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So far, the sharing economy has disrupted hotels, transportation and music. Will financial services be the next industry to suffer the impact of the collaborative economy?
Financial service providers will have to reassess their basis for competition, distribution and customer relationships if they are to withstand the coming challenges.
This was the shape of discussion when PwC Australia invited global thought leader on the power of collaboration, Rachel Botsman, to share her views on the industry changes facing banking and finance.
Personal loans, currency exchange and insurance are three sectors that are vulnerable to competition from the collaborative economy.
Peer-to-peer lending is already one of the five main sharing economy sectors that, combined, generate around USD$15 billion in global revenue today, a figure that PwC estimates will rise to US$335 billion by 2025.
In Australia, SocietyOne has established itself on the leading edge of personal loans with an offering that provides individualised rates based on a sophisticated risk assessment. SocietyOne recently received $20 million in equity funding and supports $15 million of loans but to understand the potential impact the company could have, you need to look outside of lending to the taxi and hotel industry.
Establishing trust
Over the last few years, the collaborative economy has completely changed the way we access transportation. Today, Uber links passengers directly with drivers. No traditional taxi company required. In just four years of operation, AirBnB matched Hilton hotel’s footprint of over 650,000 rooms, simply by providing a platform for private property owners to rent out their accommodation. These examples show that en masse, people are willing to set aside the ‘safety net’ of a large organisation or industry regulator in order to deal directly with the provider of the service they seek.
This is arguably a more efficient way of accessing assets – but don’t overestimate efficiency as the primary driver. The real force at play here, according to Botsman, is trust, specifically trust between strangers.
Just a few years ago, the idea that we would source personal finance through a mobile phone from a company we’d never heard of drew skeptical smiles from many banking executives. Today those same executives are investing in peer-to-peer lending companies like SocietyOne, or trying to emulate them.
When is a business vulnerable to disruption by collaborative economy dynamics? Botsman’s research has shown that there are five common drivers:
- redundant intermediaries
- limited access
- broken trust
- wasted assets
- complexity
Each one of these drivers is rife in financial services, making it vulnerable to disruption by collaborative finance platforms.
Transparent transactions
TransferWise is a UK-based currency transfer platform that’s aggressively taking banks to task in a new campaign called ‘Nothing to Hide’ highlighting opaque pricing and traditional currency transfer fee structures. Here in Australia, OzForex has a similar model that competes on price by removing bank transfer from the equation. No money moves across borders, minimising the transaction cost and the price the end customer pays.
Some financial institutions are embracing this shift. Santander UK bank actively refers some of its small businesses to Funding Circle, a peer-to-peer lender, if it believes they are better placed to handle the request. Here, Westpac has invested in SocietyOne.
Reputation as currency
But people are not just sharing assets; they’re sharing knowledge and experiences with their peers using ratings and reviews. These socially-based recommendations are often regarded as more trustworthy than traditional marketing, the corporate press release, or the advice of the broker.
The result is a hunger and a growing desire for transparency to understand how systems, fees and service providers operate. People connect with strangers, who build value using the currency of their personal reputation, thereby creating a bond of trust and accountability. And the trust cuts both ways. For example, as a passenger of Uber, I get rated just as the drivers do and that rating may influence whether drivers want to do business with me.
The old world analogue in banking is a credit rating. But this new basis for trust is one of the enablers for the disruption we’re beginning to see in the finance sector. And it looks set to grow.
With disruption already occurring, each player within the financial services industry has to ask itself where and how it chooses to fit within this new paradigm. The key question to solve is how ideas core to the collaborative economy – peer trust, transparency, direct services and asset light models – can create new and meaningful value for the customer.
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