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Remaking the Branch

There are few topics that so engage the minds of retail bankers these days as the future of the branch. The continual migration of customer transactions from the branch to electronic channels can no longer be ignored, particularly in an era when profitability is under pressure and every expense must be scrutinized.

The Mobile Transformation

The mobile banking landscape has changed greatly in recent years as customers graduated from simply checking their account balances on the cell phone to actually making payments via the device. Increasingly, mobile banking is transmuting into mobile payments.

It’s a Wonderful Digital Life, for Digital Disruptors
When it comes to linking people who need money with people who have money – the fundamental principle of banking – the digital disruptors have the competitive advantage. by CHRIS SKINNER
Mar 12, 2014  |  1 Comments

I recently had an epiphany. It was not painful, but it was enlightening.

The realization occurred to me as I looked at this chart from Zopa, which shows rocket-like growth at the alternative lender. It’s an interesting chart, especially the hockey stick rise in funds transferred as the financial crisis hit, and relates to a recent headline in the Financial Times about Zopa securing a £15 million investment from Arrowgrass Capital:

Lending Club, the largest P2P lender, has issued $3.5bn in loans since 2006 and reached a valuation of $2.3bn late last year. The company is considering a US stock offering expected later this year. Prosper, the next biggest US P2P, raised $25m from investors including BlackRock and Sequoia Capital in September ... [Zopa] has facilitated £455m of loans over the past nine years.”

OK, so these guys are growing. Fuelled by a squeeze on lending facilities at traditional banks, the person-to-person (P2P) lenders have found a niche and that niche is becoming a segment. Soon, if the innovator’s dilemma is to be believed, this segment will become mainstream lending. In fact, it may already be mainstream, as business lending grows through Funding Circle:

“Set up after a trio of Oxford University pals quit their jobs in August 2009, Funding Circle is lending £16 million a month to small businesses frustrated at not finding the finance they need from a bank. In just three-and-a-half years, it has doled out more than £200 million.” Then there are the crowdfunders who have moved beyond kickstarter and into core bank services, such as mortgages, as illustrated by firms such as The House Crowd.

So here’s my enlightenment and it’s at the core of The Digital Bank. Banks historically have married those people with money to those people who need money. They acted as the intermediary between the investors and borrowers. They enable the movement of funds from one to the other whilst managing the risks to ensure the money is not lost.

That is the basics of banking as brilliantly articulated in the movie It’s a Wonderful Life. Facing a bank run, George Bailey, the bank manager as played by James Stewart, says to his depositors: “You’re thinking of this place all wrong. As if I had the money back in a safe. The money’s not here. Well, your money’s in Joe’s house ... that’s right next to yours. And in the Kennedy house, and Mrs. Macklin’s house, and, and a hundred others. Why, you’re lending them the money to build, and then, they’re going to pay it back to you as best they can. Now what are you going to do? Foreclose on them?”

That is the core of banking. Now, back in George’s day, he facilitated these transactions physically in the branch network. If George was part of a modern day global bank, the Kennedy’s house in Bedford Falls would be funded by depositors in branches everywhere. But it would still be a physical transaction.

Now we move to the Digital World and that model is being disrupted by the Zopa, Lending Club, Funding Circle and House Crowd mob. What these new guys realise is that you can marry money that needs to earn interest with money that needs to be borrowed through a global, remote relationship. It does not need a physical overhead. It does not need the George Bailey bricks-and-mortar to take the transaction from Mr. Kennedy to Mrs. Macklin. It can be completely digitized.

In so doing, two things happen. Mr. Kennedy’s house in Bedford Falls can be funded by Mr. Chukwumereije from Lagos. In other words, any person anywhere on the planet can save or lend with any other person on the planet.

Second, the cost of enabling that transaction is virtually nothing because it is digitized. The underwriting, credit checks, calculation of interest and marriage of the saver and lender is completely automated. No human hand or head involved.

That is where the disruption occurs, as the banks evolve from their soup of bricks and mortar. To fund their legacy, banks operate at 4, 5, 6 or even 8 or 10 basis points. Digital disruptors operate at 2, 1 or even 0.5 basis points. The lenders and savers in the digital world are getting a better deal. Their borrowing costs less and their savings earn more. That is thanks to the basis point change through digitisation.

And, as all that change takes place, the only thing that slows it down is customer inertia, or lack of knowledge or suspicions, and regulations.

Mr. Skinner is chairman of the Financial Services Club, CEO of Balatro Ltd., comments on the financial markets through his blog the Finanser, and is the author of Digital Bank. He can be reached at chris.skinner@fsclub.co.uk.

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motor ryder
3/13/2014 12:51 PM

The other fact -- somewhat glossed over -- is that in Mr. Bailey's case, if Joe didn't repay his loan, then the bank would still pay interest and return capita to the depositor, either from the earnings on the loans to Mrs. Kennedy and others or out of the capital of the bank's shareholders. In the disintermediated case -- P2P lending -- the "depositor" (lender) doesn't get his or her money back if the borrower defaults. This is another factor that slows the adoption of this model.