The sharing economy works. One only need to look at global behemoths like Uber, Lyft and AirBnB to see proof of the concept – and the truth is that they are only the start of the revolution. Fintech is showing it has the potential to effectively replace a monopoly that has been around for centuries: the banks. Through social capital and economic sharing, applying the sharing economy to finance is steadily gaining popularity through peer-to-peer lending, equity crowdfunding and payment possibilities.
The traditional banking system is already being challenged by fintech solutions like Revolut, SoFi and Robinhood, and it is interesting to see some financial institutions embrace fintech into their modern operations. Progressive banks are starting to take note that if you can’t beat them, join them – and this is a sign of things to come.
Why sharing makes sense
It is easy to see why the sharing economy has grown in leaps and bounds over the past decade. It has been described as “the peer-to-peer based activity of obtaining, giving, or sharing access to good and services.” Perhaps you know it as the gig economy, platform economy, access economy, or collaborative consumption – but whatever the name, it is big business. The sharing economy is estimated to grow from $14 billion in 2014 to $335 billion by 2025.
The sharing economy’s expansion simply makes sense as people attempt to monetize goods or services they just do not use at all times. Data reveals private vehicles go unused for 95 per cent of their lifetime, and couple this with the fact that there are fewer requirements to drive for Lyft, Ola and Uber than for a taxi company means greater supply of rides. Further, prices of shared services are usually more affordable than traditional counterparts. For example, Airbnb rates between 30 and 60 per cent cheaper than hotel rates around the world.
Some of the biggest companies in the world subscribe to the virtues of the sharing economy. Uber and AirBnB are great, international examples. While their ability to attract large swaths of the general population among users is almost unmatched, many do still question whether companies of the sharing economy can be profitable at scale.
For example, Uber raised a record $11.5 billion through 18 funding rounds, ultimately valuing the company at $68 billion. Thanks to the backing, Uber quickly launched operations in 737 cities across 84 countries. However, at the tail-end of 2017, the company reported a third-quarter loss of nearly $1.5 billion. Uber is a global leader in its field – but it is intriguing that with its epic scale does not come epic profits. Far from it, the profit margins are not there.
So while the current crop of sharing economy companies are global leaders and proof of the concept, it is another sector that is projected to take the sharing economy to its full economic potential: the financial sector. Let’s look at why:
Fintech’s big three
Fintech through sharing economy applications threatens to break up the banking complex as we know it – all through the social capital and economic sharing. Evidently, this is where investors feel the sharing economy has the most potential. Fintech is already attracting huge amounts of investment and is the biggest sector in terms of Venture Capital investments. Peer-to-peer lending, equity crowdfunding, and payment possibilities are proving to be the three areas with the biggest potential for fintech through the sharing economy start to come into full focus.
Firstly, equity crowdfunding helps to create a two-sided marketplace between investors and startups. This means a slice of the private company is sold for capital, typically through the sale of securities like shares, convertible note, debt, or a revenue share.
This process is similar to Crowdfunding or Kickstarter campaigns but with possible payouts for those willing to put their money where their mouth is. Platforms include WeFunder– which connects startups with investors online – and the company of this writer, Bloomio – who connect experts, investors and startups through funding.
Secondly, peer-to-peer lending removes the need for banks altogether when it comes to taking out a loan. This method enables P2P platforms to bypass the bank to connect borrowers and investors and does so in a way that is faster and cheaper.
As reported by Forbes, P2P lending has grown rapidly in recent years and is a new source of fixed income for investors – and one which has less volatility than the stock market. Good examples of this in action include Funding Circle – which allows people to lend directly to businesses – and Lemonade – the world’s first P2P insurance company.
And thirdly, possibilities have opened up for different methods of payment. The monopoly of banking institutions have enforced high fees for international transactions and money wiring for far too long – and the technological capabilities of fintech are truly coming to disrupt this moneymaker.
Take for example the Swiss application Sonect, which transforms everyday businesses into ATM machines. Partner retailers allow cash withdrawals for users of the platform through the scanning of a smartphone barcode, which means no more searching for cash machines and no more withdraw fees. These are three of many financial applications that the sharing economy is realizing – and the banks are certainly starting to take note also.
Breaking the banks?
Fintech is the final frontier of the sharing economy because it will not only have the ability to generate huge revenue but challenge a traditional system which does not have user values at its core. Banks have taken advantage of their customers for centuries. The sharing economy means the concept of a bank can be will change forever. In this day and age, an application and user agreement means people can become lenders and groups can become financiers.
Interestingly enough, some banks are realizing that if they can’t beat the fintech revolution, why not join it? Banks in Europe are placing strategic bets across wealth management, lending, payments, regulatory technology, software and blockchain. Banco Santander added eight new fintech investments to the bank’s portfolio in 2017/2018, the most of any other major European bank. Major European banks have also participated in investments to unicorn fintech companies including Prosper Marketplace, Kabbage, and Symphony Communication Services Holdings.
It will be curious to see in the coming years how far the banking sector is willing to evolve to incorporate fintech applications. Nonetheless, the revolution will happen with or without them. It is people who are the real winners here, and they will benefit in the long run with financial options outside of the traditional monopoly. Perhaps the most exciting part of the sharing economy’s rise is that this is just the beginning.