Charles Moldow posted a thoughtful article yesterday on TechCrunch entitled "How A Trillion-Dollar Market Remains Hidden In Plain Sight", arguing that there is a massive opportunity in financing non-bank financial services.
We agree - and we've been extremely active in this area. If you include our venture capital interface platform (Hatcher.com), and our investments in ApexPeak and Telr, investments in emerging financial services platforms constitute 25% of our portfolio - but more, critically, greater than 95% of the capital we've raised and put to work this year - and greater than 85% of the valuation upsides. So what Moldow is saying in his article - that this space is set for rapid growth - is already being borne out by our own experience at Hatcher.
He's also absolutely right when he says peer to peer lending offers a much better return than sticking your money in a bank:
"...by removing traditional banks as the middleman, marketplace lenders can use their spread advantage to offer lower rates to borrowers and better returns to lenders. Borrowers on marketplace platforms pay closer to 10% interest, a third less than the average of what is paid to banks or credit card companies. And instead of receiving 1% interest for keeping their money in a CD, active lenders on marketplace platforms receive, on average, an 8% return on their investments."
But there is a more interesting comparison to be made that lumps peer-to-peer lending right in with the banks: both suffer from an absence of data, and the future of financial services is not going to be about direct or indirect lending, it's going to be about customer verification, access to data, and the efficiency of both the verification services and the decision-mining systems.
As Elias Ghanem, our Telr CEO likes to say, ""all financial services companies are really just information management companies". He's absolutely right. If you can collect the right data (in partnership with your customer), you can provide them with vastly superior financial services - including rates - compared to a bank. Banks, in many of the regions we compete in, are still "old-school" in their reliance on an SME's last three years worth of audited statements.
But what can three year old information really tell you about a game developer, versus data generated over the past month, during a period of massive growth? As a merchant, I know which data set I'd rather my bank use to make its decisions with. I know I'm much more likely to get financing that corresponds to my current rate of growth if I rely less on statements from the past three years of operations, and more on my most-recent, explosive sales numbers.
Back to Telr. On the surface, Telr appears to be simply a payments and fraud management engine - but look more closely and you'll find several unique capabilities that set Telr apart from its competitors, and enable the company to offer sophisticated, well-informed forms of financing to merchants - critical services that will enable these merchants to grow inventory and generate more sales, by getting paid faster.
Or look at ApexPeak. ApexPeak is able to provide significant amounts of cash to businesses within a matter of hours/days because the decisions it makes are based on factors relating to the business as it stands right now. Based on the data ApexPeak obtains, and a superior approach to parsing the information throughout the organization, ApexPeak is able to know that it can insure its offerings against default within a matter of minutes - and agree superior terms, before the bank can even get started.
Are banks done providing financial services to SMEs? Maybe. Banks may have massive balance sheets and other assets, but in today's day and age, they don't have the stuff that is really valuable - the current "here and now" data on the explosive business activities of the SME necessary to provide useful, timely services that will enable that business to reach its full potential, in partnership with firms like ApexPeak and Telr.
So are the days of banks numbered? Not really - we still need their custodian services and their networks (okay, and the credit cards and consumer accounts), and as such, they will remain around in some form forever. But as a service provider to small business, they will become less and less relevant, until such point as they finally transform themselves into information companies capable of instantaneous decisions based on the long-term welfare and short-term needs of their business customers.