Have you noticed the rise in small and peer-to-peer lending?
The latter is where you can become a lender yourself.
You log onto a market place, stake some money and collect interest payments. That’s if your borrowers don’t go bust of course.
It’s almost as if we’re going back to the times of old, where lenders were individuals rather than institutions.
Maybe the most famous private lender was Cosimo de Medici.
In the 1400s he set up shop to lend and borrow money.
He wasn’t particularly large. But he found a niche. He would loan money for church construction. It was a pretty safe bet with so many Catholics running around.
Teaching his sons the trade, Cosimo’s little lending shop grew quickly. They expanded from construction loans to everything else.
Within a generation everyone in Europe knew the Medici family.
They swallowed competition, invented the idea of a holding company and double-entry bookkeeping.
During their height, the Medicis didn’t resemble private lenders, but one of the most powerful institutions in the world.
They looked like one of the Big Four today, only bigger and more influential.
What eventually stopped the banking empire was a complete revolt. The Catholic Church led a coup against the Medici Bank, which was then run by meek grandsons.
Maybe we need the same to cut the Big Four down to size…
The newest ‘new bank’
There’s a new bank on the block.
It’s called Douugh.
Set up by SocietyOne (peer-to-peer lender) co-founder Andy Taylor, it’s another one of these neobanks: banks that are 100% digital.
If you remember on Friday, I wrote about a neobank called WeBank. They’re a part of the billion-plus WeChat ecosystem.
Along with Douugh and WeChat there’s also Monzo, Xinja and N26 ready to topple the Big Four…
Douugh has developed smart bank accounts according to the Australian Financial Review. And that could make all the difference when offering rates…
‘The company, which has developed a so-called “smart” bank account, with an artificial intelligence-based personal finance assistant known as Sophie, has secured a wholesale banking deal with Armidale-based Regional Australia Bank, meaning it will be able to offer full bank accounts later this year.
‘The partnership agreement means Douugh will bypass the need to go through the APRA approval process, which saw Volt Bank announced as Australia’s newest bank on Tuesday.
‘The start-up aims to stand out from the other emerging tech-led alternatives to established institutions, through its smart assistant, which will calculate a customer’s likely expenses and advise them on spending habits, in order to increase their financial awareness and reduce their reliance on credit card debt.
‘Mr Taylor said Douugh was likely to be most popular among a demographic known as the HENRYs, or High Earner Not Rich Yet, because it automates personal finance to a certain extent and educates customers about accumulating wealth.’
This could give Douugh the rate advantage, meaning their technology is better at assessing risk and therefore could offer lower rates to those borrowers it knows are safe bets.
Yet I doubt it could take billions worth of business away from the Big Four overnight.
I’m sure you could even get a better rate for whatever loan you have right now. All you have to do is call up a competing bank and organise some refinancing. Yet you probably won’t do it for a tenth of a percent.
Why? Because it’s a hassle to switch banks. There’s paperwork involved, it’s not always seamless or stress-free. Most people will just stay put if the interest rate they pay is similar to the current market rate.
And even if Douugh does make inroads on the Big Four, it won’t last. Proprietary technology is not a sustainable advantage.
Just look at what happens with smartphones. Apple brings out a new version that’s better than Samsung’s, yet months later Samsung does the same.
There are smart developers everywhere that can develop systems to mimic Douugh’s results. The Big Four has the means to hire a whole lot of these smart people.
That’s why in the long-term, I think the Big Four will hold onto their 80%-plus market share.
And unless regulators continue playing favourites, that how it’s going to be for a long time.
For local banking
I would absolutely love if Douugh and the rest toppled the Big Four. A decentralised banking system is not just good for you and me, it’s good for the economy.
It’s good for you and me because more banks will compete for our business. And that competition will lower rates and improve the quality of service.
It’s good for the economy because local banks will be allowed to thrive. And it’s these local banks that will create money for local businesses, encouraging them to produce more, adding to total output and growth for Australia.
But it won’t happen…
And that’s because the Big Four have scale of information and regulatory help.
‘The Big Four don’t just have scale on their side, they’ve got the help of regulators. The ABC wrote in 2016:
‘The big four banks enjoy a $19 billion advantage over their smaller rivals by still being able to self-calculate the riskiness of their home loans according to analysis from the Australian Prudential Regulation Authority.
‘Despite a new regulatory framework requiring the big banks to hold larger top tier capital buffers, their ability to internally assess their asset risks is still a huge advantage in terms of the amount of “expensive” capital locked up and their ability to access cheaper funding.’
‘The average capital risk weights for a standard bank is around 39% down under. For the Big Four, it’s about 25%.
‘That means the Big Four can lend out far more cash and take on much more risk than most other banks.
‘The Big Four also have the comfort of knowing a bailout is always there when they need it. The Australian Banking Association explains:
‘One of the reasons being suggested for a new levy on Australia’s five largest banks is that it is compensation for the Federal Government’s implicit guarantee.
‘The rationale is that these banks are so important to the domestic financial system that their failure would cause significant disruption, and therefore in a crisis the Government would provide financial support to prevent these banks collapsing.’
‘It’s a privilege that not all banks get, especially the smaller ones.’
For Douugh and others to get on top of the Big Four, which I would love, we need regulators to change their stance.
We might not necessarily need the Catholic Church to lead another coup. But we do need regulators to remove their favouritism for the Big Four.
For local banking,
Editor, Money Morning
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