Technology has promised much to communities historically underserved by capital markets but, in terms of borrower access, has delivered relatively little to date.
Though technology has helped to reduce barriers to accessing capital in developing countries, through micro-loans and peer-to-peer lending, the majority of lending in developed nations continues to channel to relatively well-off sectors of society.
The promise is that by reducing transaction costs, increasing awareness, and increasing the ability of financial institutions to screen the credit worthiness of borrowers, a community of people previously neglected by major banks will be able to borrow money. In developing nations, this has spurred a wave of startup activity that has enabled underserved communities, particularly youth and women, to build businesses and slowly lift themselves out of poverty.
The significant value that technology added in enabling these microfinance initiatives to flourish was to reduce the barriers to international capital flow that previously existed. This meant that both charitable and for-profit institutions that sought to specialise in providing loans to high risk individuals or businesses could do so with lower transaction costs, gathering credit risk information via the web and assessing it using big data analytics.
The value of that domestically is limited, though. While the costs of finding worthy borrowers are certainly reduced (think digital advertising and online sales teams rather than news media advertising and personal branch bankers), most banks continue to impose risk controls that make lending to lower socioeconomic communities challenging.
Digital peer-to-peer lending institutions have provided an alternative option, but the majority of loans continue to go to already relatively well-off individuals.
For example, according to statistics from Harmoney, a peer-to-peer lending platform, almost 50 per cent of borrowers are homeowners, while more than 60 per cent of the total value borrowed is attributable to this group.
This is reflective of a persistent culture whereby debt incurred by middle-class communities in order to fund further investments or lifestyle decisions. The Harmoney statistics also show that the top three loan purposes are debt consolidation, home improvements and holiday expenses, suggesting that these platforms are rarely utilised for the purpose of active wealth creation.
However, equity crowdfunding has provided one avenue for eased access to capital by small businesses looking to grow. Where previously businesses had to turn to banks or venture capitalists, companies are increasingly using their online profile to raise funds directly from their fans — often even customers.
Snowball Effect is the leading example in New Zealand, having facilitated over $42 million across 54 capital raises over the first four years of operation (up to September 2018). These markets remain small compared to broader borrowing in New Zealand's financial sector, but do offer an opportunity to invest small sums in growing local businesses prior to an initial public offering (IPO) that previously only existed for wealthy angel, venture capital, or private equity investors.
And it is lending rather than borrowing that is perhaps the greatest source of potential for digital to transform capital markets and the demographics it serves.
The explosion of ETFs (exchange traded funds) is evidence of the untapped interest among underserved demographics in investing in New Zealand's capital markets. Platforms such as Sharesies, InvestNow, and the NZX's SmartShares have provided online access to capital markets for individuals regardless of background.
Using online-first platforms, individuals can now track the market — or specific segments of it — with their investments and are able to do so with far lower sums than was commercially feasible (due to transaction fees) in the past.
This has unlocked a higher market return for groups — younger generations in particular — that have previously been confined to term deposits at best.
Low-cost, online-only funds such as Simplicity are making investment via KiwiSaver straightforward, cheap, and engaging, disrupting the traditional managed funds — and in 2018 generated higher returns than the industry averages.
Overseas, firms such as Raiz are starting to blend investing with everyday saving by "rounding up" purchases and investing the difference in an index fund.
For example, if you were to buy a coffee for $4.50, the app might round your purchase up to $5, and invest the 50 cents into an ETF. Raiz's funds under management have grown 72 per cent over the past year, and 41 per cent of accounts have less than $5000 invested suggesting the user base is not the traditional investing class.
Hatch is another company making waves in New Zealand, enabling Kiwis to invest in US shares via its app. Promising a 10 minute sign up process and the ability to invest in fractions of high value US shares, it makes the process easy for Kiwis to invest small amounts in big name US stocks like Apple and Netflix.
Whether that is a good thing is another question — most research suggests that everyday traders have no ability to beat the market over the long term, on average. Most research also suggests that fund managers struggle to outperform the market too.
This means that if low- and middle-income New Zealanders can more easily invest in the market without incurring the high fees of a bank or a fund manager, their investments might generate a higher net return than the alternative of low-interest bank deposits.
Taking people's money for investment has understandably been a more enticing endeavour for startups than lending it is. That much is reflected in the level of innovation in the market currently.
However, if New Zealand wants to enjoy a digitally driven demographic dividend from the disruption of capital markets, it will need to ensure that not only lenders become diversified, but that borrowers do too.