The Wall Street demonstrations spreading across the country are a tremendous opportunity to focus energy on changing what’s wrong with our financial system. Certainly part of that will be stopping old destructive practices from happening again. But an even more powerful opportunity quickly transformed industries like music and print news. Considering the change in technology in just the last 5 years and keeping in mind that banking is a digital product, we could transform the banking industry in a very short period of time.
Already hundreds of innovative models have developed and are changing the way consumers engage in the banking experience: crowdfunding, peer-to-peer lending and social finance sites like Prosper, Kickstarter, Progreso Financiero, Billfloat, RSF Social Finance are just a few that have emerged in the last few years gaining hundreds of thousands of customers. Hundreds more start-ups will come – most will be small, some may be irrelevant, and a handful will become the new banking models of the future.
We all have a role in contributing to this transformation.
For the protesters, while it’s important to keep up the demands for change, we also need you to start using these new technologies and spreading the word when you find one that excites you. Use a crowdfunding site to support a project, make a $25 bid on a peer-to-peer lending site. Start-ups are, well, start-ups, and every show of community support could make the difference between obscurity and escape velocity. Vote with your wallet.
For the Banks, you don’t have to just stand by and get pummeled. And the answer isn’t just some new PR campaign about how you’re lending billions to small businesses. Help support change. Banking start-ups need access to your infrastructures including your electronic payments systems, your national charters and, most importantly, your customers. Even if these start-ups are tiny now and even if their stated mission is to destroy your franchise, partner with them. Technology is not going away, it’s accelerating with or without you. It’s time to stop cutting your R&D budgets and start embracing new, big ideas.
For the regulators, you have a tough balancing act that frankly needs more thoughtful attention. You need to start discerning between the legal innovation that has dominated our financial system and the true innovation that is America’s key competitive advantage. Unfortunately, your response to the crisis has been overly negative – attempting to thwart any innovation rather than embracing breakout technologies that could also pressure the big banks to be more competitive and transparent. You need to start fighting a two-front war – fixing the old while nurturing the new. Why isn’t there a Facebook of Banking yet? The obstacles are too many and the playing field is too uneven. Just a few examples of how regulators can help:
1. Among the biggest roadblocks to new banking models is simply getting permission to operate. Today, there are essentially no new bank charters being given out and buying an existing bank is not something a new start-up can do. Shockingly, the only open path for start-ups to access national markets is to partner with an existing Bank. That’s right, banking start-ups need to gain permission from the companies they’re trying to destroy! For the vast majority of new ventures – this is a non-starter. Banking regulators need to find a workable path for responsible start-ups to access national markets. H.R. 1909, the FFSCC Charter Act of 2011, is a step in the right direction.
2. With reasonable protections, let crowdfunding sites pay interest or other financial returns on their projects. As a charity, crowdfunding is a small niche. As a new way to raise capital that pays a fair return, it’s a potential game changer. H.R. 2930, the Entrepreneur Access to Capital Act, is a good start.
3. Stop the ridiculous burden that requires $100K in filing costs to fund a $10K peer-to-peer small business loan as if it were the same as a $100 million corporate bond. Surely there is a more reasonable technology-based disclosure that would foster small business fundraising while still protecting investors.
I believe we all recognize that our financial system is still broken and that financial reform didn’t change enough. A great outcome of the Wall Street demonstrations would be a renewed focus on fixing the problem that includes a long-term view of how innovation and technology can create an entirely new banking system.