Scientists believe Homo sapiens out-competed the other Homo species through its ability to organize large groups on the basis of faith in abstract ideas, like religion or nations. Looking out across the gleaming density of London’s City financial district, built on trust in the strips of paper and numbers on screens that we call money, it seems we retain that talent. Anthony Clark-Jones, a senior manager in UBS’s Digital Consulting practice, has been studying Crowd Capital Raising (CCR) since it began, and he agrees CCR is a good example of this human feature.
CCR involves funds being transacted through online marketplaces. Both parties can easily access these dedicated platforms via laptop or smartphone. Low overheads mean that attractive rates can be offered to both sides. The platforms use their own algorithms to assess risk and take a cut of each transaction. CCR markets have developed quickly for business and consumer loans, as well as for property mortgages, student loans, invoice trading and equity crowdfunding. Cheerleaders have described CCR as the ‘democratization of finance’.
The evolution of peer-to-peer markets
Anthony sees these ‘peer-to-peer markets’ as the latest stage in the evolution of the financial markets, which we sapiens have developed. “First were bearer assets,” he explains, “as people began to trust enough to give cash to businessmen for instruments they could hold, like share or debt certificates. Next, banks and other intermediaries came along – centralizing these assets, using paper-based accounts and extending geographical reach. The third stage was when counterparties adopted electronic technology, allowing still more complexity. CCR is part of a fourth stage: intelligent technologies allowing transactions – at a far greater scale – to revert to something more like the peer-to-peer foundations, with platforms linking people for finance just as they do for taxis, news and retail.”
He sees the 2008 financial crisis as the moment that ushered CCR into being. “Suddenly, the banks were reluctant or unable to lend, while smart technologies offered a convenient way for peers to interact, with trust growing in website-based companies, just as improved analytics let these platforms grade and link the lenders and borrowers.” Initially there was a propitious moment for the new platforms, as the banks’ tightening meant there were many good risk borrowers, easily enough to sate the moderate amount of lenders.
CCR is part of a fourth stage [of evolution]: intelligent technologies are allowing transactions – at a far greater scale – to revert to something more like the peer-to-peer foundations, with platforms linking people for finance just as they do for taxis, news and retail.
Banks are catching up with CCR
CCR volumes have continued growing ever since, hitting $12bn globally in 2013 and an estimated $432bn in 2017. Almost three quarters of this is in China, where gentle regulation mixes with a population very open to using technology and trusting in platforms. Most of the rest is located in North America, with the rest of the world conservatively lagging far behind.
Anthony expects challenges ahead for CCR, even as UBS forecast the market to reach almost a trillion dollars in 2020 – still driven by China. “Banks are more willing and able to lend again, and have improved their technology and user experience. There are fewer good risk borrowers unable to access bank lending, yet at the same time much more capital looking to lend through CCR. So, returns are falling and default rates rising.”
Increasingly, Anthony believes, some of the differences between CCR and traditional banking will start to dissolve. “CCR has opened up a new perspective,” he says. “Even as they must negotiate their own numerous legacy data systems, banks are steadily moving towards offering their customers increased convenience, access, transparency and better use of data that the CCR platforms once used to stand out.”
Banks are steadily moving towards offering their customers increased convenience, access, transparency and better use of data that the CCR platforms once used to stand out.
The most precious commodity: consumers’ trust
In finance, intermediaries are not doomed to shrink into a limited niche share, as might be the case for, say, travel agents. One advantage that the banks have is their ability to cross-sell a much wider range of products than do CCR platforms. Now that most banks have woken up to the requirements of the digital era, they can also in principle match or potentially do better than CCR platforms for user experience, data analytics and the management of risk.
Anthony believes that probably the most precious commodity may be the trust of consumers. This is vital as banks (or their competitors, such as technology companies) become our partners not just with the funding of regular consumption and provision of savings products, but also of the financing of housing, education, healthcare and old age. It is becoming ever more normal that these fundamental pillars of our lives are provided through websites by people that we never meet. Sapiens still shows its uniqueness, and there are significant opportunities for those who are able to manage this properly.
Anthony Clark-Jones is a strategy and digital transformation specialist. After serving in the British Army he gained an MBA, began a business career and is now at UBS in the recently formed Digital Consulting practice, leading the Utility Settlement Coin program.