The Economy Is In Turmoil: Investors Seek Substitutes To Big Banks

The Economy Is In Turmoil: Investors Seek Substitutes To Big Banks
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The most effective wealth-building strategies can change from year to year depending on economic conditions and changes in the investment products on offer. In the current era, saving a percentage of one’s income won’t see investors achieving the types of returns they’re seeking.

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In fact, with the current record-low interest rates, parking your money in a savings account with a big bank could be a certain way to see its value erode. Shrewd investors are turning to alternative offerings to have their money work harder — and these alternatives are typically not provided by the big banks.

Why Investors Are Avoiding Traditional Banking

So what are some of the key reasons investors are avoiding traditional banking and what are their preferred investment alternatives?

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1. Low-interest rates

One of the major driving factors behind investors seeking alternatives to big banks for their savings is historic low-interest rates. While it’s now cheaper to borrow, low rates pose challenges for investors looking to grow their money, as keeping your savings in a dedicated account could see its value quickly eroded by inflation.

Online-only accounts could offer slightly better returns than accounts with traditional brick-and-mortar banks as online-only players have lower overheads. However, in a low-interest-rate world, a slightly higher interest rate might not make much difference for investors.

2. Eroding trust in traditional players

More than 10 years after the global financial crisis, distrust in the banks lingers. Since 2008, fintech players have increasingly gained the trust of consumers, who have turned away from big banks resulting in a rise of SME lending.

In the chaotic aftermath of the financial crisis during which taxpayers’ funds were used to bail out the banks, new regulations tightened banking operations and consumer trust fell. In particular, the millennial generation, which entered adulthood during the peak of the crisis and saw what their parents went through, is likely to continue viewing traditional banking services as untrustworthy. Surveys show only around 28% of millennials trusted banks to be fair and honest.

Note that borrowers, too, are turning away from the big banks for more competitive rates on products like mortgages and due to distrust. Widely reported big profits and bonuses for executives have done little to assist with the big banks’ image repair.

Campaigns like Move Your Money are reportedly seeing millions of accounts shifted to local financial institutions away from the big banks, and these movements underscore consumers’ view of big banks as unethical, unstable, and profit-driven. All of this has worked to widen the opportunities for fintech start-ups to enter and reshape consumer finance.

3. The rise of attractive fintech alternatives

Coupled with the ultra-low-rate environment and distrust of big banks is the rise of convenient, cost-effective fintech alternatives. Ethical banks, credit unions, building societies, and community initiatives might offer consumers and investors some assurance their money is deposited with an ethical and not strictly profit-driven institution, but high returns still elude investors.

It’s in this environment that fintech’s have risen to challenge the status quo. Two prominent examples are peer-to-peer (P2P) lending and cryptocurrency. P2P lending eliminates banks by enabling investors to lend to borrowers directly.

Distrust in the financial system has also driven investor capital into options like cryptocurrency. Whilst cryptocurrency tends to be far riskier and more volatile than P2P lending, the potential returns are also much higher. Bitcoin, for example, rose from around 6 cents to the heights of $20,000 before settling at its current price of around $9,200.

Some commentators have even suggested bitcoin could eventually reach $10 million in price. Regulatory drivers, such as banning cash transactions over a certain limit, could also further encourage consumers and investors to transact with and invest in decentralized cryptocurrencies like bitcoin.

Start-ups offering myriad products from P2P lending to mobile banking tend to be leaner in their operations, in part thanks to technology providing competitive terms for consumers compared with the big banks’ offerings.

A glimpse into the future

The financial sector has experienced such a rapid transformation in the last 10 years — with the introduction of blockchain technology, cryptocurrencies like bitcoin, P2P lending, big data, machine learning, online banking payments, neo banks, and cybersecurity.

Recently, the US Federal Government introduced a $2.2 trillion coronavirus stimulus package. And, this will have large ramifications for the economy when factoring in things like the printing of money, inflation and the potential debasement of the dollar.

A big question to think about is, if all of these things are happening in the world right now, then, what will happen next? Bill Gates, famously once said, “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.”

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