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.
"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.
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?
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.
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?
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?
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.
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!
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].
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.
> 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.)
> 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 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.
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"...
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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.
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.
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.
Judging by the NYC pension fund, I could manage 100 billion better.
http://mobile.nytimes.com/2015/04/09/nyregion/wall-street-fe...
"A state government wants to borrow $800 million in bonds for a new arena" ... Arenas are a curse on the population. ( http://www.theatlantic.com/business/archive/2012/09/if-you-b... )
"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.
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?
edit: clarification
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.
Sure, why not?
Deleted Comment
Deleted Comment
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.
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.
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.
Maybe I'm alone, but I don't have a huge problem with my bank being "unfun".
https://www.metrobankonline.co.uk/Discover-Metro-Bank/DogsRu...
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.
Not quite - taxi driver unions are less competitive (in part at least) because they choose not to disregard regulations.
> 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.
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.)
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.
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.
Four letters: F.D.I.C.
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.
My guess is that when they caused the recession, he got laid off.
- Max Levchin http://fortune.com/2015/03/27/max-levchin-hates-credit-cards...
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.
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.
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?
http://www.plainsite.org/dockets/8l0ickx4/california-norther...
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.
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"...