2020 Vision –A Forward Look at Digital Finance
2020 Vision is the first of a research series to provide a prescient view of the digital finance industry. While characterized as “crowdfunding”, “marketplace finance” or “alternative lending”, the application of technology to digitally connecting users with suppliers of capital has spawned one of the fastest growing industries, while laying the foundation for disrupting the world’s oldest profession, i.e., money lending. In the aftermath of the financial crisis, the banking industry has been laid victim to increased regulatory oversight, through Dodd-Frank, Basel III, and the Consumer Protection Act, which has impacted respective risk profiling and profitability models. At the same time, new and unfettered financial technology platforms are being established and expanding, significantly altering the banking landscape, in many ways threatening old guard operating protocols, customer experiences, and even product offerings. The rapidity of this change begs for the question, “Where does it go from here?” So what might the financial services, and specifically banking, environment look like only a few years out? Say in 2020?
For perspective, recent research suggests that marketplace lending represents a mere one percent of the current consumer lending within the US, but will reach 10% by 2020. This is not just a market share move by the new kids on the block, but this targeted segment represents a significant profit center for the conventional banks. Similarly, SME (small to medium enterprises) lending equally represent a precious part of the current banking efforts, but with conventional lenders competing with the likes of OnDeck and Kabbage, what may be the game plan going forward? Competing on price, efficiency, deal structure? Or will old ways give way to new, with banks setting up their own non-deposit funded platforms, or better yet, create hybrid models, engaging in both on-and off-balance sheet lending?
It is difficult to forecast the future, realizing many paths may be taken, yet we assert it is critical for the broader constituency to consider trends, possible game-changers, even black swans. There are innumerable actors and non-actors present, which can propel or deny, influence or derail, accelerate or extinguish new models. We find it is fundamental to understand this is still a science, i.e., “finance”, with technology used as the “art”, an enabler – for improved efficiency and analysis, customer engagement, and overall value added. That said, we may question the role of technology vs. human instinct in expedient decision making, and have the results thus far underscored superior performance on either approach. And while banks over time have evolved into financial supermarkets, offering a litany of lending products coupled with deposit/investment services, thus monetizing a customer relationship in many ways, do the vertically oriented newcomers have business and revenue models that are sustainable in their current mode? Will we be witnessing superb success stories or a redux of the dot.bomb era?
Our goal is to build a collaborative representation of “possible futures”, whether the destinies of the fractional reserve banking model or the tech-enabled non-balance sheet lenders, garnering perspectives from industry participants and thought leaders, financial services executives, regulatory and legislative members, academia and actual users. We intend to explore who and what is truly disruptive and why, and whether such reshaping is positive and sustainable, or something that will or should be pivoted away from. In many ways, we may have a narrative of David v. Goliath, possibly economic diffusion or something much different. In the end, we hope to stimulate thought and dialogue about how new rules can be applied to an old practice (finance) and what we can expect to see four years hence. So it’s time to apply “20-20 Vision” to this emerging and disruptive force, considering possible trajectories, futures and implications, domestically and across the globe.
Banking/Finance Segments most vulnerable to Digital Finance platforms
-What they are and the potential impact?
-Comparing operating costs and profitability between the old and new
-Role of data in creating value
-Vertical vs. horizontal strategies
-Embrace, replace or just brace yourself?
-Competition or “co-optition”
-Shadow and Narrow banking
-Who’s the Client? Investor or Issuer/Consumer?
-Shift on who’s playing the “crowd”
-Demise of the Accredited Investor
-Lifetime value of a customer/relationship
Regulation, Legislation and Liabilities
-Local, State, National, Global
Potential Outcomes, Realities, Butterfly Effects and Black Swans