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The great decentralisation: A sharing economy for the financial services
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A PwC report predicts the sharing economy will become embedded all throughout the financial services industry. Kate Eriksson discusses how a decentralised future might look and operate.
Most consumer financial services are driven by the need to conduct a peer-to-peer transaction of some kind. Whether buying a house, investing, taking out a loan or transferring money overseas, the mechanisms are all similar: stakeholders connect, establish trust, and participate in the transaction process.
Until recently, most of these transactions occurred through large intermediaries, like banks. Now, fintech startups are challenging this state of affairs. Using technology in place of institutional gravitas, they have been crafting product offerings – such as foreign currency exchange, tax services, investing or lending – that are faster, lower cost, and feature high-quality customer experiences.
Combined with other developments such as rapidly emerging blockchain technology, the status enjoyed by banks for many years – that of the go-to hub for a broad range of financial service offerings – is likely to be challenged.
In its place, a sharing economy of financial services providers is sure to be accelerated, helped along by banks and fintech companies partnering together, or fintech outfits extending beyond their narrow ‘monoline’ service offerings with new marketplace integrations.
Defining the financial sharing economy
For context, let’s broadly define what a future sharing economy would look like in the financial services industry. In other markets such as ride-sharing or room-renting, sharing economy companies such as Uber and Airbnb find new uses for pre-existing assets, regulating supply and demand using technology.
In finance, partnerships between banks and fintech companies could see the entire industry become a sharing economy. In such a scenario, supply and demand is also managed digitally, however the main effect is a decentralisation of service offerings. This breaks up the dominance of siloed banks. In their place, it establishes a broader ecosystem of banks and fintech companies.
Once this ecosystem is established, banks and fintech companies can collaborate within it, offering differentiated peer-to-peer services, adapting to rapid technological and regulatory change, or sharing revenues.
Infiltrating the industry
As the decentralisation of services continues, there are five reasons to think a sharing economy concept will infiltrate the wider financial services industry. For clarity, these reasons focus mainly on fintech-related trends and developments and make no comment on the role of the banks, for that depends on each individual bank’s strategy:
Fintech is fast growing, fast moving and opening the market.
One of the easiest ways to consider if a trend will continue is to map its growth in venture capital investment and its degree of regulatory support. In 2014 alone, global investment in fintech tripled to US$12 billion, while the Australian Federal Government’s 2016 budget declared a pursuit of a ‘strong and vibrant’ fintech industry. This points to a fast-moving, highly targeted fintech sector – one that, if provided with enough momentum, could evolve into a thriving ecosystem rather than be acquired by industry incumbents.
Fintech companies are aligning themselves on a broader, more human purpose and meaning.
Fundraising sites like GoFundMe and everydayhero attract users that are passionate about social causes and community initiatives. Digital platforms like VentureCrowd and The Australian Small Scale Offerings Board help grow Australian businesses, equity and property. Payment startups like Abra and TransferWise lower the costs of international money transfers (particularly for immigrant workers sending money back to their families) while Square provides a low cost card reader to any small business for payments processing.
By enabling a wide range of positive social outcomes, many of which can transcend borders, fintech companies have created new value and purpose on a global scale. This complements traditional models of value creation and better integrates these companies into the social fabric.
A compelling example can be found in Afghanistan, where young women cannot open bank accounts in their name. One particularly enterprising blogger was able to achieve financial independence by being paid in bitcoin for her writing services. She was then able to redeem the bitcoins in online stores.
Technology is removing barriers to trusting people or startups.
The accelerated adoption of services such as cloud computing, social networking and mobile is helping to dismantle many of the barriers within sharing economies – particularly around financial transactions. Along with the growth of identity verification technologies such as biometrics (Jumio) and transparent credit scoring (SocietyOne and Veda), the prospect of a shared economy for financial services is looking increasingly viable from a practical and technical standpoint.
Shared economies show greater levels of innovation, customer centricity and agility to change.
In a connected marketplace, the needs and behaviours of both consumers and providers are subject to rapid change. Because of this, participants in a shared economy tend to be innately more fluid and in-tune with the pulse of the entire ecosystem, and have more flexible business models. This has become the new normal for many digital industries – from e-commerce to social networking – and will likely enter the financial services sector as businesses seek differentiation, or players from other industries seek out new growth opportunities.
Sharing economies reduce costs.
In a shared economy, services such as acquiring and on-boarding customers, settling transactions and conducting credit assessments can often be achieved at a lower cost. This is because costs are distributed across the entire system, and have significant economy of scale. With many legacy systems struggling to keep up with both maintenance costs and regulatory changes in the financial sector, a future shared model would save costs and improve efficiencies.
Calculated risks
While the prospect of a future shared economy for the financial services is exciting, it introduces several risks. These include the largely untested and unproven nature of some of the new technologies, security and fraud, scalability, ‘agile’ business processes, and forgoing either transparent reporting systems or shareholder accountability.
Additionally, as the evolving regulatory adjustments enter these new technological territories, some unintended consequences will occur. Take biometric identity verification. Last year, a woman was denied service in a bank when a side effect of her chemotherapy left her without fingerprints. Will there be accessibility provisions for individuals like her to verify their identity some other way?
Fintech fortune favours the bold
Despite these potential risks, movement towards a shared economy-like structure for the financial services sector continues. This is a positive step forward, as it brings along a new spirit of innovation and improved customer offerings.
Ultimately, a shared economy for financial services goes beyond banks. It’s about choices, customer experiences, and how we connect with each other. Technology is greatly improving these processes, and a decentralisation of the financial services industry is equal parts possible and promising.
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