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Are banks being left behind in the race towards digital platforms offering alternate finance models
A McKinsey article which was originally published in the FT in October 2013 highlighted the lack of emphasis which European banks were placing on digitising their offerings. The article reported that “90% of European banks invest less than 0.5% of their total spend on digital” leading to the warning that banks were in danger of being left behind as the rest of the world moved to embrace the potential which digital platforms could bring.
Move on one year and we are already seeing the results of a sea change in the way in which people and businesses view finance. This week the Treasury announced a consultation on creating a third form of ISA which would accommodate peer to peer lending. This effectively cuts banks out of the lending process with savers lending money directly to individual or company borrowers. To date some £1.6billion has passed through peer to peer sites and if the ISA proposal comes to fruition then this market is likely to blossom still further.
The popularity of putting money directly behind favoured projects can be illustrated by The Eden Project which launched a mini-bond this week to raise funds to create a learning village. Offering a 6% per annum return, the bond reached its maximum £1.5m target in just 20 hours. And even when the rewards are non-financial, businesses and community projects are drawing in backers via sites such as Crowdfunder which has helped thousands of projects to get off the ground.
Every pound lent, borrowed or invested via non-traditional sites is another reminder to legacy banks and finance houses that they need to step up to digital or fall further behind in the race. As the McKinsey article said “Digitization will change the traditional retail-banking business model, in some cases radically. The good news is that there is plenty of upside awaiting those European banks willing to embrace it. The bad news is that change is coming whether or not banks are ready.”