Is the future of financial services circular?

“One man’s rubbish may be another man’s treasure.”

Hector Urquhart was a Scottish gamekeeper who lived in the nineteenth century and collected the stories that communities in the Highlands shared as a form of entertainment and enlightenment. The observation above features in the introduction of a book he published in 1860 and has since evolved into a central principle of what some of us now refer to as the circular economy. The central idea hasn’t moved on much over the intervening century-and-a-half: that waste in the right hands can be redefined as resource.

In theory, this should be an extremely seductive concept for the financial services community. Waste surrounds us to the point that we have become almost blind to it - and this goes far beyond ocean plastic. Today’s cars are parked 95% of the time. England has more than 200,000 empty homes. People do not wear at least 50% of the clothes in their wardrobe. In economic terms, these are under-utilised assets that could be put to more valuable use.

In 2009, Garrett Camp and Travis Kalanick couldn’t find a taxi in Paris, despite being surrounded by a sea of parked cars. And so Uber was born - funded by venture capital. Around the same time, Brian Chesky and Joe Gebbia were selling cereal boxes to fund their idea for a website to help people rent out unused space in their homes. Thus, Airbnb was born - and subsequently funded by venture capital. Meanwhile, Harvard Business School students Jenn Hyman and Jenny Fleiss were securing seed funding for a luxury fashion rental business called Rent The Runway - which now has more than 6 million members and generates over $100 million in revenue. These three businesses are collectively valued at over $150 billion - a sum greater than the combined GDPs of Iceland, Estonia, Jordan, Botswana and Paraguay.

The rental models employed by these businesses barely scratch the surface in terms of the opportunities for value-creation that the circular economy represents. There are myriad ways in which waste can be used to create value: through resale, repair, refurbishment, remanufacture, and resource recovery. The circular economy is estimated by ING to generate between 1% and 4% economic growth over a decade. It has attracted the attention of huge companies such as Google, Danone, Nike, Philips, Renault, Unilever and H&M - all of which are investing in circular innovation. But there is little evidence of an equivalent level of innovation in financial services, beyond a small number of government-backed investment funds and specialist venture capital businesses. Only a handful of large banks have much to say on the subject - with Dutch banks such as ING, Rabobank and ABN AMRO leading the way.

Many of the circular business models listed above challenge traditional valuation and risk models. Novel technologies for converting waste streams from one industry into raw materials for other industries are untried at scale. And models based on collaborative consumption, rental and resource recovery require contractual arrangements and a prohibitive level of trust and transparency to exist between strangers. Despite the macro benefits of decoupling economic growth from resource depletion, the financial community is likely to remain stubbornly immune to circular business. A 2015 report by ING argues that this is fundamentally a cultural issue. The finance community is unlikely to care for circular business models unless it first adopts an appetite for performance-based business models, longer time horizons and pricing end-of-life use of assets into cash flow forecasts. It will take a high degree of motivation to wrestle with the financial and legal complexities that the circular economy poses. In all likelihood, the circular economy will follow the pattern set by the sharing economy in being funded by a small but ambitious set of venture capital funds characterized by an appetite for risk and motivated by the delight of finding treasure where others only see rubbish.

Nick will be continuing the debate with ING, Lloyds Banking Group and Ellen MacArthur Foundation in the Financial Services Forum event "Take, Make, Waste" Doesn't Work: The Move To A Circular Economy on 24 January, 2019. Find out more here.