Role of A Sharing Economy in Finance Ecosystem

Sharing economy may have started with cars, taxis, and hotel rooms, but financial services will follow soon enough. Our 8th part of Fintech series speaks on the same.

The Sharing Economy

The sharing economy is a broad concept that has roots in online peer-to-peer communities. One of the first such platforms with broad appeal was created by eBay Inc. because it connected buyers and sellers for specific items. Darlings of the movement, such as Airbnb and Uber, have transformed long-standing industries based on these principles.

Uber as a ridesharing service integrated payment solution where the customers scan their credit cards once gives an indication of the future of payments where the act of paying for a service is integrated with the service itself.

The same can be said for insurance, where Airbnb offers homeowners insurance and host-protection insurance as an integrated part of the service.

Finance and Sharing Economy

In the context of finance, the sharing economy refers to decentralized asset ownership and innovations that match financial counterparties in manners that were previously impossible. Peer-to-peer lending and insurance, crowdfunding and social payments are all growing in popularity to meet the evolving tastes and needs of consumers and businesses.

For the financial sector, the blockchain technology represents such a technological paradigm shift where the ledger itself is public and distributed. This eliminates the need for costly elements such as clearing and settlement, making blockchain and micropayments the ideal platform. This enables more services to be leased on a granular basis like paying for Wi-Fi by the minute as well as removing more of the friction in the payment process.

Evolution of the Finance Industry

Increasingly, financial institutions may play either an intermediary role, with less at stake, or just be one node in a network. This evolution will be driven by peer-to-peer transactions, enabled by partnerships between today’s financial services firms and a new breed of Fintech companies.

A number of enabler companies target specific verticals like student debt, or connecting debtors and investors. They are building platforms that enable ordinary individuals to raise funds and draw credit lines from retail investors. Apple has filed a patent application for “person-to-person payments using electronic devices” that could allow iPhone users to transfer money more easily. This could potentially commoditise retail banking even further.

Instead of using relatively high cost bankers to broker the connection between those who have and those who want, the disruptors are using technology to make the match: faster, cheaper, and maybe even better.

In Developing Markets

In developing markets, where branch networks are typically less dense, particularly in rural areas, physical distribution will continue to evolve, and banks are more likely to partner with new entrants to create alternative distribution channels. For example, M-PESA in Kenya, handles deposits and payments using customers’ cellphones and a network of agents. According to a recent report, the service is now being used by 90% of the adult population in the country.

In the new digital age, when businesses as well as individuals are increasingly techsavvy, new customers will gravitate toward lower fees, convenience, and ease-of-use. And once there is enough critical mass and liquidity, the network effect takes over, and the disruptors’ market share could grow exponentially, as it has in Kenya.

Conclusion

According to McKinsey, 80 percent of customer interaction with their banks is through paying for goods and services. When this is integrated into the service, banks become invisible in everyday spending. Regardless of its criticism, the sharing economy is expected to generate revenues up to $335 billion by 2025, and its impact is predicted to affect nearly all industries.

(References: PwC, Investopedia.com, techcrunch.com)