With banks yielding near zero interest rates returns for those with money and turning away loan applications for many who need it, there’s pent up appetite and money in the market for alternative investment opportunities and real return on capital. The Irish Times reports that Irish households have €40bn in deposit accounts, earning an average interest rate of 0.24 per cent, lower than rate of inflation!
Peer-to-peer lending is individuals taking financial matters in to their own hands, removing the bank from the inefficient market equation, replacing institutions with community crowdfunding platforms. The U.S has led the way. Lending Club issued $4 billion in loans by the end of March 2014.
This is the story of disintermediation in financial services, and it disrupts the entire ecosystem; savings, borrowing, investments, transactions and transfers.
America may be ahead of the curve on micro-finance but Africa is the use case for mobile payments. As The Financial Times reports, “In Kenya, where M-Pesa launched in 2007, the platform is so widely used that a third of the country’s $44bn economy washes through the system”. The Guardian explains of mobile banking, “If you want to pay a utilities bill or send money to a friend, you simply dispatch the amount by text and the recipient converts it into cash at their local M-Pesa office. It is cheap, easy to use and, for millions of Africans unable to access a bank account or afford the hefty charges of using one, nothing short of revolutionary.”
Here is an extraordinary example of a mobile telecoms provider, Vodafone, harnessing the global connectivity of their mobile networks to transfer credit rather than calls, texts or data. This is a radical shake-up in how money moves and who moves it. Vodafone recently announced it had acquired an e-money licence to operate financial services in Europe, paving the way for change in how we pay and get paid. Money is still the base currency, unlike digital currencies like BitCoin, as it is converted to and from credit at both ends, but it is not the banks transferring the credit or charging the transaction fees and commissions. The pendulum of power has swung away from the financial service providers to the mobile and internet services providers (Telcos & ISPs). Little wonder Google & Facebook are scrambling to create their own internet infrastructures through initiatives like Loon.
Here at home in Ireland, Realex Payments is our early adopter in mobile payments, releasing Realex Fire Personal Account. Realex Fire is a regulated financial institution, authorised by the Central Bank of Ireland. Unlike Irish banks however, Realex is not a credit institution. It is an online current account facility where people can transfer money within the community at low to zero commission. Again, signs point to redundancy in day-to-day utility banking services.
Centralised financial regulation has been shown to be a misnomer over the past 20 years as banking practices wrought havoc on world economies. Just as banks require independent governance, so too must new FinTech models demonstrate due diligence, anti-money laundering and consumer protection. With the balance of power shifting to crowdfunding websites, money transfer services such as M-Pesa or mobile payments networks Realex Fire, the responsibility of compliance is with a new team of players and the game is regulated by the punters. The rule of law is crowd-sourced from within the community itself. Whistleblowing and neighbourhood-watch work in modern day policing. Community governance of financial systems in partnership with financial regulatory authorities could too.