Banking is Necessary. Banks are Not.

This quote from Bill Gates in 1990 is still relevant. It sums up the growing irrelevance of banks for consumers today. Last time, I discussed how borrowers today have...

Snehal Fulzele 9th May 2015

This quote from Bill Gates in 1990 is still relevant. It sums up the growing irrelevance of banks for consumers today. Last time, I discussed how borrowers today have a plethora of choice if they are unable to procure a loan from a bank. Gone are the days when banks were the primary source of funds for individual borrowers and small businesses. Banks were essential for economic development in the industrial age, however, today they are more focused on regulations, leaving a wide space for innovative alternative lenders to fill the gap.

In developed markets, non-banks are knocking on the door of mainstream finance. We are not far from the time that alternative sources become the mainstream finance options for the majority of people. Why do I say this? In 2014, over $20B in business and consumer loans were made by online lenders. LendingHome and Realty Mogul are revolutionizing real estate lending. OnDeck is a shining example of online small business lending. And, we aren’t even talking about the inclusion of assets which were ignored by traditional banks, for example, ApplePie Capital is an online lender for franchise business owners, and underserved market by banks.

alternative-bankingWhat’s so different about non-bank lenders? It’s how they leverage technology to offer innovative credit models. They are automating the investment process, developing algorithms and providing valuable information to investors. In addition, the ubiquity of smartphones and digital transactions has widened the competitive playing field of companies that are capable of providing financial services. According to the FDIC, more than 50 million American adults who have bank accounts still pay to use financial services from other providers instead.

Big data is also changing the way customers and financial providers think about risk. Non-bank lenders today leverage non-traditional data to fill in the gaps in the credit history, and underwrite loans effectively. In the wake of the financial meltdown, FICO scores are no longer sufficient and data from social media and reviews from Yelp are being used to assess the borrower.

Innovation in the FinTech space is driving simplification and transparency of processes in the lending space. Increasingly, technology is being used to decrease the cost of origination and underwriting of loans, lower the costs of cross border money transport for a seamless global market, and to match high-quality borrowers in third-world countries with high-quality lenders who have few high-yield options in their local market.

So do we foresee a future without banks? Probably not. Banks will continue to play a key role as institutional investors, funding the growing pack of non-bank lenders and other ventures. For example, Union bank, among others, is an institutional investor in Lending Club. Non-bank lending institutions may be replacing banks as a popular choice for funds but banks rather bank like institutions are still needed for providing the regulatory framework for financial institutions and businesses to operate in. We believe non-bank lenders will eventually lead the consumer finance sector while banks will continue to be a major source of lending capital.

The collective result is that we are at the cusp of a revolution where non-banks are entering mainstream finance. So, what’s the banking industry’s next move? We’ve noticed some movement at the innovation edges of banks. More to come on that.



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