Thoughts on hacking finance (continued)

There is just such a HUGE opportunity to reinvent this stale, corrupt, end of empire business we call finance.

In response to the NYtimes article on the crooked behaviors of financial planners, Sean Park made this wonderful comment. He should know since he has been at the forefront of the financial sector for many years.

In the traditional of this blog, let me continue on my ideas of how to hack finance. If you have further ideas to add on, please leave them in the comments section. We all need better discussions and ideas on how to reinvent this industry.

Covestor for financial planning
Financial planning really isn't all that hard. We can make it easier through online tools. More importantly, if we allow people to start sharing their financial plans, there might be less need for the so call 'professional' planners. After all, if you have spoken with any of them,you know how 'sophisticated' they really are. What we need are just ways to surface the best among us so that we can depend on each other for sound financial advise, rather than some arbitrary third party.

Financial services for new kinds of markets (carbon, power, water etc)
Current financial services are build on thin value. However, the potential of finance is so much more. It can reallocate resources, through markets, to projects and companies that are bringing real value. Now, with the technology and economic infrastructure of the 21st century, it is entirely possible to implement a market-based pricing of intangible externalities. This means the real cost of our activities, including those on the environment, can be properly measured and evaluated. To do that, we need a whole new suite of financial services, from information tools, to risk management and trading.

Better risk assessment models for the so-called high risk groups
I have mentioned before in my first post on hacking finance that we need better ways to serve the under-served. That include groups such as students, low-income and creative folks. The key solution is to develop alternate risk assessment models that better understand the context of these groups and take into account factors that might otherwise be missing from traditional risk models.

Let's take students as an example. Interest rates for students loans are a bit out of whack:

Interest rates on student loans, including on popular federal programs like the unsubsidized Stafford (now nearly 7 percent) and Parent Plus (8.5 percent), are running several percentage points higher than the rates on secured loans, like home equity lines of credit.

One of reason for that is that the FICO model doesn't accurately measure the risk of student loans. Students have no credit history which leads to FICO producing unreasonable credit risk. A better model is to capture the human capital aspect of students' education. A startup called HumanCapitalScore is doing exactly that.

We can learn from that experience and develop better risk models for the rest of the under served groups. With that, we might reinvent how finance can be extended to them successfully without taking on huge amounts of risks.