For sure, defeating banks in the matter of customer interaction seems like low-hanging fruit. As the article says, they are too slow, too cumbersome, and I'll add that they are too unfun, and their sales departments are pushy and intrusive.
Do we even need monolithic financial entities in this day and age? Most transactions would be better handled by smaller, specialized and modern service companies. Banks are to financial startups what taxi driver unions are to Uber.
And the financial sector definitely deserves a shakedown, after they essentially plunged the rest of the world into a decade of misery with their securities fraud during the housing crisis, and went unpunished for it.
>Do we even need monolithic financial entities in this day and age? Most transactions would be better handled by smaller, specialized and modern service companies. Banks are to financial startups what taxi driver unions are to Uber.
You forgot one of the most critical functions of banks like this-- large scale institutional lending.
A business needs to borrow $2 billion dollars -- are you going to crowd fund that?
A state government wants to borrow $800 million in bonds for a new arena, can you GoFund that?
A major government wants to store $30 billion of their own currency in a financial product that will decrease in value against the dollar more slowly than their currency. Is there an app that helps governments store 30 billion in assets (or are we naive enough to suggest that bitcoin is a smart investment?)
A major pension plan serving 100,000 retirees needs their 100 billion dollars in assets to be managed responsibly, can a 24 year old Stanford grad manage that?
I think calling Banks the "taxi union against Uber" is painfully naive in the sense that it only looks at small transactions and consumer transaction while ignoring the very large institutional business-to-business and business-to-governments side of banking.
Maybe small business will get their lending needs with new technology but I just don't see a Fortune 50 company taking a multi-billion dollar loan through crowdsourcing.
Having worked for a major bank for several years, the way huge deals like this get placed isn't too far removed from crowdfunding, it's just that the dollar amounts are higher and the participants are big institutions instead of individuals.
I was on the deal team for a $1.4bn capital raise and probably 20 or so $100mm-$500mm raises, and the way it happens (for bond and equity issues anyway) is there's a brief marketing period and then a bunch of sales guys get on the phone, call all their institutional accounts, get commitments from them, and the deal is done. It's amazing how quickly it happens. And the fees we earn on these deals are ludicrous. I think there's no way the banks don't get disintermediated.
> A major pension plan serving 100,000 retirees needs their 100 billion dollars in assets to be managed responsibly, can a 24 year old Stanford grad manage that?
Judging by the NYC pension fund, I could manage 100 billion better.
Wow, no kidding! For the huge discount over their current guys at a mere $1,000,000 a year, I'd happily put the pensions into some Vanguard index funds... :D
"A major pension plan serving 100,000 retirees needs their 100 billion dollars in assets to be managed responsibly, can a 24 year old Stanford grad manage that?"
If the tech start ups change the game, do you think the pensioners are going to trust their money with a kid? no... Do you think the Wall Street talent is going to disappear just because the reviled industry they worked in changed? I don't think so.
I for one welcome the change. The industry is a bit of a mess right now.
Is it a terrible thing that massive amounts of money can't be promised and taxed? If that kind of lending is in fact good business(I'm not convinced it is) Couldn't the same loan be made through multiple smaller share holders?
I don't think billion dollar loans are a requirement for society to function, or the best option.
It could but that's the wrong perspective. In "free" system that respects private choice, what can and cannot be achieved isn't as important as what deciders decide on.
A large bank will perform risk analyses and consult with their data and math people, consult their legal people, consult their insurance people, and will choose what they think is best.
So your option can be totally feasible and never chosen by a large bank- a similar fate to many new technically feasible ideas.
But then again, if you were a large entity, would you prefer to be indebted to one large entity, or a thousand small ones? All things equal, I'd rather owe 1 person 1000$ than 1000 people 1$, and I imagine their lawyers and insurance people agree.
I understand why you would only want to owe 1 person $1000, but I think you see more ideas funded as the number of funding providers increases. My dislike of large banks is totally a bias here, but I'd like to think more funding options = superior to a single decision maker.
If Intel is sourcing a billion dollar factory, shouldn't their revenue be multiple times that? If you're telling me the factory they need costs $1 billion, my response is that the cost is only that high in a market full of banks that make billion dollar loans...
