Wall Street may be facing some competition from new, innovative financial services that are looking to push their way into what has traditionally been perceived as an industry with huge barriers to entry. Funding Circle and SmartBiz are just some examples of new actors in financial markets that aim to make previously costly services like investing and obtaining loans accessible to small businesses and individuals.
Complicated products, misleading sales tactics, and a lack of transparency are just some of the cited reasons as to why there has been such a demand for an alternative to the practices of the financial establishment. Peer-to-peer technology is still relatively new to finance, and could disrupt traditional financial service providers similar to how it disrupted transportation and housing. Funding Circle has lent more than $1 billion through a peer-to-peer business model since it was established in 2010.
Platforms like Loyal3 provide an opportunity for individuals to invest in the shares of many companies for free. Others like Aspiration allow people to invest as little as $500 into their own hedge-fund-like product. There are tech startups looking at lowering the costs of entry into almost every sector of the financial industry—even major, established players like The Goldman Sachs Group Inc. have been attempting to compete with their own peer-to-peer lending service. In an interview with Bloomberg, PayPal Inc. co-founder Max Levchin stated, “Pretty much every kind of financial service is just waiting to be reinvented for modern Americans.”
This provides small businesses, of which there are almost 28 million in the U.S., with access to financial services outside of established financial corporations. Peer-to-peer organizations also claim to avoid riskier practices and have attempted to present themselves as more transparent and trustworthy financial service providers – an option that is appealing after the 2007-2008 financial crisis that damaged many businesses.
These kinds of market responses to established practices are the lifeblood of creative destruction. If consumers are unhappy with current service providers, they will seek out new ways of producing that service, and if these new innovations are successful, they can undermine the established, traditional components of the industry.
Overall, consumers benefit because these industries eventually evolve to provide superior service to the consumer. While key players in finance may be unlikely to disappear any time soon, innovation and entrepreneurship has created alternatives that many will welcome.