The Internet of Things (IoT) is driving the idea of shareable assets and real-time market places, which is super cool for consumers but devastating for the banks’ lending books.
While shared assets will create big opportunities for the first of the world’s big banks to connect these assets - and place them into a real-time market place - the laggards will see their asset lending business destroyed, according to Paul Brody, EY’s Global Innovation Leader, Blockchain Technology.
Obviously, the San Francisco-based adviser is not talking about the end of private consumption here. But he is saying that consumption is changing and take-up of blockchain-mediated marketplaces will be fastest wherever there is a compelling value proposition.
And asset utilisation sits at the top of his list. “The value proposition with renting out spare capacity is high - which is why Airbnb has been so successful," said the former IBM head of IoT.
However, the world of shared highly-used assets creates a massive problem for the lenders since their markets will shrink and with it their customer base as well as their ability to charge high interest rates.
“The car industry offers a good example," Brody added. "The average car is only used 5 per cent per cent of the day. So, if every car becomes a shared asset, experts calculate you need 50 per cent fewer cars on the road.”
There is some good news for banks in that a marketplace will improve loan quality since a highly-utilised asset will produce a very consistent cash flow.
“A digitally-connected asset is for all intents and purposes a secured asset. You can finance the asset, you can easily understand its value and the odds of the loan being repaid are higher," said Brody.
Already in the US, he explained, car companies link car financing with the IoT control system. Here, if a consumer misses a loan payment, they are unable to start the car.
“It’s not the same thing as a full legal repossession in that the lender doesn’t have access to the car but it seems to raise repayment rates.”
But the disadvantages far outweigh the benefits for the banks. If a customer's repayment rate is high and the bank's risk is low, then interest rates will drop and capacity will rise.
“Essentially, a shrinking market will lead to an outbreak of competition as banks try and reshape their markets or grab share from rivals," said Brody.
Clearly, the business case for sharing assets is very strong and the former IBM head of IoT is convinced that banks’ specialist asset lending businesses are under the most threat.
New research from Goldman Sachs also confirmed the numbers simply don’t stack up for banks.
For instance, Goldman found that capacity utilisation for rented construction equipment is much higher than when wholly owned by a single company.
Further, the investment banker discovered that when these rental companies went one step further and turned the equipment into a connected digital asset, utilisation rose even higher.
"Should the banks want to switch from financing a specific customer to enabling a marketplace or driving a customer towards a digital asset based marketplace they will potentially disrupt the business they already have," argued Brody.
“First, customers won’t be borrowing as much money from you and second they will expect a lower interest rate since the asset can be considered secure.”
Far from being a hyped-up view, the Silicon Valley operative is expecting this change in asset markets occur soon – particularly where assets can be electronically tagged and managed remotely, where there is a lot of excess capacity and where ownership is not highly concentrated to prevent collusion between owners.
“Assuming there are no regulatory barriers, you can see how cars and vacation home easily meet these criteria, not to mention construction equipment," he said.
"I think we will also see this with costly medical diagnostic equipment, warehouse space, office space especially as it gets redesigned to be a shared asset."