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Wednesday, 11 March 2009

Thoughts on hacking finance

Finance has almost been part of my life. My education was in financial economics as in my first job. However, I have a great distaste for the industry and therefore left it to pursue my current interest in digital or new media. Now that Wall Street has self exploded, and we can see clearly how rotten the system is, it is time for startups and entrepreneurs to start reimagining how finance can be made better.

A light weight and responsive investment banking model

Traditional investment banks thrive on information arbitrage and limited disclosure, not to mention exploiting customers to the fullest. Next generation investment banks will use technology to empower the customer; giving the customer as much information as possible as well as the tools for them to easily determine and manage his/her investment portfolio or risk. Case example: WeatherBill.

New models of financing
Traditional financing has shown to be unable to adapt to new models of lending. That is why we are seeing stuff like microfinancing coming up from places that are far away from where traditional banks are. Social lending, debt exchanges, community currencies are all new approaches where financing can be raised.

Serving the under-served
We need better ways to provide financing to those who need it: students, low income groups, creatives, people with poor credits. These are all markets that needs disruption. There are lots of opportunities to provide easy to use, low cost alternatives to what traditional banks are failing to offer.

Peer to peer
financial advice
It is clear that the centralised way of managing the financial industry will not be sustainable. We have seen how industry after industry has been disrupted through empowering the individuals: blogs disrupting publishing, social music disrupting labels, SaaS disrupting entreprise software etc. Very soon, financial advice will be sought from your peers rather than from investment or personal bankers. There will be tools that help 'amateurs' and peers become 'professional' investment bankers and wealth advisors. Covestor is the leading example.

Financial research will be bottoms-up
StockTwit is a manifestation of an idea expressed by Umair Haque two years old. By unleashing the information bottleneck created by private networks, Stocktwits will make the market more inefficient and levels the playing level for everyone. The bigger picture is to recognise that financial information and research will be distributed. That creates opportunities for intelligent aggregation and filtering.

Advances in risk quarks
Through technology, we will be able to identify risks and make them plastic. We can then better manage them to reduce our exposure and limit financial damages. This article gives great examples of how these risk managment tools can look like.

Rating agencies will be replaced
The crisis has shown us that our current rating agencies are inadequate. Why do we need centralised authorities to tell us what is investment worthy and what is not? At Etech2009, there is an interesting startup that attempts to decentralise the rating process. It wants to give everyone the ability to assess risks using open source tools. More can be done in this area.

Financial literacy needs to be improved
I have blogged about the need for financial literacy before, reflecting on this Economist article that states the inadequacy of how we teach finance to the masses. I continue to think that this is an area that desperately needs our attention to make it better.

Making banking service more human and personalsied

Customer service in finance is not the most enjoyable experience. With the Web and some clever software, I wonder if a new kind of retail financial services experience can be created that would beat the pants off most of the mainstream high street banks.