The article by Bondora CEO and co-founder, Partel Tomberg, originally appeared in the European Credit Research Institute Newsletter.
Marketplace lending will make universal banks obsolete by giving everyone the opportunity to provide capital directly to consumers and businesses. Every consumer and small business should have an option to find the best service provider for every type of their financial needs instead of having to buy all services as an expensive bundle.
Every product within traditional banks’ offering, from current accounts, to foreign exchange, to lending and investment management, can now be purchased from an alternative fintech vendor. Those vendors are highly focused and efficient, which makes their services cheaper, faster and easier to use for the end customer. Over the next decade, these changes will replace today’s universal banks with smaller, single product focused, service providers that are loosely coupled through different marketplaces.
This future will ensure long-term stability, as a failure within a single product (e.g. US sub-prime mortgage lending) will no longer cause a financial system collapse. There will be no “too large to fail” notion in the world where financial services are provided by a myriad of highly focused and efficient players.
A financial system that is driven by open marketplace principles will accelerate economic development by reducing financing costs for the end users, increasing credit availability and ensuring supply of credit even at the times of economic crises.
Unbundling of universal banks has same benefits, as unbundling of electricity generation, transmission and distribution. However, while unbundling of vertically integrated utilities was enforced by the regulators, unbundling of banking is enforced by the technological innovation.
Stand-alone service providers can focus solely on improving a specific product or solving a unique need without having to worry about the legacy technology, regulatory burden in un-related services and conflicting incentives from other business lines.
In addition, different lenders with a diverse risk-appetites and cost-structures will be able to finance a wider spectrum of borrowers ensuring competitive credit terms to all segments of the society.
Finally, separating services protected by deposit protection schemes from other businesses will ensure that regulators and consumers alike will have transparency over where the raised deposits are invested and taxpayers will not have to pay for excessive risk-taking any longer.
All this will make for a very stable and effective system propelling economic development and making large-scale financial crises something for the history books.
Technology will inevitably unbundle banking and unleash economic growth, but proper regulation can help this change occur faster. Regulators need to start with forcing the public sector and financial institutions to open up and share their data. The data that is necessary for credit underwriting, customer identification, managing counter-party risks, and understanding a financial service provider’s own financial health need to be open and available to everyone. Transaction ledgers need to be public, a single data exchange protocol standard shall be introduced and homogenous sets of data should be made available all across Europe.
Reducing information asymmetry between service providers, their customers and partners will slash transaction costs; and consequently will cause unbundling of the industry without regulators having to enforce such change.
We at Bondora have embraced open data in order to develop the first single marketplace connecting borrowers and lenders all across Europe through personal loans. The transaction ledger, including all loan applications, issued loans and payments, is public and available for download to anyone.
There are a number of service providers that use this data to provide our customers with added insight and advanced investing tools. We envision that there will be thousands of services built on top of our open marketplace serving both borrowers, lenders and our partners. Openness is vital to fulfil our vision of seamlessly connecting every European consumer with millions of investors to allow both sides to get the best possible deal in seconds.