Influence of the Confluence: Is It the Right Time for Alternative Financial Services to Become Mainstream?
Posted by Dave Uhryniak, financial services research leader, Deloitte Services LP, on September 11, 2013
“Honey when you go to the store, buy milk, refinance the mortgage and get a quote for auto insurance.” Sound crazy? It might not be as crazy as you think.
Could the current confluence of industry and regulatory factors potentially push alternative financial services into the mainstream? First, a trust deficit in traditional institutions could present the possibility of using alternative providers1. Second, technology allows consumers to directly access financial services without using traditional distribution models of banks and insurers. Next, traditional providers may not be engaging unbanked and underbanked consumers and the financial needs of these groups may be met via technology focused alternative providers. Lastly, regulation is potentially enabling further penetration of alternative providers, as restrictions fall for non-financial market entrants and rise for non-bank financials, such as the recent expiration of a Dodd-Frank provision.
For decades, consumers have trusted financial institutions to safeguard their home, savings and family. However, recent examples have shown that if a cheaper, more convenient option arises, consumers have demonstrated a willingness to adopt the service. Consider that PayPal, a technology company, controls 60 percent of the online payments market2. This dominant market share is likely a result of consumer willingness to use and trust not only new providers, but also new technology, as alternative providers are increasingly using new technologies to improve consumers’ lives.
One example of a technology that has improved consumers’ lives is the development of social networks, which allow us to keep in touch with each other easier and faster than ever. Social networks have fostered peer-to-peer exchanges and in financial services, peer-to-peer lending has established a niche foothold in the market. Now the model is expanding. For example, a start-up company based in Germany has developed a peer-to-peer insurance model where customers form their own insurance networks. Among the benefits: they pay lower premiums. The company provides online peer-to-peer insurance for household, personal liability and legal-expenses insurance.3 It is possible that this peer-to-peer insurance model could soon reach the U.S.? The product lowers costs and addresses market needs.
New competitors aside, the reality is that some traditional institutions may be allowing the needs of some markets to go unaddressed. In Little League, my coach told me to “hit it where they ain’t”. Poor grammar aside, the advice can be as relevant in business as it is in baseball. At year-end 2011, 34.1 million U.S. households were classified as unbanked/underbanked, up 10.7 percent from 30.8 million in 2009.4 Traditional financial institutions may not be engaging this segment, making it a viable entry point for alternative providers. Consider one U.S. based technology-driven consumer financial services company that offers debit/ATM cards and bypasses the traditional checking account. Consumer use is robust, as the purchase volume of the company’s products has grown rapidly since 2009 and reached a record level in 2Q13. Transactions can occur at major retailers the unbanked/underbanked already frequent.
Regulation is also enabling alternative providers to enter the mainstream. Among the most extensive pieces of financial regulation in the past few years has been the Dodd-Frank Act. A Dodd-Frank provision that prevented commercial firms entering financial services has expired.5 The provision imposed a moratorium on the Federal Deposit Insurance Corporation (FDIC) providing deposit insurance to any industrial bank, credit card bank, or trust bank that was directly or indirectly owned or controlled by a commercial firm as well as acquisitions of these institutions by commercial firms. Without this provision, a commercial firm may buy or launch a financial services company.
Adapting to changing market conditions is a key to surviving in any industry and financial services are no different. The last transformative period occurred in the late 1990’s when regulatory changes enabled the financial supermarket phase. Current changes being driven by regulation combined with technology and sentiment could potentially enable alternative offerings. While the entire impact of the confluence is unknown, one likely outcome could be the purchase of financial products and services becoming as ubiquitous and as easy, as buying milk.
1Edelman “trustbarometer”, 2013 Annual Global Study, Financial Services Industry Findings, http://www.edelman.com/insights/intellectual-property/trust-2013/trust-across-sectors/trust-in-financial-services/
2The Motley Fool, “Can PayPal Continue Compete with Big Banks?”, Stephanie Faris, July 21, 2013
3The Economist, “Friends with Benefits”, T.R., June 15, 2012
42011 FDIC National Survey of Unbanked and Underbanked Households, September 2012
5Dodd-Frank Wall Street Reform and Consumer Protection Act, Title VI – Improvements to regulation of bank and savings association holding companies and depository institutions, Section 603, Moratorium and study on treatment of credit card banks, industrial loan companies and certain other companies under the bank holding company act of 1956.