Mohamed El-Erian has a very smart piece up at Project Syndicate in which he speculates on the rise of a new generation of disruptive startups in the financial sector. A large-scale transformation is likely, he argues, because today’s entrenched companies are facing the twin challenges of increased regulatory pressure combined with unnaturally low interest rates.
As a result of these two factors, established institutions – particularly the large banks – will be inclined to do fewer things for fewer people, despite being flush with liquidity provided by central banks (the “liquidity paradox”). And banks and broker-dealers can be expected to provide only limited liquidity to their clients if a large number of them suddenly seek to realign their financial positioning at the same time. But this is not just about them. The fact is that providers of all long-term financial products, particularly life insurance and pensions, have no choice these days but to streamline their offerings, including a reduction of those that still provide longer-term guarantees to clients looking for greater financial security.
This creates an opening just as a new generation of consumers is coming of age in the era of hyper-personalized à la carte services. We’ve already seen some innovation taking place in the personal lending space, where companies like Kabbage and Lending Club are trying to provide smaller loans to individuals and entrepreneurs using algorithms that take things like social network behavior into account when assessing creditworthiness. And though the luster of the bitcoin experiment faded some as early adopters lost money when hackers hit a couple of exchanges, peer-to-peer platforms remain highly promising.
Will we get an Uber of banking out of all this ferment? Perhaps. Or perhaps more likely, as El-Erian suggests, we’ll get a proliferation of new services as the titans of the financial sector either try to “self-disrupt”, or partner with (or outright buy up) the innovating start-ups.
From the customer’s standpoint, however, these changes will not just be welcome, but may well be necessary. With the employment landscape of the future likely to demand much more flexibility from the workforce, the consumer-facing parts of the financial sector need to adapt as well.