The term ‘disrupter’ is used among technologists as an informal title given to something that has completely disrupted an existing business model or industry.
Recently, Uber has been given this title. It is the approach of using a mobile app to connect the buyers and sellers of a service, as opposed to capital assets, that has disrupted the taxi industry.
A similar system is now displaying nascency into the banking industry. Financial technology, known as fintech, comprises of ‘bank disrupters’ that can play into the traditional roles of a bank such as providing loans, payment and wealth management.
Many of these start-ups, known as ‘Unicorns,’ have already achieved values of over a billion dollars. These companies have no need for an office, ATM or any of the more tangible aspects of a bank. They are tech-friendly, fitting in with the modern consumer’s needs, and it is easier, cheaper and faster to apply for a loan online.
This method of banking has been described as a ‘more sophisticated form of crowdsourcing.’ Unlike the traditional banks, these businesses may operate as peer-to-peer lending or as online and mobile payment systems. There is no ‘one-size-fits-all’ category which allows the cost structure to be inherently cheaper, described as ‘dirt-cheap,’ than that of traditional banks. It can create serious competition for incumbent banks that will be struggling to reach the technology and the profit level of the bank-disupter.
An example of such a successful bank-disrupter is Social Finance, known as SoFi, specialising in American private student loan market. SoFi is fairly selective in its clients and picks ‘the most creditworthy student-borrowers who attend high-quality, fully accredited four-year schools’. Meaning the less creditworthy persons are left to the US Treasury, whose student loans have ‘sky-high’ default rates. Meanwhile, SoFi’s loan loss rate is almost zero.
Old banks vs. disrupters
The FinTech model is quickly growing popular, mimicking the beginnings of ebay and Amazon that disrupted retail sales almost 15 years ago. However, traditional banks provide consumer protections that is not a guarantee from such start-up disrupters. Uber-modeled banking businesses would not have to worry about bank examiners or bank regulatory capital requirements, some can even obtain licences under local laws. An attempt at providing greater protection would lead to regulatory agencies such as Consumer Financial Protection Bureau becoming stricter and possibly posing a bigger hurdle for the Uber businesses than incumbent banks.
To follow ebay’s progress, as an example, it is now a fairly regulated site with protection offered through legal as well as non-legal mechanisms such as user ratings and Paypal. It can be safe to assume that if fintech becomes the norm, in near future, such protection measures will also be developed shortly afterwards as technology lives through innovation.
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