The way that financial services are delivered to consumers is undergoing profound change. In the same way that businesses such as Uber are revolutionising personal transport and Airbnb is transforming accommodation services, technology is empowering consumers to access a host of financial services in totally new and more efficient ways.
Democratising the marketplace
Whether it is in financial advice, insurance or lending, the rise of technology is enabling new delivery systems to be created that effectively put more control in the hands of the buying public and put more money back in their pockets.
Take the example of insurance. A technology start up known as Trov has spawned a revolution in insurance purchasing. From humble beginnings in San Francisco, it is now spreading across the globe, including Australia. Trov simply allows consumers to purchase their insurance on-demand from their smartphone, with micro control over which items are covered, where they are covered and when cover starts and stops – all with a simple swipe of the smartphone screen. You only pay for the items you really want to insure, so there is no longer a need to conform to the rigid policy constraints of traditional insurance systems.
Financial advice is undergoing similar ‘digital disruption’ with the advent of “robo-advice”. While this new channel may not fully replace personalised advice from a human, it does offer an alternative for investors to access certain levels of technology-based advice in areas such as choosing investment options for their portfolio. An investor can submit details on their age, gender, income, assets, financial goals and risk tolerance to the robo-advice provider, which then uses this information to develop investment recommendations based on algorithms. Removing human intervention reduces cost and thereby saves fees for the consumer.
A revolution for borrowers and investors
Ever heard of peer-to-peer lending? If not, you soon will! Just as robo-advice and smartphone insurance apps are transforming financial advice and insurance, peer-to-peer lending through companies such as RateSetter is opening up the lending marketplace for the benefit of borrowers and investors alike.
Peer-to-peer lending (also known as marketplace lending), offers a novel alternative to traditional financial institutions. The concept involves matching people who have money to invest directly with people who are looking for a loan. This is done using an online platform, which effectively bypasses the need for a financial institution.
The attraction for investors is in the potential for achieving higher returns while being able to control the level of risk they take on. They can specify parameters on the use of the funds they invest, such as nominating the interest rate, credit criteria and the loan period to reflect their risk appetite.
For borrowers, the attraction is being able to get access to finance at more competitive rates than are available through larger financial institutions. Rather than having a ‘middle man’ setting the rules and rates, they have direct access (via an online platform) to the marketplace of investors who are looking to lend.
The changes are here to stay
While some of these concepts are only in their infancy in Australia and may seem a little too ‘left field’ to actually take off, the reality is that they are already becoming well established in advanced economies around the world. Peer-to-peer lending, for example, is already capturing a substantial slice of the market in the USA and UK, so there is little doubt that it will continue to transform the way we invest and borrow.
The ultimate test of just how entrenched these new digital platforms are becoming is their success with consumers. For example, in the UK the British Government is lending via RateSetter to fund SMEs. RateSetter has funded GBP1.8bn in the UK, representing some 390,000 loans – a strongly growing share of consumer and SME lending. Australia is a few years behind, but growing just as fast.
Large institutions are also getting behind them. Insurance giant, Suncorp, is backing Trov in the US and financial services colossus, Satander, is getting involved in peer-to-peer lending in the UK. It’s a classic case of “if you can’t beat them, join them” and convincing proof that the changes are here to stay.
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