[Dave Birch] We all understand that the line between banks and non-banks is blurring in certain areas. Areas, essentially, other than taking deposits and creating credit. Forum friend Brett King has posted a couple of pieces on this point.

Clearly, to be a deposit taking bank and offer products like Mortgages, loans, savings accounts and so forth, it would be easier to have a bank charter. However, today the lines between banks and non-banks offering financial services is blurring faster than speculative investors dumping shares for Facebook.

[From Do you need a Banking License to do Banking? | Banking 4 Tomorrow]

I think Brett is right to point to the rise of the “near bank” as a highly probable trend in the next phase of retail banking evolution. So why is this, and why have we been talking to our clients for some time about the potential for sector-specific near-banks to deliver services? In Europe at least, the regulation of payments and the regulation of banking are separating. This means a lighter touch for payments, which should in turn mean more competition. This is in contrast to the well-understood demands for tighter regulation in the banking sector, largely because of banks’ ability to create money by lending. It’s taken for granted that “credit” means, to all intents and purposes, banks.

Yet this is changing. In the October issue of Prospect magazine there was a superb article about the alternatives to conventional bank lending by Sam Knight. I’ll leave it to you to read the article for yourself, but I want to pull out three particular points from the piece that relate to different types of lending.

First, the credit union. According to the piece, 40% of Americans belong to a credit union but only 1.5% of Brits. Credit unions could play a huge role in providing an alternative source for lending, but unfortunately that do not have the most efficient infrastructure.

What members were asking for, [the credit union manager] explains, were small loans, in the payday range of £50 to a few hundred pounds. She was keen to issue them, but it was hurting the credit union. Each £50 loan brought in just £1 in interest but cost £60 to process.

The arrival of mobile phones and the internet really ought to have fixed this problem by now (and I should mention in passing that Consult Hyperion are involved in a project touching on these issues in the UK right now). With the effective use of mobile as an alternative to cash, these costs should reduce substantially and expand the reach of credit unions in the UK.

Secondly, the growth in person-to-person (P2P) lending seems to indicate that some fraction of the economic transfer function needed for society to function can exist outside of the banking sector, co-ordinating lenders and borrowers via the internet rather than through institutions.

Right now, P2P companies have 1% of Britain’s £23 billion personal loan market, and are growing as a sector at 100% per year.

I’ve been playing around in this area for a while, since I opened up an account with Zopa, the market leader in the UK. By way of comparison, in the last quarter, I calculate that I earned three times as much from my Zopa account as I would have done had I left the money in my bank savings account. So +1 for P2P!

Thirdly, the provision of capital for business is also ripe for similar co-ordination. Funding Circle (which I’m also a member of!) has brokered £47m of small business funding in the past two years. One aspect that Sam didn’t explore in his article is the boundary between investment as a rational, financial activity and investing as a form of entertainment. I like Funding Circle because it’s fun and interesting. Even if my portfolio yields the same as a conventional savings account, I’ll stick with it, simply because it’s enjoyable to look through the lists of businesses and decide which ones to fund, and then see how your business acumen and instinct correlates with subsequent performance. The article also mentions Abundance,a P2P platform for savers to invest in renewable energy developments. It is run by Forum friend Bruce Davis, so I think I’ll head over and try that out too.

You can see a potential future here where third-parties offer consumers services that look like a bank but are actually a portfolio of non-bank services, a sort of supercharged Simple that provides a pre-paid payments account, a Zopa account, a hook into Kickstarter and Funding Circle, all under more Nutmeg-like interface. You set the dial, the system decides to move some of your spare cash into Zopa and lend it out.

Joseph Nocera’s excellent book “A Piece of the Action” describes the radical impact of money market accounts on the US bank system. I wonder if these “near bank” accounts will have a similar impact? Sam finishes the Prospect article by saying that “we will all, in time, become banks ourselves”. Well, not all of us, I’m sure, but for a great many of us the idea of removing the middlemen is as inevitable in financial services as it is in other commerce in the online world.

These are personal opinions and should not be misunderstood as representing the opinions of 
Consult Hyperion or any of its clients or suppliers

1 comment

  1. Great post. To put things into perspective, we should recall where (and why!) money-lending (and, hence, banking) originated from – “The House of Rothschild” is a good start… As those conitions are no longer relevant, we can all be a bank indeed, “subject to terms and conditions”. Trust is the main barrier to entry.

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