Banks of the future

The silicon valley crowd has noticed the ridiculous $$$$ to be made in finance, and would like a piece of that rent seeking pie.  From Kevin Roose at New York mag:

To listen to Silicon Valley tell it, that will change soon. “I am dying to fund a disruptive bank,” venture capitalist Marc Andreessen tweeted earlier this year. Financial start-ups—known collectively as “fintech”—are spreading like kudzu, each with a different idea about how to usurp the giants of Wall Street by offering better services, lower fees, or both. Bitcoin and other digital currencies are the tech scene’s infatuation du jour. But a number of other companies are finding success by innovating within the monetary system we already have. “When I go to Silicon Valley … they all want to eat our lunch,” lamented ­JPMorgan Chase CEO Jamie Dimon this year.

Of course, the problem is the entrenched rent seeking, itself.  Being there is what matters, and staying there is what TBTF is all about.  That’s why when we bailed them out, none of the guys in charge lost their jobs.

Of course, these companies are still tiny by Wall Street standards. And as they grow, the temptation will be to sell to the large institutions they’re trying to upend. (“All these guys are kind of waiting for Visa to pick them up,” said Glenday.) But even if they remain independent, it may be hard to do more than nip at Wall Street’s ankles. Big banks have huge, systemic advantages over start-ups, from armies of lobbyists in Washington to access to near-bottomless supplies of cheap capital. And while some of these start-ups are independent big-money players rather than peripheral banklike service-providers, none of them has attempted to assemble the big balance sheets necessary to take on the giants. Of course, tech outsiders have shaken up Wall Street before—most notably, the high-frequency-trading shops that replaced old-school stock dealers—but much of the innovation in banking’s past has come from within the sector. “There’s a reason why size breeds strength,” says Nash. “The closer you are to the money supply, the easier it is.”

Still, there’s hope.  The article mentions automated financial advisor businesses that are online now (RIAs).  They did not mention the crowdsourcing of loans, which has, I think, the potential to disrupt the banks much more quickly.  Charles Moldow at Foundation Capital notes:

Banks, as intermediaries, have always added to the cost of borrowing and lending – that’s the price we pay as a society for their market-making abilities. That spread represents a price that was accepted because the banks played a part in the community, and served community needs.

Today, they do neither. Consolidation has created national mega-banks that are more financial mega-stores than they are pillars of the community. And following the 2008 financial crisis and the regulation that ensued, lending has dropped precipitously. While volumes have declined, profits have held. Why? Because banks make a significant, and ever expanding, profit off the spread.

No one could have imagined the success that the technology companies have had over the last 20-30 years, and it’s possible that someone might figure out a way to do it with banking.  All I can say is, SIGN ME UP!!!

ht Dish


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