Garnet Capital Advisors Blog

Fledgling startup companies could one day dominate the banking industry, financial expert Richard Magrann-Wells wrote in a recent American Banker piece.

Innovative companies disrupting industries
Web-based startups like ZipCar, Uber and AirBNB have already disrupted industries such as transportation and hospitality in a brief period of time, observed Magrann-Wells, a senior vice president and Financial Services Practice Leader for Willis North America. While no application has had this effect on the banking sector, the situation could soon change, he asserted, noting the proliferation of apps that facilitate person-to-person payments.

P2P lending proliferates
He also pointed out the quick rise of peer-to-peer lending platforms, emphasizing that these companies have earned credibility and drawn significant capital. Magrann-Wells used San Francisco-based Lending Club as an example, noting that company's valuation is almost $4 billion.

Earlier this year, the company took the first steps toward holding an initial public offering, hiring investment banks Goldman Sachs and Morgan Stanley, people familiar with the proceedings told The Wall Street Journal. In selling shares to the public, the company might seek an even higher valuation and aim to raise more than $500 million, some of these individuals told the news source.

Regulatory implications
If innovative startup companies like Lending Club disrupt the banking industry, it could have massive implications for regulation and compliance, Magrann-Wells emphasized. These firms will present a whole new host of risks for regulators to monitor, including greater chances of cybersecurity problems and fraud.

As these companies proliferate and their associated risks grow, government agencies might have a hard time keeping up, he stated. While innovative banking methods might present greater risks, consumers are frequently willing to take on this danger in exchange for more convenience. This willingness could prove troublesome for more traditional banks that are used to focusing on risk management instead of innovation.

Industry observers look to Lending Club
Industry observers may have good cause to be concerned about such disruption, as some think the P2P lending model used by Lending Club is simply a sign of what the banking industry will look like, according to The Wall Street Journal.

Lending Club is typically regarded as the best-known company in its space, and Its founder and chief executive, Renaud Laplanche, recently served as the keynote speaker for P2P lending conference Lendit. As a result of this prominence, many other firms will likely observe the San Francisco-based company's IPO.

How banks can stay ahead of the curve
In this situation, where innovative companies are disrupting industries and market participants will be watching P2P lending's most visible company offer shares to the public for the first time, what can more traditional banks do to keep up or get ahead? Being proactive in this space may be the key to protecting key sources of revenue, such as loan origination.

One option is collaborating to develop direct lending alternatives and universal payment systems, Magrann-Wells asserted. Alternatively, larger banks can leverage their cash reserves to purchase innovative startups.

BBVA buys Simple to offer digital solutions
Spanish bank BBVA took that route earlier this year, paying $117 million to buy disruptor banking company Simple, according to American Banker. As a result, the two financial institutions now work together to provide mobile - and personal computer-based banking. Jay Reinemann, executive director of BBVA Ventures, commented on the situation.

"We are excited. We are very serious about the digital transformation and helping our customers and we believe Simple can help us on our path," he told the news source. "The bank has been on a path to digital transformation for many years."

Simple's younger customer base and digital value proposition helped attracted BBVA, Reinemann told the media outlet.

Magrann-Wells also emphasized the impact that age can have on technological adoption, stating that while he would likely use a startup's technology to transfer money, his children would be even more likely to do so.

Amid this changing technological landscape, financial institutions interested in developing relationships with internet lending platforms might consider speaking with Garnet Capital Advisors, which helps its clients in this matter.