You can bank on it
Why the world's richest institutions are being forced to adapt
Look no further than the inaugural Virgin Media Business Disruptor 10 list for evidence that even the rich, rarefied world of finance isn’t immune to disruption. Four of the ten firms to make the table are challenging old-school banks.
And the whole fintech bandwagon is only just getting going. In the last six years at least 100 British finance providers have launched potentially-disruptive funding solutions. Companies like Zopa and RateSetter have disrupted the loan industry with peer-to-peer lending (P2P) for consumers - but there is growth in P2P for business too.
Millenial approach to finance
Alternative finance expert, Katrin Herrling, is CEO and co-founder of Funding Xchange and has noted such a rise in the market.
She says: “Funding Circle and Market Invoice are the most established, having provided a total of £2.6bn to businesses. Other funders are snapping at their heels: ThinCats and Assetz Capital have lent £203m and £179m respectively. More and more businesses are considering non-bank finance as their first option. Many are attracted by the ability of funders to make quick decisions, and by the super slick online journey to apply for funding in minutes.”
Tech has played a defining role in the renaissance, creating a user-friendly way for business borrowers to access credit from non-traditional sources. The process has effectively dispensed with intimidating meetings with a bank manager and replaced them with little more than some online form filling. It’s the millennial approach to finance.
The legacy tech straightjacket
Katrin says: “Tech is playing a facilitating role. Innovation is about understanding the customer pain points and solving the problems in an inventive way. This is often led by start-ups that are nimble, closer to the customers and don’t have to worry about an old revenue model that often penalises the best customers, or legacy technology acting as a straightjacket. Without these constraints it is much easier to reimagine the future.”
Even as business P2P establishes a foothold, the field’s most innovative companies have taken the disruptive ball and run with it. For example, Market Invoice, a Shoreditch-based P2P, has brought single invoice finance to small companies who can use outstanding invoices like an overdraft. Instead of waiting for a 90-day payment term, they can release the funds in just a few days. Meanwhile the P2P startup Urica has access to trade credit profiles of 40million companies anywhere in the world and uses this data to unlock funding for companies exporting internationally.
A banking rethink
Mainstream banks are sitting up and taking notice. Metro Bank last year became the first British bank to lend via a peer-to-peer platform, namely Zopa. Royal Bank of Scotland and Santander are partnering with Funding Circle by referring enterprises refused loans to the platform.
So disruption is forcing conventional banks to rethink what they do - but some are intent on beating the newcomers at their own game.
Katrin says: “P2P platforms have been disruptive largely because they have made it convenient to apply for funding - online and at any time. Customers are provided with decisions on the lending experience in hours or days. Credit goes to these platforms for transforming the customer experience.
“But now we are seeing some of the traditional players leapfrogging the capabilities and customer experience provided by alternative finance. Macquarie is just one example of a traditional lender who has launched an innovative asset finance solution that delivers near-instant funding decisions.”
Finance is one ecosystem
Katrin insists that disruption shouldn’t be viewed as a threat to traditional banks, but rather as a positive force that is changing their approach to help them survive and will even save them money. We wholeheartedly agree.
She says: “Using the rich data that is available on business performance has the most potential for transformation of the traditional bank lending space through instant decisions and cutting the costs of traditional underwriting processes by up to 90 per cent.
“So don’t count out the banks. They have proven they are good at picking out the pieces that work for them, and will either buy “innovation”, build partnerships with the best disruptors or copy the models that work. My view is that distinguishing between old and new, traditional and alternative finance is already outdated. It’s all one ecosystem, with new alliances forming all the time and innovation spreading quickly between the old and new.”
Disruption doesn’t mean it’s time to wave bye-bye to banks – but it’s comforting to know that even the world’s richest institutions are being forced to adapt to survive.