Why do we need banks? What service and benefit do they truly provide? Of course, they enable you to access your money from anytime, anywhere. I’d argue the main benefit to the banking system is security — knowing that the money you put in will be there when you want to take it out.

Sure, the banking system does work, but it’s ripe with inefficiencies and overhead that’s not needed to accomplish its core business. The physical real estate that banks own and operate are largely unneeded to serve consumer needs. They have literally thousands of employees behind the scenes. Again, largely unneeded overhead.

Hence my question — can the whole consumer banking system be completely wiped out with a website and some peer to peer lending technology?

In short. Yes.

And, the more I think about this, the more I think NOW is the precise time for a web company to do it.

As you can tell from the title of this post, I’ve been thinking a bit about the future of the consumer banking industry and peer to peer lending for awhile – for numerous reasons. My thoughts on this actually started in Ghana last fall when my buddy Dan (who runs Bankvibe.com) and I spent our down time (and there was a LOT of it – ever heard of “ghanian time”?) during our stay with Lumana Credit discussing random web and banking ideas.

The consumer banking space is fundamentally broken and ready for a disruption

Why do I bank with BofA and still not know a single person at the company (other than the customer service folks I’ve met via Twitter)? Why do I have to use such useless online banking tools? Why doesn’t BofA help me track all my finances & categorize them like Mint.com does? Why do I repeatedly have problems transferring funds between accounts and it takes 3 days? Why must I pay outrageous fees to withdraw cash internationally?

Answer? There is no easy or better alternative. Which is precisely why I think now is the right time for someone to turn the consumer banking industry completely upside down.

It’s no secret I haven’t exactly been thrilled with the consumer banking system over the past few years, though my “switch” (not 100% yet) to Charles Schwab and School Employees CU of Washington from BofA is certainly helping in the way of problems with debit cards I’ve had abroad. I hate everything about the current banking system. Aside from the ability to withdraw cash from ATMs, I see little value in the current banking structure.

Peer to peer lending works

Given my passion for microfinance, it’s a given I’m a huge advocate for the power of peer to peer lending given what’s it has done to propel microfinance forward through sites like Kiva and Wokai. If peers can lend entrepreneurs around the globe money — why can’t they also lend money to others within the US — and make a profit from it?

The web is changing

The web is evolving faster than we can keep up with, and seemingly no industry is safe. Real estate, travel, autos – you name the industry, it’s been massively transformed by the web’s ability to transfer information to consumers almost instantaneously. Google dominates search, Facebook dominates social. What’s the Facebook of personal finance? There isn’t one currently (Bankrate isn’t quite there), but it’s only a matter of time before someone lands in that spot — it’s too lucrative a niche not to.

There is a Better Way – And the World Is Already Moving that Way

What I think this issue really comes down to is getting enough mass adoption toward some sort of “digital currency” accessible via your mobile phone. If you think about it, many of you likely already deal almost entirely in digital currency. In the states, I charge almost everything to my credit card (but pay it off in full every month). However, while abroad for much of 2010, I relied almost exclusively on cash given that credit cards are not widely accepted for small transactions, and rarely accepted for any transactions in Africa where I spent 2 months in fall of 2010.

In Kenya, after speaking with my friend Allan, I learned that Safaricom already enables individuals to transfer money to others straight from their mobile phones. Imagine person A finds some shoes at a street vendor they want to purchase, and both person A and street vendor B have Safaricom, person A can wirelessly transfer credit to street vendor B to complete the transaction without the need for cash. Either person A or street vendor B can either retrieve their credit from any Safaricom distributor, or use the credit to pay for others goods or services (including of course phone calls). In the US, it’s a little different in that individuals purchase monthly phone plans rather than prepay cash for their phone usage as they do in Kenya (and much of the world). But a mobile carrier could easily add items to a customers monthly bill, and paying your cell phone bill would quickly replace paying your credit card bill. I doubt any major bank would give a startup going after this space access to their ATM system, which would solve the cash problem – consumers have to be able to take cash off and put cash on to their phones at a wide variety of locations for the model to work. However, there is no reason a tech startup couldn’t partner with a company like Starbucks, Barnes & Noble, AT&T, or some other national franchise with locations across the country in order to give consumers a place to go “cash” their credits or deposit cash into their digital account.

So why do we need the brick and morter component of the financial system as it stands today? We don’t. Wouldn’t we see more value if there wasn’t such high fixed costs (real estate) in the system?

Establishing Trust

The other crucial issue to disrupting the consumer banking vertical is establishing trust with consumers. A startup tackling this has to be very well funded, have some major partnerships in place, and a seasoned executive team behind it. Building consumer trust is going to be a massive massive obstacle given the stigma of online fraud — and I’m sure the traditional banks will put up a fight to keep this issue front and center on consumers minds.

The Perfect System

What’s features would the perfect payment system include? Well, it actually should stay drop dead simple. Simple works. Of course, seamless integration with all major mobile phones is a must since the phone is the device that will be the central focus. With your phone rather than an actual credit card as the hub, the perfect digital banking system needs to allow you to transfer funds to a variety of devices that local merchants can easily get setup with. It would need to allow you to easily transfer funds to any other account online or via your mobile phone. The most important thing is simplicity. It can’t do everything for all people — or it’s likely to fail.

Wrap Up

Is VISA, Mastercard, or AMEX working on this service? It seems the most viable company/service is PayPal — but I’m not sure they are innovative enough to pull this off. I’m all but sure Square is working on backing their way into this business model.

One thing I am positive of — I for one will certainly be an early beta user if such a service comes out.

So, back to the original question of whether peer to peer lending wipe out the consumer banking industry as we know it?


WILL it happen?

Only time will tell.

[photo via CanEquity]