The banks are losing control as new technologies such as crowdfunding link smart investors with the best and brightest entrepreneurs, says Deloitte in its latest report: “Banking disrupted: How technology is threatening the traditional retail banking model”.
Disruption hits banks
The report warns traditional banking is under threat from digital disruption. Banks need to “transform their business strategy”, the analysts warn.
“Emerging business models are using new technology to re-invent key elements of financial services and new players are undermining the traditional bank business model by cherry-picking more attractive parts of the business. As bank lending remains constrained due to higher regulatory capital requirements, banks will face further competition as businesses raise finance direct from capital markets,” said Deloitte’s lead banking partner, Zahir Bokhari.
Crowdfunding services like P2P business lending in the UK rose by 211 percent between 2012 and 2013. The British Business Bank channelled half its £660m in business loans through alternative finance providers such as Funding Circle last year, say the analysts.
Crowdfunding breaks the banks?
There are three impacts:
- Customers are likely to migrate to other banking services, limiting bank access to cheap funding via current accounts.
- Entrepreneurs are more likely to seek crowdfunding support, limiting bank access to profitable credit deals.
- Investors are more likely to make investments using crowdfunding and other emerging channels. This limits bank access to their funds and enables new players to make crowdfunding investments in order to enter the startup investment game. A game once the sole domain of banks, grant funding and venture capitalists.
“As competition from alternative sources of funding intensifies, banks will need to re-invent their technology infrastructure. It is not credible to anticipate healthy returns while operating inflexible IT systems based on 1970s technology,” warns Bokhari.
Google was tiny once
In 2012, Andy Haldane, a senior policy maker for the Bank of England suggested crowdfunding models might render traditional lenders obsolete: “With open access to borrower information, held centrally and virtually, there is no reason why end-savers and end-investors cannot connect directly”.” He also warned, “At present, these companies are tiny. But so, a decade and a half ago was Google.”
UK think-tank, Nesta, last month said UK crowdfunding platforms climbed 50 percent last year.