Intel's factories cost billions of dollars (actual cost is around $5 billion now, not a mere $1 billion) because they're unbelievably advanced. This isn't the housing bubble applied to factories. They're building a facility that uses the most advanced technology in the world on an industrial scale.
Their revenue is many times that, certainly, but that doesn't mean they just have billions of dollars lying about doing nothing, waiting for the company to need a factory.
Sometimes it's not so simple. I recall Google issuing bonds because it was cheaper than repatriating non-US revenue from abroad to fund US investments (it would have been taxed twice, albeit at an extremely low rate on it's non-US revenue).
> Is it a terrible thing that massive amounts of money can't be promised and taxed? If that kind of lending is in fact good business(I'm not convinced it is) Couldn't the same loan be made through multiple smaller share holders?
Sure, in fact, the same loan probably will be with the existing system. Large (hundreds of millions of USD) bond offerings to the public, from either a state agencies or private firms don't end up with only one purchaser in many cases, even if they have a big financial firm facilitating the offering.
The question is how do alternative mechanisms do this as well or better?
A major government wants to store $30 billion of their
own currency in a financial product that will decrease
in value against the dollar more slowly than their
currency. Is there an app that helps governments store
30 billion in assets (or are we naive enough to suggest
that bitcoin is a smart investment?)
Could someone, well versed with central banking methods or fiscal/monetary policy, explain how this works?
I'm not very monetarily/financially literate.
Why would a country invest in some product that decreases in value in the first place - even if their own country's currency is slowly but surely losing value?
By "decrease in value", does the author mean temporarily or in a slow downward trending gradual spiral ?
Why not pump the same money into something that is likely to grow in value, like rare earth minerals or into companies that hold rare expertise in battery technology or something similar?
because of risk, is in everybody interest of playing as safe as possible with the government assets (unless you channel them to your Swiss account using your cousin's fake company as a front
You bet that you can crowd fund Capital markets. It's just done with much bigger checks. One of the very large food and ag banks told us (AgFunder) that they were losing clients to JPM and GS because they didn't have their distribution power, and that if we could provide them with a distribution platform they would literally bring us billions of dollars of deal flow. On the other side of the table we have sovereign wealth funds and PE funds that are asking us when we can bring on larger deals. One conversation today said that they were looming for $500m deals to invest in.
1 - Connecting money providers and money users. This can play out in the big deals that you mention. They provide $2 billion in financing, and line up a bunch of investors on the other side. Additionally they fulfill this in trading securities.
2 - Taking short term money (deposits which can be withdrawn at any time) and funding long term debt (mortgages, long term bank loans). This can only be done by aggregating lots of suppliers of funds, and pooling them together.
I suspect that much of this can be crowd-sourced and disaggregated, starting at the bottom.
Exactly. If these small players start by acquiring deposits and investment accounts, they will be offsetting those deposits from the big banks. Once the small entrants reach a certain size they will themselves be able to play in the larger financing space thus competing with the big banks in more areas.
Hedge funds have been doing this for years, and some of the largest hedge funds now participate in many of the lines of business that are traditionally thought of as investment banking.
Both those problems can be solved by emiting bills that anybody can buy and sell on a secondary market.
The problems that can not be solved by that are basically how to discover who one should trust enough to lend money, and agregating people to persue unpaid loans.
The problem of course being that banks have a heavily regulated oligopoly on the _creation_ of money. Banks have a right to lend (a lot) more than they have deposits and capital. Think fractional reserve banking. They effectively create money out of thin air. Kickstarter and friends can't do that.
But the tech sector may come start scratch at the edges. I hope so, together with you!
Fractional reserve banking doesn't mean you lend more than you have. It merely means you keep less money on hand than the sum total of your deposits and capital. This "creates money" because the depositors still act like their deposits are 100% present, and the debtors have some of that same money to spend. Banks aren't lending more money than the deposits and capital they hold.
Kickstarter and friends can't, but there are other tech options for creating money, or money-like instruments. Bitcoin and Zynga points are some first steps in that direction. IOUs could be another. Any firm that can give credit is also a move towards money.
But these are very different business cases - retail banking and institutional investing have very different customers, practices, regulations, etc. So why not make these be different companies?
>But these are very different business cases - retail banking and institutional investing have very different customers, practices, regulations, etc. So why not make these be different companies?
Operating Systems and Search Engines are completely different business cases with different industries and markets.
