'Silicon Valley Is Coming' Warns JP Morgan CEO
americasmarkets.usatoday.com
americasmarkets.usatoday.com
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.
Not quite - taxi driver unions are less competitive (in part at least) because they choose not to disregard regulations.
If by "disrupting" and "meritocracy" you mean "break the law" and "kleptocracy"...
[1] http://en.wikipedia.org/wiki/The_Market_for_Lemons [2] http://time.com/3592035/uber-taxi-history/
Erm... your audience here is mostly literal-minded computer techies.
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.
The US government already lost the battle on "export grade" encryption, and I believe they'd lose any attempts to ban other code as well.
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.
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.
As a mildly amusing aside: the Hong Kong dollar is printed privately, and issued by three private banks.
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.
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...
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.
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.
Passport photo authentication is effectively crowdsourced, with a very British requirement that the person authenticating the photo be suitably middle class: https://www.gov.uk/countersigning-passport-applications
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.
Also, some AAA offices may be able to register your car with the DMV.
Passports, on the other hand...
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 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.
Four letters: F.D.I.C.
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 $30 billion of their own currency in a financial product that will decrease in value against the dollar more slowly than their currency. Is there an app that helps governments store 30 billion in assets (or are we naive enough to suggest that bitcoin is a smart investment?)
A major pension plan serving 100,000 retirees needs their 100 billion dollars in assets to be managed responsibly, can a 24 year old Stanford grad manage that?
I think calling Banks the "taxi union against Uber" is painfully naive in the sense that it only looks at small transactions and consumer transaction while ignoring the very large institutional business-to-business and business-to-governments side of banking.
Maybe small business will get their lending needs with new technology but I just don't see a Fortune 50 company taking a multi-billion dollar loan through crowdsourcing.
A large bank will perform risk analyses and consult with their data and math people, consult their legal people, consult their insurance people, and will choose what they think is best.
So your option can be totally feasible and never chosen by a large bank- a similar fate to many new technically feasible ideas.
But then again, if you were a large entity, would you prefer to be indebted to one large entity, or a thousand small ones? All things equal, I'd rather owe 1 person 1000$ than 1000 people 1$, and I imagine their lawyers and insurance people agree.
Now you could replace banks with e.g bonds sold in the public market, but you still need something to finance the IT of the world.
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.
Also I am going to have to ask for a source for your hypothetical reply.
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?
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.
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.
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.
But the tech sector may come start scratch at the edges. I hope so, together with you!
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.
Judging by the NYC pension fund, I could manage 100 billion better.
http://mobile.nytimes.com/2015/04/09/nyregion/wall-street-fe...
Sure, why not?
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?
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.
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.
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.
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 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?)
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
"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.
> 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'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.
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 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.)
My guess is that when they caused the recession, he got laid off.
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.
- 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"...
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]
[0] http://www.bloombergview.com/articles/2014-08-27/lending-clu...
Competitors are coming in the payments area.
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.
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.
https://news.ycombinator.com/item?id=9321019
https://medium.com/bull-market/a-cynic-s-guide-to-fintech-3c...
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]
Twitter, everyone got their own chatroom.
Instagram, a photo-album.
Perhaps the next killer finapp is to allow everyone to become their own bank?
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).
The author applies heavy skepticism, but does rate some of the fintech business models as worthwhile.
In what ways?
Or are they just going to skip a generation, and move directly to io.js/Node.js?
Btw, the creator of C++ works on Wall Street.
http://www.morganstanley.com/profiles/bjarne-stroustrup-mana...
I apologize for upsetting you.
Since that was so long ago, I assumed they'd be further along by now.