only have one hole to drill? What use is there in a car that spends half the time in the garage? And why not have guests in your spare room more often? Online P2P platforms (peer-to-peer platforms), launched by innovative start-ups, bring the different parties in a transaction – private owners and users – directly into contact with each other. Unlike rental companies or hotels, such platforms offer products or services without a central agent. This makes them cheaper – take Uber and Airbnb, for example.
Even the financial sector we are seeing P2P platforms emerge, for example for payment transactions, lending and financing.
So what now? In principle, all the ingredients for a sector-derailing disruption are there: new start-ups, the fintech companies, offering products and services to clients who are less attractive to traditional banks – products and services that are moreover cheaper and more transparent. But in contrast to the scenario in Christensen's theory1, the emergence of P2P platforms does not immediately mean the end of today's financial players. Indeed, a recent study from the World Economic Forum has sketched out three different scenarios, some more likely than others:
- Disruption that derails the sector: the traditional banks disappear and the market is taken over by P2P platforms.
- Collaboration between traditional banks and P2P platforms, in which each party serves a different target group and focuses on its own strengths.
- Traditional banks develop their own P2P platforms.
Rules, rules, rules
Why is the chance of a sector disruption small? “Firstly, the financial sector is more strongly regulated than other sectors. It is precisely this level of regulation, which banks complained about so much in the past, that will protect them against this scenario now. It is simply a fact that lending, for example, is subject to legal regulations. So either P2P platforms will have to work with a bank sooner or later, or they will have to conform to the rules themselves, and that takes time.”
A question of trust
“Secondly, P2P platforms are often set up as a reaction to the monopolies of specific central players, in this case banks, particularly the large ones. What is crucial to the success of such platforms is mutual trust. The financial sector has organised itself around central players, precisely because they can provide that trust. It is perhaps paradoxical, but according to studies by Febelfin, people trust their bank – and in particular their local bank manager – even after everything that has happened in recent years. Banks are also making the effort to regain trust where necessary, and to keep this trust. And it is trust that the fintech start-ups still need to create.”
Clients who stick to what they know
Thirdly, according to Cumps, you should not underestimate the inertia of clients. “We find it very difficult to change banks, let alone suddenly entrust all our financial affairs to a start-up that is still unfamiliar. Some experimenting with one product or another does happen, but this is miles away from a ‘bye-bye banks’ scenario.”
Besides, a sector disruption assumes that newcomers will gradually take over the market and the traditional players do not see this coming, so do not react or react too late. But traditional banks are already reacting, according to Cumps, for instance by developing their own P2P platforms and collaborating with other firms. For example, KBC has launched Bolero Crowdfunding, BNP Paribas Fortis has forged a partnership with MyMicroinvest, and Belfius Bank has integrated crowdfunding into the financing mix for businesses. Various banks have set up an internal team to continuously monitor what fintech businesses and platforms are out there and whether they are an opportunity or a threat. In other words, they are anything but blind to what is going on.
Culture and legacy
Could the third scenario be the most plausible? “More plausible that the first, but less likely than the second. Traditional banks and fintech businesses have different strengths and weaknesses. Banks react far more slowly than fintech businesses to changes in the market. There is a cultural difference: banks are not as flexible and agile and, in comparison to fintech businesses, not really client-centred in terms of product development. Until just a few years ago, the financial sector was almost the least innovative sector.”
Furthermore, traditional banks are slowed down by their legacy systems, explains Cumps: “They find it difficult to wipe the slate clean overnight. The systems that support their traditional products and services need to keep working and on top of that they would have to come up with an innovative P2P platform. And these two environments preferably need to communicate with each other, as clients want all their products to be linked. Fintech businesses have the luxury of being able to start from scratch and can start operating quickly.”
“Note that, as I said, some banks have brought their own P2P platform onto the market.”
But banks are also aware that radical innovation of their own requires a lot of time and money and demands an enormous cultural change. So why would you want to do everything yourself if you can work with a fintech business and both do what you are good at? And that is exactly what you see happening. TransferWise, a P2P platform for international money transfers, works with various local banks. ING has formed a partnership with Kabbage, a platform that provides loans for SMEs. Thanks to a fully automated risk assessment, a loan can be approved in a matter of minutes. Such alliances are beneficial for all parties. “Take granting credit, for example. These days banks prefer to invest in less risky projects and they would rather have a risk-averse clientele. P2P credit platforms have other target groups – borrowers with a high-risk profile and lenders who are less risk-averse. Banks and platforms refer clients to each other. Together they cover the whole market, and clients also benefit from this.”
Markets are different
Cumps closes with the following important proviso: “The fact that the second scenario is the most plausible is only true for financial markets such as those in northern and western Europe and in the USA, where about five large banks dominate the market and have heavily invested in digitisation in recent years. These banks are no longer digital dinosaurs. However, in the Chinese market there is a much lower market concentration on traditional banks and the digital maturity of these banks is also much lower. There you see a much clearer emergence of P2P platforms, so the chance of the first scenario becoming reality is much greater.”
“But one big Uber or Airbnb for the financial sector? I can’t see that happening here any time soon.”
1 Clayton M. Christensen came up with concept of disruptive innovation. See for example Christensen, C.M. et al., “What is Disruptive Innovation”, Harvard Business Review, December 2015.