So why does Google do Search and Android? Because both fit the larger Google Data focus.
Both retail and institutional banking fit the larger Bank Finance focus.
They are one big company for the same reason why Apple makes smartphones and desktop operating systems.
For the same reason why Microsoft develops the best Office Software as well makes tablet computers with styluses.
What can I say? You can use government to force large companies to break up, but otherwise the existence of a large company that works in multiple industries or has multiple focuses isn't that crazy or alien.
A business needs to borrow $2 billion dollars -- are you going to crowd fund that?
A state government wants to borrow $800 million in bonds for a new arena, can you GoFund that?
> A state government wants to borrow $800 million in bonds for a new arena, can you GoFund that?
say you have an arena that holds 50,000 people, sell the right to name a seat for $100, and the right to choose an image to put on the seat for $1,000. That's 5,000,0000 in naming rights on the seats, and 50 million for the images on the seats.
Charge more for putting an image on contiguous seats - if you want n seats in a row, that's $1000 *n^2. They always end up selling naming rights to these things anyways, why not just have images in the seats be ads or pictures of loved ones or whatever?
Sell colored tiles in the bathrooms and even things like the color of a single screw for $10. sell the names of the concession stands and the names of urinals on the bathroom and the pictures on the bathroom stalls.
But who needs a fancy, multicolored stadium named after and showing the character, images and pictures of the people and brands from the city when you could have a big bland boxy thing named after a large company, and then 30 years of bonds to pay it off, right?
I mean, realistically you don't have to charge fans a cent. Kraft bought the Patriots a stadium in Foxborough at his personal expense: zero cost to taxpayers or subsidization from fans outside of the business he operates.
My point wasn't to find an alternative to taxpayer stadium financing as those alternatives exist today, my point was to say: If a government wants to take out a $800M loan, how do we make that happen. If an entity has a need: how do we meet that need. Merely saying "your need is invalid" is not a solution in any sense.
By trying to invalidate my use-case of an $800M loan, you side-step the actual problem: Providing a 20 year $800M loan. That's a real need in today's world. Providing a billion USD that you don't get back for multiple decades. That's a real world need that will have to be met by your future-tech. Not evaded, not made irrelevant, not ignored: but solved. How do you crowdsource finance in a way that you can take someone's money for 20 years? Because we know how traditional banks can achieve giving away billions for decades, but not how an crowdsourced futuretech solution would approach it.
Doesn't a liquid securities market imply that a lender in a 20 year loan can always sell their loan to others if they want? So there's no need to require them to provide a 20 year lockup, assuming a secondary market exists.
If the government (by US theory, this is: "the people") wants to take out a $800M loan, then, by definition, it will have no problem 'crowd-funding' it.
>If the government (by US theory, this is: "the people")
You're talking about the Federal Government, which yes can monetize debt through the Treasury and Federal Reserve by act of Congress.
However, I'm talking about State and Local governments which are unable to run deficits and unable to create treasuries to sell to the Reserve for new cash.
For all American governments EXCEPT for the Federal level, they must, like any large corporation or entity, find a lender and pay interest.
The bigger question is what happens if you don't sell at that price.
Large bond placements usually begin with testing clients' enthusiasm at specific interest rate, and then adjusting the interest rate in case of under/over-subscription.
Not saying you couldn't do that via an online auction system, it's just that cost and time it takes is usually under-estimated.
Although it also would disrupt several startups, I have been saying for a long while now that the payment processors like Visa, MC, etc., really shouldn't exist. The government should have its own digital currency and its own payment processing network.
If the government doesn't get on that, it is under serious risk of losing it's primary purpose of governance, to which currency and financial systems belong.
There is talk about the end of the dollar as a physical currency sometimes, but government types should really start realizing that simply handing over currency and payment processing to private entities represents probably the biggest threat to the westphalian nation state that ever existed.
One of the primary powers that cause people to congregate around a nation state government is the control of currency. It may even represent another major crack that could result in the fracturing of the USA.
I disagree that private ownership of payment processors means the government is losing control of it's currency. I see Visa, MC, and banks in general as an abstraction of the dollar rather than a replacement for it. When I use a card or bank wire to transfer money I'm still technically sending dollars from one entity to another.
