The Disruption of Consumer Finance and the Banking Sector

Have you ever heard of financial democracy? No, me neither. But you’ve likely heard or read stories about the increasing inequality in wealth distribution. In my view, the key factor that contributed to our financial system crash was not determined by individual misbehaving, but rather by the failure of the system itself-where decision power is centralized within an array of institutions.

Due to the disturbed trust relationship between savers and the financial sector, individuals now require and expect to be more in control of their financial resources. In other words, we want to be the master of our own capital and logically so. This change in consumer preferences has deep implications for the financial sector, as individuals will favor highly-specialized service providers which can assure a higher level of transparency and decision power.

The industry is experiencing a major shift in terms of “unbundling” (as defined by Fred Wilson in this video), moving away from the centralization of old. Now, only a few companies are fully part of this movement. But they are, in my view, disrupting the industry. More interestingly, these companies are just the pioneers of the movement-and that’s why the FinTech sector is really “hot” at the moment.

Now, let’s discuss examples of these pioneers I mentioned, as they embody the movement of increased control and transparency in today’s financial climate. I purposely chose to focus on FinTech consumer-driven solution, which provides the largest impact on the banking sector today.

1) Wealth / Investment management

Investment management is a key activity for financial institutions. However, unless you are a top-tier customer with several million entrusted to the firm, it’s essentially impossible to track or control how your money is being managed. Especially after the massive shocks some institutions went through, savers are increasingly worried about their money and prefer to be more in charge of investment decisions.

That’s probably one of the reasons why companies like WealthFront in the U.S., Nutmeg in the UK and Stockpot in AUS are gaining large market consensus. These companies not only lowered the barrier to entry (as you just sign up on their website), but also assure lower transaction & management fees (thanks to a leaner structure) as well as better, real-time transparency and control of the investment strategy. Most importantly, they offer savers these benefits without requiring them to exert any effort in the decision making process. In other words, those institutions lessen the hassle of making a savvy choice by walking you through and facilitating your decisions, leaving you, the user, fully in charge.

2) Lending

There are many individuals and small businesses demanding micro loans. On the one hand, financial institutions face overexposure to market and default risk, and on the other hand, individuals want to maintain full control of the way their capital is being allocated. Taking this into account, it is no surprise that companies like (the now public) LendingClub in the US or Funding Circle in UK are experiencing exponential growth. It may seem like a non-overlapping market for banks, but it will actually start to take its toll on the traditional banking sector sooner rather than later.

3) Online Stock Trading

In other words: making the investment in stock-listed companies available to the masses. This is controversial, but extremely disrupting and in line with the new taste of savers for being the arbitrators of their own money. Even though it’s taking the appearance of online gaming, online investment platforms are addressing the same kind of customers that banks serve and, just like for lending, it will increasingly affect their business. A natural evolution of this movement will be the creation of an online marketplace for privately-held shares, featuring lower liquidity, lower regulatory requirements for the companies and higher intrinsic risk. Some initiatives in the EU as well as the US seem to indicate this eventuality is near.

4) Collection of savings and personal finance

How was the banking sector created in the first place? Simple: collection of capital in return for an interest rate and allocation of the same capital for a higher average interest rate.

Today, there is an entire sector of online-only banks, which are offering lower costs and overall better services to their customers, thanks to a leaner and more flexible structure. This enables them to implement new value-adding features to improve their services. EverBank is already public while Moven, Simple and Green Dot are other valid examples. These banks offer full transparency and prove to adjust their technology to the changing taste of savers.

Getting Married? What Are The Finance and Credit Implications?

There is a big difference between looking after your own finances while living alone, or with parents, and living with a partner. The transition can be very difficult, especially if both partners are strongly independent, or one partner is financially weak and the other strong. In fact, it is an area of a new relationship that has many pitfalls if you do not set the ground rules from the start.

It is best to sit down together and quietly plan your finances, even before you get married or move in together. Then, when you do so, it is important to be open with each other, and discuss what may go wrong with the domestic finances if you do not plan correctly. That way, you can work on a plan together, and a budget, and set ground rules for a smooth financial future together. It is sensible to bring the use of credit into that discussion, as there will come a time, maybe from day one, when credit cards and other forms of credit become an issue. Agreement on all relevant credit and finance issues will reduce the risk of problems, arguments and misunderstandings later on.

