The men who want to get rid of banks

PayPal co-founder Max Levchin was 16 when he saw his family's life savings of $US7,000 almost disappear just as they were due to flee the rising anti-Semitism of the Soviet Union to the safety of America.

In 1991, the crumbling Soviet government devalued the ruble to a tenth of the US dollar and in an instant, Levchin says, “instead of having $US7,000 to start a new life, $US700 was the grand total we landed here with. In my one brief lesson with devaluation, I learnt you're not safe no matter what you think or how much you save.”

Mr Levchin probably need never worry about money ever again. A multimillionaire at 27 after the $US1.5 billion takeover of PayPal in 2002, Levchin is now worth an estimated $US300 million thanks to his stake in Yelp.com and the sale of another company, Slide, to Google for $US182 million.

But that early lesson in trust seems to have stuck. Despite his enormous wealth, the young entrepreneur, who is famed for working 18-hour days, is as dedicated as ever. “The reason I get up in the morning is because I fundamentally see an opportunity to remake finance,” he told the audience here at the Dreamforce conference in San Francisco. “The financial industry is supposed to be the lubricant of society. It is by definition secondary [i.e., there to assist transactions] -- and yet it is so inefficient it has managed to take over everything else.”

Mr Levchin was joined on the panel by two of his PayPal co-founders, Reid Hoffman, now of LinkedIn, and Jeremy Stoppelman, CEO of Yelp. All agreed the financial industry was ripe for disruption, a key theme among many of the venture capital companies here. According to Accenture, a global consulting firm, investment in financial technology, or fintech, has doubled to $US3 billion in the five years to 2013 and is predicted to rise to $US6-$US8 billion by 2018. Jeff Schumacher, CEO of BCG Digital Ventures, part of the Boston Consulting Group, says of the companies receiving series A or B financing in Silicon Valley, around half of all investments were into consumer facing companies, and almost two-thirds of those investments were into fintech.

In short, there is a wave of money aimed at chipping into the hefty profit margins of the major banks. And according to the Bank of International Settlements, Australia's big four have the heftiest profit margins in the developed world.

Max Levchin is putting his money where his mouth is. His start-up Affirm wants to disrupt the credit card business by offering short term loans on the spot to people who enter their phone number into an app. That number opens up something like 70 thousand personal qualities that can help predict a person's likelihood of repaying. Mr Levchin raised $US45 million in June this year and, given that an estimated six in ten of American millennials have never signed up for a credit card, he expects to write $US100 million worth of loans in 12 months.

Which comes back to trust. Australians, who haven't experienced the wave of defaults, foreclosures or banking collapses of the US, have a much more benign view of the banking sector and so our banks have chugged on with their cosy relationships with customers.

In the US, start-ups see a clear lack of trust between lenders and consumers -- something that offers the perfect opportunity to crack apart the relationship between the banks and their customers.

“Since the financial crisis, many people are still disenchanted with and wary of traditional financial institutions and are looking for new nonbank options,” says Sam Hodges, co-founder of Funding Circle in the US, a company that operates a platform for direct lending to small businesses. "Consumers have become comfortable with small online transactions using services like PayPal, and they are getting more comfortable with the idea of lending and borrowing through online marketplaces with their peers."

Founded in the UK in 2010, Funding Circle has already given out $US600 million in small business loans and expects to double that amount this year alone. Loans are between $US25,000 to $US500,000 and interest rates are generally competitive with the major banks. Like Max Levchin's Affirm, Funding Circle rapidly distils multiple data points to rapidly determine a client's creditworthiness.

Companies like Affirm or Funding Circle might not be a threat yet to Australia's banks but the market is ripe for the picking. Funding Circle is already receiving capital from institutional investors, eager for the returns available on the platform.

The increasingly ubiquitous use of mobile, and the fact that most of the payments infrastructure has now been built and is available to startups means that Funding Circle is at the front of a wave of investment into fintech. 

"The banks who don't embrace the fintech revolution, will be left behind," Hodges says. "It's now so easy to scale. Funding Circle has launched in the UK, the US and can easily scale out to Australia, Europe and other countries with a more efficient model at not much more cost.”

Jackson Hewett travelled to the Dreamforce 2014 conference as a guest of Salesforce.