Since the gold standard has already proven to be too unstable, and cryptocurrencies haven't proven to be stable enough yet, I believe the only competition for the dollar is other nations' currencies. And determining which nation's currency will be the world standard is typically based on who has the strongest military and economy.
payment processors like Visa, MC, etc., really shouldn't exist
Agreed. When it's cheaper for a large company to do checks (physical or ACH) then we can pretty much assume that putting electronic money in the hands of for-profit entities like Visa and MasterCard is a real mistake. The cost of a credit card transaction is too damn high.
I will grant that a (US) government agency is cumbersome and inefficient and risible, but putting that amount of control in private entities is a mistake on many levels.
Payment processors are a cartel. I'm not from the US, and no other processors have really come up. It's basically an underlying tax on all products -- as much as I don't agree with the rest of parents post -- it really is absurd such simple tech isn't done by the government. It would be like delegating private presses for the dollar and in turn giving them a huge fee for bank deposits.
Not only checks, but the hallmark of irony in this is we still use paper money. It should be a lot cheaper and simpler to move bits!
It all goes to funding those cartels, and most of their spending is not to improve service but maintain the absurdity.
Is your comment intentionally dripping in irony? The government ceded their control over the financial system long ago. Ask yourself, how many senators and congressman handle strictly financial matters? Ask yourself, who primarily earns interest on all the loans people take out? Ask yourself, why was the federal income tax prohibited in the original constitution?
The government already has its own fiat currency that can also be handled digitally. I don't see any risk of the fiscal and monetary policy slipping out of their hands soon.
How does this work when you travel abroad? It seems like various currency-issuing governments are small-to-medium players in this arena with large transnational companies being the only ones to capture the economies of scale.
Bitcoin is going to break the backs of governments anyway - they can create their own digital currencies, but there's no guarantee that people will use them!
Sure there is -- they can make alternatives illegal. Then big companies must accept the government sponsored digital currency, which would make it the only currency viable for mass market (alternatively, no digital currency will be widely adopted).
I don't know if this is unique to NYC or something, but the last time I had to go to the DMV, I scheduled my appointment online ahead of time, walked in 5 minutes before the scheduled appointment, renewed my license, and walked out in about 20 minutes total.
Their site was a little ugly, the clerk who assisted me was a touch curt, but overall the worst part of it was my apprehension about going to the DMV.
I know my situation was simple, but I thought that was the big objection to the DMV: simple things are hard. The whole thing was pretty easy.
A week ago I moved and had to register my car in California. I spent, all told, twelve hours waiting in line. I could have gotten an appointment, to be sure...in two weeks.
For something like a DMV, it is important that a live human being personally verify individuals and documents in-person. This is inefficient by design, but quite necessary.
Automation of things such as this with current technology makes something as important as vehicle licensing and government-issued identification (along with everything that entails) a very risky and dangerous thing indeed.
Okay, so going to the DMV is boring and even infuriating. But, for now, we must have human beings asking all of the questions, administering all of the tests, looking at every person in the face, double and triple-checking things and so on.
Yet in other countries similar processes are no where near as painful, so the claim that "having human beings involved necessarily makes things painfully in efficient" is not very plausible.
For reasons I don't understand American government systems tend to be very difficult and painful to deal with. This not unique to the US, but in the developed world most other nations have seen improvements since the '70's. The US, not so much.
Getting a driver's license or health card in Canada used to be pretty painful. Today it's very streamlined. You still have to deal with people face-to-face, but the process has been designed to be quick and efficient.
I'm in the UK, and "going to the DMV" is one of those US rituals I don't understand. We have one licensing office and interact with it entirely by post or Internet. Photo authentication can be done off the passport photo system.
WaMu. Maybe they weren't perfect, but one of the things we lost when Chase ate WaMu was their "quirkyness." They always seemed happy and friendly in my branch. Now? Zombies.
Sometimes slow is forgivable if things are fun. For example, I enjoy walking to the farmers' market, though it would be faster to order food for delivery. But I don't enjoy driving, parking, and picking packaged goods from a warehouse (Target), so I prefer to have my paper towels delivered.
You're not alone, I want my bank to be boring and I want almost no interaction with them. There's a bank in the United Kingdom called Metrobank which promised to be different to existing high-street banks, they managed to get me through the door out of interest but as soon as I saw one of the members of staff dressed as Henry VIII I made a hasty exit out of the other door. They also seem more interested in dogs than their customers[0].