An early decision to make is whether to keep finances separate or not; deciding, for example, whether to have joint bank accounts or joint credit cards.

The Benefits of Joint Accounts

The advantages of consolidating funds into one current account include:

1. Easier record keeping.

2. Should you apply for a loan at any time, there will be less paperwork.

3. Working closely together on the running of the account may help to solidify the relationship and build trust. It gives an opportunity for both of you to bring out your best co-operative nature.

There is one drawback, though. With two people actively using the account, it is not so easy for you to keep track of the account transactions and balances, especially if you are both using the account a lot. This can be overcome by discussing openly all expenditure the day it happens.

The Benefits of Separate Accounts

Keeping separate accounts will allow each person in the relationship more freedom: each will not need to check with their partner over every purchase. In addition, having separate accounts may create fewer complications in the relationship. It will allow them to maintain a sense of independence, and this can be very important to some relationships.

One negative to a joint finance arrangement is that it can seem unfair. If one partner earns £40,000 per year, and the other only £25,000, the person with the lower salary may feel there is a lack of trust!

If you do decide to have joint bank accounts checking or savings accounts, then you will need to find a system for paying household bills and handling other joint finances together. One option that works well, and that I use, is to have one joint bank account into which you both pay each month for the house expenses. This can work very well, especially if you sit down together and agree the budget first, and what proportion will be funded by each partner. It is important to get this all clear from the start, then there is likely to be less risk of a problem with financial arguments later on.

Joint Credit Arrangements

Something else to consider with joint finances is credit. This can be considered beneficial, or problematical, depending on your individual credit ratings. At some stage, though, you may both want to apply for joint credit. This is most likely with a big purchase, such as a car or a house. It is best to do that if you have joint credit. With joint credit, you will both be 100% responsible for the debt, even if you co-sign a loan with your partner, or add your name to your partner’s credit card account. If, on the other hand, you decide to maintain separate credit, the general rule is that you are not responsible for each other’s debt. An exception to this may be if the debt is considered a family expense.

Should one person have had a bad credit record before marriage, then it is advisable for the other to keep their credit separate. A joint credit application will be considered based on the two crdit scores, and the lower one will drag down the other.

Business Financing and Mixed Signals For Small Business Owners

Business financing programs are resulting in mixed signals for borrowers. Business lenders are increasingly reducing or canceling commercial lines of credit, refusing to refinance commercial mortgages and turning down new requests for small business loans. In contrast to their actual lending practices, most lenders have announced that they are lending normally to businesses. These mixed signals are due to a variety of financial and economic issues, but the end result is likely to be confusion for small business owners.

Having enough cash flow to support daily operational requirements is a critical need from the perspective of a small business owner. Very few businesses are debt-free, and the inability to borrow needed funds on an ongoing basis will quickly produce serious consequences. It is probably fair to say that the average business owner does not understand why they are currently unable to get adequate working capital or commercial loans from their current lender. The primary mission for commercial borrowers is likely to involve locating new sources of capital once they realize that their current lenders might not be up to the task of helping their business financially.

Looking at this perplexing situation from a lending perspective, it is likely that most commercial lenders truly want to be more active in providing small business financing than they currently are. However, many banks are undercapitalized and have been forced to increase their liquid assets to satisfy government standards. This can force such banks to make fewer new loans and to cancel some existing loans. In other cases, lenders have depended excessively on short-term commercial financing sources and now find themselves short of capital to make loans because their own business funding sources are proving to be inadequate.

Some good news emerging from this confusing lending climate for small businesses is that there appears to be an adequate supply of new lending sources to fill the void left by the exit of many banks and other lenders from commercial lending. A prominent commercial lender recently announced that they needed more capital in order to continue making small business loans. Even though the failure of this lender would be inconvenient to businesses using their services, it has become clear that there are indeed other lending sources sufficient for solving the problem.

Despite the unfortunate complications due to mixed signals from lenders, business owners are in better shape than they probably realize to make it through the current business funding chaos. In order to increase the chances of their business surviving, borrowers should take a more active role in their business financing.