Uber, the dragon and the banking sector

Uber, the dragon and the banking sector

Banks lend money. Taxis transport people from one pace to another. You might not think there is much similarity between the two. But both are based on a simple enough premise. Both have managed to build an undisputed and reliable status quo. Both face challenges to their dominance, and both resist or (at best) slowly adapt to the changing times.

As Albert Einstein said, “Everything should be as simple as possible, but no simpler.” But what is simple in the 21st century? In the world of people transportation, Uber has found an answer. He tapped into the modern world and understood the psyche of modern man and in the process shook up the status quo. But what about the banking sector and specifically bank lending? Over several hundred years of trading surely the banks have had time to develop a product that is as simple as possible? But is the 21st century simple, and if not, where does that leave the banking sector and traditional lending?

Everyone is familiar with the likes of Barclays, HSBC, Lloyds or Santander, and this is because they are banking giants – a veritable banking cartel – which, by the size of their market share, dominate the credit landscape. They should not innovate or be too accommodating or flexible. They have set criteria and fixed requirements – boxes that their customers have to check before they consider lending.

By virtue of their size, they represent a volume business based on typical deals that are underpinned by a methodological and transactional approach that has served them well for decades. The result of this approach is that they manage their risk well and are thus able to lend at very attractive interest rates.

But the risks are changing as the business world evolves in the 21st century. It’s a pace of change that traditional banking risk appetite isn’t necessarily keeping up with. Sometimes all the risk modeling and financial sensitivity analysis in the world can’t answer the question; do I accept this person, his business and his plan?

The question do I accept this man, his business and his plan is more relevant than ever.

Now we enter the world of the dragon and it is in their lair that business finds its finances. In the recent past, this was a niche world beyond the reach of most businesses. But now it is evolving and entering the mainstream under the guise of peer to peer lending.

With low interest rates and lower yields, many private investors and hedge funds are pouring billions into peer and independent lenders. You and I can sit in that comfy leather chair, see the metaphorical whites of a person’s eyes, and make an instinctive decision about them, thus deciding the fate of their dream – a power usually reserved for the super rich… or television personalities.

But the allure of being a dragon, the potential for higher returns for the investor and faster, more convenient loans for borrowers mean this sector will grow and in the process begin to shape the lending landscape.

But let’s bring some context to things. In the current market, peer-to-peer lending to SMEs still represents less than 1% of total lending. However, the number of new entrants to the market is increasing and the amount of money lent is growing rapidly. He has captured the imagination of all wannabe dragons. But more importantly, it attracted the attention of large funds with huge sums of money to invest – enough money to ensure that the investment was not speculative and failure was not an option.

Peer to peer and Uber are here to stay – hop on or ride the last old black cab until the last century.

#Uber #dragon #banking #sector

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