I haven't actually entered a bank in years thanks in large part to software development. I think it's kind of 'fun' to take picture of a check and deposit it.
Making managing your funds 'fun' as in interesting, and addictive is a huge win in a place where most people are so financially illiterate they are afraid of their own money-management.
Uber used a classic wall st. move to get where they are: regulatory arbitrage. The law said that you can't pick up passengers that wave you down in the street unless you buy a yellow taxi medallion for $1.5m. But uber said that pressing a button on your phone while standing in the street is not the same as waving your hand at the car so now it's ok.
I've been thinking that if someone can do a similar thing for banking using bitcoin that they can avoid some of the rules and operate for a lot less cost than the existing regulated entities. Unfortunately I have no idea what this would look like.
I don't know about you but this makes me incredibly nervous; I have mentioned before there probably is some inefficiency in taxi medallions, but uber is also doing things like ignoring government regulations wholesale (see Germany), potentially breaking labor laws, and may exist to the detriment of the public as a whole. If you recall 2007/2008 the banks got in big trouble because they were doing legally questionable things (sub-prime lending, etc). If the means by which tech start ups get ahead of Wall Street is by subverting the spirit of the law even more so than Wall Street does currently, the precedent and consequences that would come of this would be rather awful and most unnerving.
Lots of those legally questionable things were driven by regulation. Repackaging subprime mortgages as AAA security was driven by the requirements of some institutional investors to only deal in AAA rated securities.
Instead of giving banks secrecy and deposit insurance, we should do the opposite: require open books (perhaps with a six month lag), and no deposit insurance. That would keep customers monitoring their banks much more carefully for any fanciful shenanigans, and give a premium to the most boring banks imaginable. Boring is sometimes good.
I agree mostly, I think more regulation is important, and transparency is critical and much needed. I would not choose, however, to bank with anyone who wasn't FDIC insured; while the FDIC may allow some banks to be less risk-averse than they should be, consider a metaphor to your suggestion: when was the last time you audited all the security critical code on your computer? When was the last time an average person audited the security code on their computer? To truly expect everyone to watch out for themselves is asking a lot, without deposit insurance, sets up you up for the kind of problems seen in the 1920s that brought about the FDIC in first (even "good" banks can suffer a catastrophic run during events like what occured in 1929). If you're ever seen the amazing games corporations can play with their accounting, and begin to realize the magnitude of the task before a group like the SEC, to expect an average consumer to trust his/her checking account to their own ability to watch out for themselves seems rather foolish.
I'd expect other people to do the audits, short the banks that fall short, and then publish their reports.
I think back in 1929 we didn't have the transparency requirements that I was suggesting. (And if you really want a bank that survives any run, you will have to pick one that offers no-fractional banking, and suffer high costs on average. Might be worth it for some.)
HN downvoter herd mentality types can't handle the individuality and personal responsibility of libertarian utopias that Uber and its ilk will usher in, so they fight back with the only tools at their disposal. Stupid laws are meant to be broken, and 'kleptocracy' is a shibboleth, identifying you as a poor (or, worse, a poor-sympathizer).
The laws put in place are not stupid -- they are put in place to protect both riders and drivers against well-known market failures such as information asymmetry and market-for-lemons [1,2]. They may be outdated and in need of revision, but I think it's premature to conclude that Uber has all the right answers.
While I agree that many of the laws aren't stupid and should be followed, I can't figure out any justification, other than greed, for restricting supply the way many cities do. If you can, please share.
I was being sarcastic, and if that's not fairly apparent I should probably change my approach; there's a tendency for HN to go full meritechnocrat in these situations and side with whoever seems the most disruptive. I find it obnoxious for exactly the reasons you've posted here, among others.
> Do we even need monolithic financial entities in this day and age? Most transactions would be better handled by smaller, specialized and modern service companies.
Try dealing with all the special snowflake APIs of twenty or a hundred suppliers of physical goods which are essentially a list of transactions. Then on the other end you mesh with Amex, a merchant gateway for Visa/Mastercard, Paypal, Amazon, etc.
Even "standards" tend to get "adjusted". EDI becomes Vendor X's bastardization of EDI that only resembles EDI at a glance from a non-technical person.
