Startups and the un-banking of America

by.  (@VCRebecca)

Historically, when looking for opportunity in the financial industry where technology can have the greatest impact — for investors and entrepreneurs — the best place to start has been with one of our oldest institutions: banks. However, while critical to our economy, banks are generally inefficient, have high fixed costs and don’t exactly elicit happy thoughts from the average consumer. It’s for these reasons, among others, that the biggest opportunities in the financial world revolve around the disintermediation of these banks and core financial services.

Given this backdrop, it’s not hard to imagine that a majority of the people in the U.S. could be “banking” with startups, in one form or another, in the next three to five years. It’s been happening for some time, but the pace and volume of business taken away from banks by startups in the last few years have been significant — and this trend will continue to grow.

Disintermediation of Consumer Credit

For starters, we have to look no further for evidence of the inefficiency of our banking system than during our most recent recession. In 2009, the credit crisis was at its peak, and it was practically impossible to get a loan, even for prime borrowers. Interest rates were low, with consumers receiving 0.25 percent on a savings account and prime borrowers paying upwards of 18  percent annual percentage rate. The spread was huge, and so was the opportunity.

The credit crisis showed the tech industry that one of the biggest areas of opportunity for startups was in re-imagining consumer lending. People were looking to alternative forms of lending for answers and thanks to the problems above, interest in solutions like peer-to-peer lending were on the rise. Not surprisingly, a cohort of companies emerged to take advantage of these trends, beginning with Prosper, which was soon followed by Lending Club and a litany of others.

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