Few would have thought, back in 2008, when queues were forming outside Northern Rock and Anglo Irish Bank started to collapse that it would inspire a revolution in financial services and change how we interact with banks.
It has lead to the emergence of crowdfunding and P2P lending, alternative currencies and development of blockchain, the use of mobile phones to store funds and make payments. It has also instilled a sentiment among consumers that there can be trusted alternatives to the established and previously well trusted, banking sector.
As traditional banks struggle to meet the borrowing demands of small and medium sized business and offer negligible interest rates to savers, Peer to Peer lending has emerged as a credible alternative. Funding Circle in the UK is now the third largest provider of credit to SMEs. This innovative way of connecting borrowers and lenders has moved firmly into the mainstream.
The announcement this week that Santander has signed an agreement with Kabbage to offer small business loans is an example of how traditional banks can move with the times. Kabbage look at many factors to determine exactly how much money to provide to account holders such as average monthly revenue, seller rating, time in business, transaction volume and other feedback measurements. Data sources they can use to analyse business are PayPal and eBay. On the surface Kabbage is a finance company offering loans but in reality they are a data analytics business. Their success is driven by the complex algorithms they use to process the data sourced from Companies House, credit rating firms, social media and anywhere else they can find it. The question now open to the traditional banking sector is, how can they compete? They could have access to the technology that underpins Kabbage and use it to deliver the same levels of customer service that has helped this startup grow to multinational company. Do they have the flexibility and willingness to take advantage?
Grow Advisors has been a part of this revolution. It has worked with businesses around the world helping them utilise this technology to meet the needs of their customers and to increase efficiencies and profitability. What the greatest learning has been is that companies like Funding Circle and Kabbage rely on a combination of many different technologies (APIs), some of which they will own, some they will be licence from third parties and others will be open source. Secret is in how you use them.
APIs are the building blocks or engine components that are combined to deliver the business processes required to deliver a user experience the customer expects. For P2P lending, equity or rewards based crowd funding the components are similar. A backend that can securely capture and manage users information, software that can enable “know your client” processes and meet regulatory standards, a payment gateway that can allow online transactions in varying currencies. All put together by a skilled software developer who understands the importance of user experience. This is obviously a simplified summary but the challenge for the tech community to
look at these businesses processes and identify where they can automate or adapt to make efficiencies, improve user experience or create a datapoint that adds value to the business. In short, can they create an API that can save their client money and help them make more?
Likewise for the wider financial sector they can look at their traditional business model, processes and customer journey and find opportunities for improvement or full revolution using these APIs. In these exciting times there will be new challenger banks entering the market and it shows how slow the sector was to change that Metro bank was the first new licenced UK bank in 100 years back in 2014. Mondo bank is a great example of a new bank focused primarily on user experience with strong innovations in security. Other sectors Grow Advisors see real opportunity for disruption and innovation are insurance, asset management and financial advice. Will the established players have the wisdom to act first, reach out the tech community and utilise those APIs that can revolutionise their businesses or will they wait and watch as they lose market share to the start ups?
Earlier this year at Davos, the WEF sent out a message that resonated strongly with fintech.
“We stand on the brink of a technological revolution that will fundamentally alter the way we live, work, and relate to one another. In its scale, scope, and complexity, the transformation will be unlike anything humankind has experienced before. We do not yet know just how it will unfold, but one thing is clear: the response to it must be integrated and comprehensive, involving all stakeholders of the global polity, from the public and private sectors to academia and civil society.” K laus Schwab, Founder and Executive
Chairman, World Economic Forum
These industry developments give rise to the need to inform, enable and help change in the marketplace. As Klaus Schwab stated, the transformation will be unlike anything mankind has seen before. Finance and financial services will play a central role in transition and only by doing so will it live up to the expectations many in the industry have. To deliver the services required by an increasingly online world will require collaboration, openness to change and and the foresight to invest now.
As a global pioneer and leader of digital finance, the Grow VC Group is championing an industry wide awakening and acclimatisation of disruption in financial services. The consulting and advisory unit Grow Advisors offers professional services aimed at fostering and growing the use of digital finance around the world. Grow VC Group & Grow Advisors were both recipients of Finance Monthly Fintech Firm of the Year 2015.
ABOUT THE AUTHOR
Michael McDowell is a consultant with Grow Advisors – the consulting and advisory unit of the Grow VC Group. They offer professional services aimed at growing crowdfunding, crowd investing and p2p finance around the world from funding solutions to marketplaces and co-investment models.