The more "special snowflake" providers you have, the more complex the system becomes and complexity breeds all sorts of inefficiencies. I'd much rather have 50 'monolithic' banks that all abstract things and talk to each other so I only have to deal with "my" bank than 10,000 "financial entities".
> what taxi driver unions are to Uber
I don't want Uber "oh, we'll break regulations and standards because we can get away with it and the contractor is the one that is legally liable" anywhere near any kind of banking system. That attitude would cause all sorts of truly massive problems.
> EDI becomes Vendor X's bastardization of EDI that only resembles EDI at a glance from a non-technical person.
Having spent much of the last decade dealing with systems dealing with EDI in healthcare, I have to say I suspect that largely happens with X-12 EDI standards (at least, the HIPAA mandated ones in healthcare, its possible others are different) because they only resemble suitable technical standards for the intended business domain at a glance from a person unfamiliar with either technology, the business domain, or, ideally, both. (And, on top of that, they are interdependent, each standard is non-free, the standard packaging of all the mandated standards doesn't include the basic standards underlying all of them that they rely on, and even with all the X-12 standards each of them relies on, by reference, dozens of other non-free, third-party standards, for many of which the X-12 standard provides only a postal address for the third-party source.)
Fair enough, but I was mainly using it as an example of a "standard" being not-a-standard-because-too-many-different-implementations and why a monolithic entity would be less prone to this problem.
> and I'll add that they are too unfun, and their sales departments are pushy and intrusive.
I think you missed something big: They are too rich. As the saying goes, "Where are the customers' yachts?"
Just as the rise of etrade, datek, ameritrade killed off the overpriced stock broker biz, there are whole swaths of banking waiting to be dragged into the internet age.
> Do we even need monolithic financial entities in this day and age? Most transactions would be better handled by smaller, specialized and modern service companies. Banks are to financial startups what taxi driver unions are to Uber.
On the individual consumer-banking side, there is a strong case to be made that this is true.
However, as long as Fortune 100 companies and large pension funds exist, they're going to do massive transactions in the capital markets -- and you need similarly huge financial institutions to bookrun on these kinds of deals.
So in my view, it's likely that startups that can provide a more agile / fun / efficient / whatever experience stand poised to eat banks' lunch in some areas...but there is definitely a significant slice of the market that requires market-makers to be massively capitalized.
I don't see any reasons why a silicon valley startup couldn't. Lots of small bank startups sprout up all over the country. Also, Simple.com was a startup (they are now part of a very large bank) that got FDIC insurance through a partner bank.
Private corporations already underwrite bonds (and related debt products like pensions, corporate loans, annuities or mortgages). A deposit in a bank is not completely different from a customer loaning money to the banking institution (at low or zero interest) in exchange for on-demand funds availability.
I worked for JP Morgan Chase a couple of years ago, as part of the main technology division for the entire bank. If I remember correctly, this 'IT department' had the same headcount as Apple. It was an interesting place. There was a lot of technologies being used through the organisation, lots of python and Java code, perl with Mojolicious, puppet and cfengine, desktops were Linux based terminals connected to virtualised Windows desktops, Hadoop and Cassandra was being rolled out, interesting things with FPGAs were being done e.g. http://web.stanford.edu/class/ee380/Abstracts/110511-slides.... I worked with many skilled and experienced people, and nice people too. I have worked for many multinationals before, and this bank was certainly the most nimble of them all while being the biggest and most stable at the same time.
I also worked for approximately two years at JPMC. My anecdotal experience (and of many friends in other departments) is that the bank is so large, that the following phenomena can be seen:
1. Yes, there is a lot of variety in technologies used.
2. This variation is due to the large organization not being structured for different departments to communicate with each other.
3. Therefore, for every department using Hadoop, you have one on COBOL. For every Scheme group on Linux, you have a Visual Basic group on Windows.
Yes, it was huge, and made up of a lot of units independently. They used to joke that the company was a technology vendor's delight, since they weren't very strict with what technology a department can choose to use, leading to finding a bit of almost every vendor somewhere. When I was there they had a push towards centralising IT between the divisions, providing common services and support to get economies of scale. I suspect this is a cyclical trend over decades.
