How Alternative Finance Is Democratizing a Stale Industry

Dusty Wunderlich  |

The future of finance is decentralization. Big banks still dominate the landscape, but new companies are giving them a run for their money (pun intended) with unbundled services.

For decades, big banks controlled the infrastructure, hardware, and operating systems for financial products. If someone wanted to open a checking account, he or she did so with Bank of America (BAC), PNC Bank (PNC), or another marquee brand. People had to use those channels if they wanted an account that's easily accessible via ATMs and drive-up services.

Now, tech companies are upending that model. Traditional banks tend to be massive, hierarchical organizations that are slow to adopt new technologies. Many haven’t upgraded their product offerings for the younger, more tech-savvy audience. Agile fintech startups understand that people want faster, more accessible financial options. They’re focusing on unbundled services instead of trying to be all things to all customers.

The centralization of services — including checking accounts, loans, and investment products — created a sense of complacency in the financial industry. Innovation stagnated and the customer experience declined. People were unhappy with their banks, but they knew they couldn’t find better anywhere else. Until now...

Fintech companies offer better customer experiences, more favorable rates, and more accessible products than traditional banks. PayPal (PYPL) was a successful pioneer in this field because it gave consumers easier digital options for moving money without needing to go through a bank. This bank-free mentality then spread to the brokerage industry. Platforms such as E-Trade and RoboAdvisor disrupted the way people acquire and trade stocks, making the market accessible to a broader audience. Cryptocurrencies such as Bitcoin now enable consumers to circumvent the traditional banking system entirely.

Alternative platforms specialize in distinct services, such as personal lending, banking, or trading. Peer-to-peer and alternative lenders revolutionized the finance space by creating new ways to access credit. Startups in this field are implementing a long-term infrastructure that will allow them to rapidly gain more market share.

Finance is No Longer One Size Fits All...

Rather than accommodate customers’ every need, alternative finance companies focus on select services and deliver them exceptionally well. This approach removes the discriminatory practices inherent in product bundling and centralization. In the past, a spotty credit history could keep people locked out of the banking system entirely. Alternative startups benefit a wide range of consumers through new underwriting algorithms and means of securing credit. Unbundling is making for a more equitable and cost-effective marketplace.

The next big innovations will occur in insurance and alternative deposit spaces. Millennials who lived through the Great Recession distrust traditional banks, and they’ll seek more secure venues for protecting their assets. That sentiment could fuel the rise of Bitcoin and other alternative currencies like Ether.

Insurance is one of the last bastions of traditional financial services...and it’s due for disruption. The industry will soon rely on algorithms that write personalized policies rather than group plans based on massive numbers of people. Innovations will include individualized risk profiles that help companies better assess risk and write policies that are relevant to their customers.

Smart contracts are also on the horizon. These self-verifying, self-executing contracts run on secure databases and will transform how deals are made. Based on blockchain technology, smart contracts streamline processes by removing the need for multiple touchpoints among signing parties.

The impact of unbundling financial services cannot be overstated. Banks have been overly confident in their positions, and decentralization will force them to innovate or die out. As startups create products that compete with traditional banks, consumers will opt for the cost-effective, digital solutions. Unbundling is democratizing financial services, and everyone will benefit.

Dusty Wunderlich is the founder and CEO of Bristlecone Holdings, a high-growth network of consumer and business-to-business finance platforms and financial technologies. Its mission is to democratize the world of finance for the better. Dusty is a current recipient of the Twenty under 40 Awards in Reno, Nevada, and is a member of the Young Entrepreneur Council.

(Photo 1 by Chris Yakimov)

(Photo 2 by John Walker)

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Companies

Symbol Name Price Change % Volume
PNC PNC Financial Services Group Inc. (The) 141.26 -2.75 -1.91 1,940,660 Trade
PYPL PayPal Holdings Inc. 89.62 -1.00 -1.10 8,304,301 Trade
BAC Bank of America Corporation 30.74 -0.29 -0.93 45,593,045 Trade

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