THE BLOG
03/07/2013 07:07 BST | Updated 01/09/2013 06:12 BST

The Quiet Revolution in Banking

At a Demos Finance event last week, banking commissioner Baroness Kramer predicted that banking would be 'unrecognisable' in ten years' time as changes in consumer behaviour and technological innovation disrupted traditional bank models. Two events yesterday brought that home strongly.

The first was a government summit on payday lending - the part of the loans industry that provides small, short-term loans at high interest. Research from consumer group Which? shows that around one million households take out payday loans each month and the number is growing.

Four in ten of these borrowers use the money to pay for essentials like food or fuel.

Offering loans at exorbitant interest rates is nothing new, but modern technology makes it easier than ever to borrow - and therefore even easier to fall into a cycle of debt. The industry has been rightly criticised for failing to tackle irresponsible lending: statistics from debt charity StepChange and from the Office of Fair Trading show borrowers are able to take out loans with multiple lenders or roll over loans without any checks on their ability to repay.

Regulating this industry better to weed out malpractice is to be welcomed, but that doesn't mean we should be lulled into thinking that relying on traditional high street banks to fund consumers' needs is a better bet. As Robert Peston points out, many of payday loan companies are safely and well run businesses - if Wonga collapsed tomorrow, no taxpayer would end up on the hook - and, unlike the small print of PPI, for example - the charges on many payday websites are clear and simple.

The burgeoning online payday loans (and pawnbroking) market shows that what a lender looks like, how they should behave, and what role they will play in ten year's time is in a state of huge flux. The Wired Money conference held in London yesterday showed that to great effect: from crowd funding, to peer to peer lending, to online currencies, to money transfers using the camera on your phone, the model of traditional retail 'banking' (payments, loans, and deposits) is being disrupted.

Coupled with the rise of social networking, technological changes are allowing 'fintech' entrepreneurs to cut out banks entirely. Iwoca, for example, analyses all of the data available from marketplaces such as eBay and Amazon, and is able to determine whether an applicant is eligible for a loan or not within five minutes.

In fact, it's an approach that echoes much of the way in which the payday lenders operate: using sophisticated technological analysis to credit score applicants, they can turn around loans at lightning speed in a way traditional banks cannot.

But it's not all about lending. Much of the 'disruption' in financial services centres around new ways to help businesses grow, or money to flow, using computers, tablets or mobile phones - and in parts of the world where the mass market may well skip traditional bank models altogether.

Kwanji, for example, which presented at the Wired conference, is a start-up foreign exchange platform aimed at small and medium sized enterprises in emerging and transitioning markets. Kwanji's platform allows these businesses to skip credit cards and banks and find the best rates for them directly from other providers.

Much of the focus since the financial crisis has been on what went wrong with the system and how to fix it. But tweaks to the architecture of the current system and changing some of the people working in it are not what will bring about a revolution. Developments in the payday loans industry, and the start-ups showcased by Wired demonstrate that revolution is quietly happening elsewhere: in Silicon Valley, Silicon Fen and Silicon Roundabout. And it'll be here sooner than you think.