"Building financial technology is hard. Really hard. Startups are always hard, but fin tech is a whole different level of self-inflicted pain. You’ll be regulated. You’ll deal with big banks. They’ll see you as little and cute until you’re meaningful. Once that happens, they’ll want to crush you out of existence."
This has been my experience in most industries. Once you gain traction the main players will do everything they can to stop you. Frivolous lawsuits are probably the most annoying tactic.
Most people take SV/WS as a geographical identity, starting a war between the two. However, rather than war, we've been seeing a confluence. WS is nothing but a group of workers, morality, tradition and culture.
Right now, WS is not being destroyed: it's merely being mixed into the SV. Either by bringing its top executives or fostering a 'brogrammer' culture, the similarity between the two are becoming clearer and clearer.
It's been going on like that for years. Think of all the wall st folks who made their careers on tech stocks of the past, like Rick Sherlund at Goldman with Microsoft, and Mary Meeker. The funny thing about the overwhelming attitude regarding the financial industry on HN is that the venture capital business is just another area of the financial industry and it has all of the same (mis)behaviors: managers benefiting from information asymmetry, high fees for questionable returns / risks, etc.
I wonder sometimes what is left for banks to do that couldn't be fully automated (at least on the consumer side). Creating accounts, making deposits, withdrawals, transfers, paying bills can all be done online or through apps. Getting a loan or credit card seems to largely be a matter of 1) obtain credit score 2) calculate terms. Investments can be done through the likes of Vanguard/Wealthfront/Betterment. I feel like I must be missing something here, or maybe people really like talking with someone they know at the bank when getting a loan or mortgage.
Banks are primarily market makers in the credit market. They borrow money (via deposits) and lend it out, earning money on the spread. If you want to earn a yield on your deposit, the bank will have to invest deposits, and this is not a simple process. Each investment requires separate handling, where the bank bases its offer price on the risks associated with that particular project. I'm not saying it can't benefit from some sort of automation, only that it's a non-trivial task, not easily automated. This is traditionally what banks do.
Of course, if the debtors-to-be can get better conditions elsewhere -- like a zero interest loan from Kickstarter -- they will go there.
But as long as people want to earn interest on their savings, there is a place for banks.
Agreed. At least from a consumer standpoint. I use an online only bank account after switching. And there's plenty out there. Better service, fewer fees, and without a physical "bank" location in the traditional sense it can keep costs lower. Haven't looked back. I don't need a physical bank to accomplish 99.9% of my banking needs. With offerings like Ally, Simple, etc I think the traditional and big banks will only be necessary for non consumer facing stuff: large investments, mass ACH, trading (including high frequency stuff), etc
I was nervous before switching to Simple, but then I thought about how the only time I went to my physical bank in the last 3 years was to exchange currency, and in that time they charged me $300 in fees for one reason or another. It's been almost a year with zero fees and zero regrets.
I've been using Simple since January of last year, and I am incredibly thrilled with them overall. I could ramble for days about their outstanding customer service, how their "Goals" system has significantly improved my own ability to save money, yadda yadda. Chase was the bank I had to suffer with prior to switching to Simple, so I have to admit that it makes me ridiculously happy to see Dimon legitimately concerned about companies that actually give a fuck about people.
It's not just that startups are identifying cool new technologies like cybercurrencies, and it's not just that they're using new models to offer loans faster. Startups have started to take on markets which banks pretty clearly knew about, but refused to touch - you can refinance a federal student loan with SoFi or commonbond now, which was unheard of five years ago.
The problem is that the little guys' competitive advantage seems to lie only in their willingness to enter the space. Once the market is proven, Wells Fargo and JP Morgan won't really have a difficult time stepping in with boringly normal technology and using their giant pile of money to dominate the market.
What can finance startups do to avoid being squeezed out by the older, established banks?
The problem with starting a new institution these days is that the regulatory & audit issues mean that you'll be a small bank, with the overhead of a large bank.
There's also the package integrations to deal with. Banks tend to buy packages for their core functions, and then (try) and integrate them. There's an opportunity here for someone who can offer a "Bank In A Box" -- all the software needed to start a bank/credit union that is well-integrated and complete -- from GL/AP to lending, depositor management, ACH + Fedwire connections, and disaster recovery.
>> “Rest assured, we analyze all of our competitors in excruciating detail – so we can learn what they are doing and develop our own strategies accordingly,” he said.
