Banks don’t have a history of revolutionising the financial sector.
Why would they? They’re happy to stick with the bureaucratic business they’ve established.
As long as they don’t innovate, they don’t have to change. That way the banks can keep making money in the only way they know.
And that’s the problem…
As Tim Dohrmann, small-cap analyst of Australian Small-Cap Investigator told me this week:
‘…there is an unspoken admission that the big banks can’t come up with the cutting-edge financial services that consumers increasingly demand. Their layers of bureaucracy stifle bright ideas before they get off the ground.
‘For example, peer – to – peer (P2P) lending. This idea would never have seen the light of day in a big bank. Instead, it took a couple of entrepreneurs who were unhappy with the current system to force the financial industry to change its ways.‘
P2P has been increasingly popular for the past few years overseas. Last year alone, P2P loans in the US totalled US$2.8 billion and £1 billion in the UK.
SocietyOne, Australia’s first functional P2P lender has only issued $4 million in loans since it started in August 2012.
As you can see, Australia has been relatively slow in catching onto alternative borrowing methods.
Yet, Westpac’s [ASX:WBC] investment of $5 million into Australia’s first P2P lender, SocietyOne, tells Tim one thing: ‘A buy in at this stage from Australia’s first and oldest bank shows that P2P lending is here to stay.‘
But P2P lending points to one thing — an overall shake up of the banking sector.
You see, consumer banking is changing as we know it.
The thing is, the banks aren’t changing the industry. It’s the start-ups that are pushing the industry to change. And this is because consumers want another way of doing things.
Why innovation like P2P lending doesn’t come from the banks
P2P lending has proven popular overseas because it offers a more attractive return for investors than an interest bearing account. And because of lower overheads, borrowers often end up with a lower interest rate from a P2P lender than a bank can offer.
But the shakeup isn’t just in loans.
It was a frustration with a utilities company that led Josh Reich to set up Simple with a friend:
‘I had to pay my first gas bill in America by cheque. I’d never had to pull out a cheque before in my life. It was a dawning realisation that I was stuck in an adversarial relationship with my bank.‘
After a few weeks of writing code with co-founder Shamir Karkal, Simple, the online bank that isn’t a bank but a banking service.
Simple’s concept is brilliant. There’s no branch. There are no overdrawn fees, no interest charges and no account fees. When you sign up, you get a Visa debit card, so you can access cash, and use it as you would a normal debit card.
To deposit money into your Simple account, you can do an electronic transfer. If you still happen to receive cheques, you just take a photo of the cheque on your smartphone and Simple will do the rest.
Do you have a company that wants payment for an account by cheque? No problem. Simple will issue a check on your behalf.
You can link to third party payments systems like PayPal as well.
But the real merit behind the idea is the principles that drove the company: How much can I spend today, without hurting me tomorrow?
The idea from the founders is to encourage you to save money. That’s unlike traditional banks which make more money from issuing you debt.
Rather than just look at your account balance as with a normal bank balance, this software factors in future spending (like bills or a savings goal), and gives you a safe spending limit with all of this factored in.
As Reich said:
‘We never want to profit from customers not understanding their finances. We never want to profit from customer confusion.‘
So how do they make money? They take a fifty-fifty spilt on merchant fees.
Also, Simple demonstrates their efficiency when it comes to cancelling credit cards if the customer loses it or has it stolen. You just block the card through the Simple app on your smartphone. And you just use the app to order another one or unblock the card if you find it.
Rather than physically ringing a bank and then waiting for them to issue a new one…Simple does it all in seconds.
Clearly, one big bank likes this idea. Because Spanish Bank, BBVA, recently bought the company for US$117 million.
This sort of development would never happen within the archaic banks. Insight, innovation and technology development aren’t their strong points.
The big banks can’t revolutionise the systems, but they’re keen to buy the companies that can. As Tim says:
‘In spite of banks dragging their heels with technology, innovation never stops in financial services. The thing is, to reap the biggest rewards, investors have to stay ahead of the wave and pick the trailblazers before the big banks do.
‘There are some huge opportunities ahead for investors in early stage and small-cap financial companies. It’s all about taking the time to find them.‘
Shae+
Editor, Money Weekend
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