It's Banking Jim, but not As We Know It

I’m sceptical about the predicted rise of Social Banking, peer-to-peer banking or ‘Facebank’.

However I think that disintermediation in financial services markets, driven by a combination of social and algorithmic enablers, will be a powerful and disruptive reality in the next few years.  

‘Disintermediation’ was a buzzword of the late 1990s, the fall of the traditional brokerage to low-cost online stock trading was touted as its first scalp, but it seemed to run out of steam and drop off the hype radar.

In other words, Disintermediation was one of those trends that appeared on the cover of Wired Magazine one month, hadn’t transformed the world by the following month, so was quickly overlooked. But while the hype curve subsided, the reality was (and is) slowly, inexorably building.

Disintermediation has at its core the open, free access to individual market participants of: market information (data); and the tools to perform aggregation, search, filtering and analysis on that data. In the pre-digital world, this access was expensive in terms of effort and money, and restricted to intermediaries or agents. It should not be so in the digital world. Although there are regulatory barriers protecting agents in many markets, I believe these will fall as individuals realise they can bypass costly intermediaries, and governments accept that potential gains in productivity far outweigh the interests of the intermediaries.

On the extinction list are the usual suspects - recruiters, real estate agents, etc. But also, more tantalisingly, I think the process of disintermediation may completely transform the global banking system as we know it.

A new financial paradigm will require BOTH ‘social’ and algorithmic governance. The social and altruistic elements of peer-to-peer online banking and microfinance will combine with: tools to perform real-time analysis of risk/return across large, live datasets; and willingness to make personal finances semi-public in order to significantly reduce financing costs.

We’ll see completely new businesses, and new disintermediated relationships between depositor/borrower, insured/insurer in services like student loans, business receivables finance, consumer credit, who knows what else...