After so much development in the Fintech space due to the progression of “private banks” all over the digital world, many entrepreneurs have started to base their Fintech startups on the premise that banks will soon stop to exist in our lives.
Well, considering the fact that most of the world’s population is still heavily involved in banking and is slowly transitioning into digital banking, it’s easy to say that banks won’t go anywhere, right?
Well, not necessarily. They will still be around for sure, but not in a way you and I may be used to. It may become quite hard to find a bank office near your house
in about 10 years or so. Why? Because almost every company is keen on reducing costs as much as possible, and what’ better than not paying for real-estate and thousands of employees?
The banks we know today are very likely to turn into nothing but an application on our phone. And the consultants we met in offline offices are likely to turn into a line of code with an artificial voice.
Lending is getting very old with banks
In order to determine the longevity of a bank’s business model, we need to determine its current competition. In most cases, it’s just other banks that tend to have either a better marketing strategy or maybe better offers on interest.
But, in the grand scheme of things, every single bank is a color version of another. It’s very hard to find diversity no matter where you go. Sure, there may be some banks that still cater to the older population which isn’t as tech-savvy, but the concept
of generating income is still the same.
Let’s think about the fundamental revenue source for banks. It’s the interest they charge on lending funds to others right? Well, how do they get the funds in the first place? Through what people have deposited on savings accounts, and in some cases their
credit accounts as well.
The art of banking is a very intermingled web of borrowing and lending funds through the same funds that may one day be unavailable.
That is why the savings accounts sometimes have a restriction of cashing out for the next year or so.
When we look at it from a different perspective, for example like looking at a set of gears. Every gear provides some kind of power to the whole machine and keeps it working. In this case, the funds that are located on savings accounts are like oil for these
gears. As long as its present, the gears will continue to work.
However, the moment the supply of this oil is cut off somehow, the whole machine breaks down. Why? Because the gears cannot move anymore, or at least they can’t move at the same speed.
That is one of the arguments against unscalable banking. What would happen to the local economy, or to the funds of those already engaged in loans when a large majority of the population decides to cash out due to some serious economic problem? Well, we
got to see a
similar case in 2008, but large banks managed to survive due to size and the importance of cash during a recession.
What is the alternative?
The only alternative that has shown itself in terms of the art of lending is P2P lending. Well, what is it?
It’s basically a platform, where the person who deposits funds, does so for the sole reason of lending out these funds. In this case, not only in the lending aspect mentioned in the agreement, but it’s emphasized. Meaning that people don’t treat their funds
as a deposit, but rather as an investment.
Some platforms tend to
allow lenders to choose who they want to borrow funds to and assign a specific interest rate. But others, act like large funds where the money is compiled and distributed to applying lenders according to the platform’s standards. That’s not a real improvement
over already existing options. So let’s focus on the “free-willed” lending option.
Will independent lending replace banking?
P2P lending as it right now stands absolutely no chance in competing with traditional banking, as it requires a bit too much time from the lender’s side.
However, should technology such as Artificial Intelligence be successfully implemented on these platforms, it’s likely that P2P lending will occupy a large percentage of the financial market share.
Why? Because not only does the lender get to choose who they will lend their funds to, but also adjust their rates according to the current market standards. It’s an introduction of a more floating market for interest rates, as banks usually can’t raise
or lower theirs without violating some kind of regulation or losing market share.
With P2P lending, it’s up to the lender to assign a realistic interest rate and allow the system to match him or her with a potential borrower. Once the match has been made, it’s up to the platform to act as an intermediary for making a contract and holding
each side accountable should something unlawful occur.
With banks, the lender does not participate at all. In fact, the lender doesn’t even realize that he or she is a lender. As already mentioned, the funds are perceived as a deposit rather than an investment.
Implementing the freedom of lender choice gives market participants a lot more flexible opportunity to generate profit, while the borrowers are also given value through the benefit of choice.
Should they choose to borrow from a lender who’s asking 5% interest, it will be on their own decision, rather than a lack of decision due to market standards.
Will this new tech trend revolutionize banking then?
No, most definitely not. As outlined in the article. P2P lending will most likely take a large percentage of the market share, but it won’t truly discredit banks from it, simply because depositing, fast transactions for small funds will still be dominated
by commercial banks.
Overall, people who will be most impacted through this development will be those who actively keep their funds in a savings account and being content with 1 or 2% interest rates.