The shake-up in financial services in many ways parallels the airline industry following the Airline Deregulation Act of 1978—though for banking, regulation is causing the disruption. While financial services was once dominated by several large banks that maintained a stranglehold over consumers' options, the sector is now seeing enormous growth in online lending with many small and agile financial technology companies establishing themselves as serious competitors.
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The Airline Deregulation Act of 1978 enabled new airlines to enter the market, creating competition that resulted in a significant decline in flight costs; since the act went into effect, the cost of airfare has decreased by 50 percent.
The financial crisis of 2008 was in many ways a similar catalyst for the growth of the then burgeoning fintech market, albeit due to increased oversight that was fueled by consumer discontent.
Increased regulation of the financial industry was imminent as it teetered on the brink of total collapse. Prior to the crisis, the Federal Reserve acted as a supervisor to specific institutions. After the crisis, its focus shifted to overseeing the industry as a whole to avoid future crises capable of taking down the economy. This spurred the passing of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, solidifying systemic oversight through additional regulations and the creation of new committees. The overhaul of the system opened the door to fintech start-ups like Prosper and Lending Circle, which are able to navigate the new regulations with more ease than the establishment and are held to fewer restrictions, giving them a competitive advantage.
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Fintech companies have also had the benefit of crafting their companies around the new demands of the consumer. As many Americans saw their savings evaporate, lost jobs and had their lives significantly altered by the crisis, a large gap of distrust grew between consumers and banks, especially among the millennial generation. Consumers suddenly felt that the status quo would no longer serve them. They wanted to be knowledgeable and in charge of their financial futures. Fintech start-ups have been able to hone in on the customers' need for trust and an enhanced personal experience.
Some in the fintech space, like Lendio, have created marketplaces, similar to that of comparative airline search engines like Kayak, allowing banks to compete directly with the offers of their new competitors. With new options in the lending field as well as increased transparency, consumers are able to shop around to find the best fit and decrease their overall costs.
Though hard to predict exactly how the financial services industry will change in the coming years, it is clear that the potential for growth of fintech start-ups in the lending space is nearly exponential. Online lending has addressed less than 1 percent of the U.S. market, the overall consumer credit market is estimated to be $3.2 trillion. The industry is already being revolutionized, but we're on the cusp of seeing a true transformation over just the next several years.
Commentary by Stephen Dash, founder and CEO of Credible, which enables college students and graduates to compare personalized loan offers from multiple lenders in one place. Follow him on Twitter @stephenjdash.