The sharing economy is forcing banks to compete with dynamic tech firms outside the traditional financial sector. While competition is key, “Uberization” is also creating opportunities for synergy between banks and P2P platforms.
The Sharing Economy
The term “sharing economy” dates back to 2007 when Harvard Professor Lawrence Lessig used it to describe how the Internet was changing the world of work. Since then, the term has become a buzzword for peer-to-peer (P2P) platforms—upstarts capitalizing on Internet and mobile phone penetration to directly connect consumers to service providers. The sharing economy is now prevalent in sectors ranging from transportation to hospitality.
Uber, the most recognizable brand in the P2P space, is a transportation network company that launched in 2009 and now provides ridesharing services in roughly 785 cities worldwide. Uber is so well known that another term, “Uberization”, came into usage to describe the spillover of P2P business practices into other industries, including responsible finance.
While typically associated with ridesharing and hospitality, the sharing economy is also disrupting the market for financial services such as payments and credit. People in both emerging and developed markets now have more service providers to choose from. Accordingly, they’re less dependent on traditional banks to manage their finances. In many places, someone can make payments, get a loan and manage a savings account using a mobile app provided by a fintech company rather than by a bank.
This has been a bucket of cold water for traditional financial institutions, but they’ve gotten the message and are now working to adapt to the new market conditions. Those that keep up will be the institutions best able to leverage the power of digital technologies—in large part, by using the data generated by digital financial transactions to develop credit, savings and other products that better meet the needs of their customers.
In order to stay afloat, financial institutions will need to Uberize—in some cases, in the literal sense.
How Financial Service Providers Can Benefit from the Sharing Economy
To offer an example of how financial institutions can effectively engage with the sharing economy, let’s start with Uber. Like other ridesharing platforms, Uber makes money in two ways. First, by charging a commission from its drivers. Uber takes a commission from each fare (this varies by country; in the United States, the commission is 25 percent). This is a massive revenue stream when you consider Uber drivers completed more than four billion rides worldwide in 2017.
But while the revenue Uber earns from ride commissions is considerable, the data generated could potentially be even more valuable.
Ridesharing services generate revenue from the data they collect on both drivers and riders. As a rider, Uber collects data on where and how often you travel—and this data is transferred to third parties and used to develop offers on restaurants, hotels and more.
As an Uber driver, your driving history can be used to establish your creditworthiness. That means you can use your digital footprint to qualify for a loan even if you don’t have much collateral—and even if you don’t own your own vehicle. When utilized by a responsible finance institution dedicated to empowering low-income people, this data has the power to dramatically change someone’s life for the better.
Recognizing the tremendous potential of the sharing economy to expand financial inclusion and help people take control of their financial futures, future-focused financial institutions are now forging new partnerships with P2P platforms.
My organization, FINCA Impact Finance (FIF), a responsible finance institution that provides impactful financial services to low-income people in 20 emerging markets, is on the cutting-edge of that movement. In an effort to better serve our customer segment and make a positive social impact in the communities where we operate, we’re putting Uberization into practice.
Finance and the Sharing Economy in Guatemala
Guatemala is the center of FIF’s effort to establish partnerships in the sharing economy. There, roughly 6,000 people drive for Uber and nearly all of them are based in Guatemala City—a bustling city of close to three million inhabitants and an insatiable appetite for taxi transportation. The typical Uber driver earns a monthly gross income of roughly USD 1,000, significantly higher than the national average.
But while gross income can be lucrative, net income is another story. According to Uber Guatemala, most drivers don’t own their own vehicles. Instead, they use rented vehicles to make their rounds. Rental fees take a chunk out of net revenue each month, so drivers end up taking home less money than they would otherwise.
A new partnership between Uber Guatemala and FINCA Guatemala, FIF’s subsidiary in the country, aims to change that, offering a financial solution to enable drivers to purchase their own vehicles and eventually earn a larger net income. This year, FINCA Guatemala launched the “Uber Loan”—a credit product designed to provide creditworthy Uber drivers with the financing necessary to purchase their own vehicles. As with all our loan products, FIF targets income-generating businesses, offering credit to help clients build assists, create jobs and improve their living standards. Loans for Uber drivers fit well with our current offering of credit products.
The financial risk in extending credit to drivers is relatively small—in Guatemala City, a driver can purchase a suitable used car for as little as $6,000, and a new car for as little as $10,000—and the data generated by Uber makes it easy to make an accurate credit decision. And we already know from nearly 35 years of operation that low-income borrowers are just as likely to repay their loans as are people in more developed markets, if not more so.
The partnership between the two organizations makes the loan application process simple. FINCA Guatemala’s loan application form is directly integrated into the Uber online dashboard. By clicking “Apply”, the driver’s history (length of service, rating, total trip count, average weekly trips, average weekly payments) is automatically pre-screened according to rider satisfaction rating and length of service.
Once the application makes it over to FINCA Guatemala, it’s double checked and, if the key indicators are all there, the company orders a credit report. The loan application can be processed in hours, and the streamlined process has increased efficiency and allowed us to slash disbursement fees.
At the time of writing FINCA Guatemala has disbursed roughly $1.5 million in Uber Loans. Repayment has been high, affirming the business case for providing loans to Uber drivers. While we have the capacity to issue higher volumes, the loan product is still in its early stages. We plan to reach more drivers with responsible finance as the ridesharing market expands and develops. There is still a lot of room for growth.
Compete Where Necessary, Collaborate Where Possible
It’s widely assumed that the sharing economy presents nothing but trouble for financial institutions, because P2P platforms are disruptive and often designed to allow users to bypass banks. The competition is fierce, but there is also room for synergy.
The Uber Loan product is a good example; it benefits FINCA Guatemala’s bottom line, helping it identify creditworthy potential borrowers and to develop and offer financial products accordingly. It’s also beneficial to Uber, which has an incentive for its drivers to earn as much income as possible. A driver with the potential to earn a higher net income on each ride has an incentive to perform more rides, thus generating more revenue for the platform.
But most of all, the loan product is beneficial for our customers, who can use their driving history to receive credit from a responsible finance provider and avoid having to deal with predatory lenders.
As the financial services industry continues to be transformed by technological innovation, financial institutions are facing new pressures. One way to respond is to compete against the sharing economy, providing more flexible, lower-cost financial products able to meet the needs of a more sophisticated marketplace. The financial institutions that remain competitive in the coming years will succeed in doing exactly that.
Another way to respond is to harness the power of the sharing economy wherever possible, to establish new partnerships—like the one explained above—that benefit all parties while providing people with financial products and services that can make a positive difference in their lives. These two approaches to responding to the sharing economy are complementary, not binary, choices.
For financial service providers, it pays to become Uberized.