Perhaps worrying more about analyzing their customers needs and less about their competitors would be better.
I also found it amusing he considers PayPal a "new payment technology"...
One reason I don't think JP Morgan or traditional banks can compete effectively with smaller startups is the regulatory framework that they operate in. New startups can structure themselves outside this framework and be more nimble.
For instance, Lending Club essentially passes through all credit risk to its investors with its assets and liabilities perfectly matched. So every dollar loss in loans is a dollar less to the holders of the notes.
If a bank tried to have this sort of structure, it would be incredibly leveraged and would require a large amount of capital reserves.
There was a great Bloomberg article addressing just this [0]
You all have read about Bitcoin, merchants building their own networks, PayPal and PayPal look-alikes. Payments are a critical business for us – and we are quite good at it. But there is much for us to learn in terms of real-time systems, better encryption tech- niques, and reduction of costs and “pain points” for customers.
Everyone in the tech world, specifically the investors, has known this for a while. Marc Andreesen could have told this to Jamie Dimon ten years ago. "Software is eating the world" holds just as true today as it did when he first said it.
The problem is that "software is eating the world" only in the long term. It's easy to get behind the mantra when you're imagining software in an idealistic, abstract sense. After all, just look around you. Software is disrupting industries left and right. It's cheap, reproducible, and highly leveraged with low marginal cost. Software is more economically efficient than the incumbent operations of every industry it disrupts.
The financial industry is unlike any other industry software is "disrupting." The operations are irrevocably complex because they are inherently driven by human operators. Each year, more tech creeps in between the operators and the operations, and software gradually "eats" the industry. But bankers are not losing their jobs. Why would they? Software is more efficient, it makes them more money. It gives them more time to focus on improving other efficiencies. Bankers see software as a resource they can leverage just like anything else. The more it eats their industry, the more they feed it. As long as it continues making the bankers money, they will keep their own jobs. As long as they keep their jobs, they will keep leveraging their resources, which inevitably increases the complexity of the financial system.
The longer humans are in charge of the financial system, the more complicated it becomes. I see very little chance of humans relinquishing complete control of the system to algorithms. There is always a human, or group of humans, at the top -- that is the nature of politics and civilization. Perhaps the human has less input as technology improves, but politics still requires that human to occupy the seat at the top of the economy. Somebody needs to be responsible for the system. We cannot relinquish all control to the robots.
I agree that there is some naivety when attacking huge institutions as mentioned in the article. Particularly when it comes to dodging regulation. Rather than putting you on top dodging regulation is probably going to put you out of business when it comes to Financial Institutions.
[P.S. will the Gods of HN please upvote my comment so I can have the slightest visibility here]
Banks have one advantage in this area. The have government regulations and many other laws making it hard to organize competition, such as anti-money-laundering and know-your-customer laws.
Look at what happened to E-Gold. It was a threat to traditional banking, laws were changed, and the business was declared illegal (and many of the operators went to prison for violating laws that were passed after they started operating).
I find it curious that pain points is given the inner quotes treatment whenever the JP Morgan CEO uses that term. It's almost like such a concept didn't exist before startups started addressing it.
I think what is especially interesting about this comment is that Wall St, which is on the East Coast, uses the internet in very different ways than Silicon Valley does, which on the West Coast. Both have ground to make up in this sense; Silicon Valley could be much more in tune with their East Coast counter parts...
I haven't paid attention for 15 years or so, but I spent the late 90s with a company making server software for banks to run on pcs instead of mainframes. Mostly C, C++, but also VB, and I think even some Turbo Pascal if I remember correctly. Consumer lending, mortgages, lead generation, checking, atms...
Since that was so long ago, I assumed they'd be further along by now.
HN likes to promote upgrading technology stacks to the new hotness (which at one time was Java, and is now Javascript/Node.js) for no other reason than the old standard being old. This is often under the guise of "Disruption" when the good trolls are doing it.
Do we even need monolithic financial entities in this day and age? Most transactions would be better handled by smaller, specialized and modern service companies. Banks are to financial startups what taxi driver unions are to Uber.
And the financial sector definitely deserves a shakedown, after they essentially plunged the rest of the world into a decade of misery with their securities fraud during the housing crisis, and went unpunished for it.