Adding to the “Entire Thing”

In an interview with Bloomberg Businessweek today, Marc Andreessen issued another clarion call for change. If software is going to eat the world, then when it comes to the finance industry “We can reinvent the entire thing.” As some of my past posts should make clear, I feel pretty strongly the same way. You can’t look at the finance industry today and claim things work the way they should. Certainly no one working in the trenches feels that way. For an industry that is supposedly the epitome of ruthless cutthroat capitalism, there are huge pockets of inefficiency. To be clear, I’m not making some moral claim, and I am not asking anyone to occupy anything. We can discuss the societal benefits of finance someplace else. Instead, I am arguing that most of the financial industry could do its job much more efficiently. And those changes are going to get forced on the industry one way or another.

In the Andreessen interview, he cites several good examples of how technology is going to change finance. He mentions the use of big data tools to assess credit scores for consumers. That caught my eye, because I am writing another note about a company that is doing something similar to gauge the creditworthiness of businesses.

My one complaint about the interview is that he does not go far enough. There are so many areas of the industry that need or are open to change. Things like Bitcoin and credit scores are a good start, but the title says the “Entire Thing”. I think that is the right sentiment, and want to add a few more to the list.

In my past notes, I have looked a lot at possible changes to equity research – the business of financial analysis for investors. This is a small field, but one which can still drive a lot of business, if done right. A complementary area that is also adrift are institutional sales forces, the people who take orders from big investors. Talk to most salespeople today and they are a glum group. There is a sense that their role is going to be entirely automated, or entirely dis-intermediated. Certainly, a lot of their work could be done by software or a low-cost offshore replacements. That is a reflection of management challenges, not their abilities.  What company does not need salespeople? The salesforce has a huge role to play, but not when they are burdened under incredibly weak software systems. I do not know of a single bank or large brokerage that uses CRM software in a constructive way. Alright, maybe one or two, but no one has developed a really good CRM tool for this kind of sales force. If I were to start a company today, it would be based on the idea of building a ‘social’ graph of Wall Street investors and hooking into this problem. I think there are a couple of companies nibbling around this, but so far no one has  quite nailed it. (The irony is that the one company that could do this, but has not, is Bloomberg, the publisher of the aforementioned interview, and likely among the top companies to get disrupted should Andreessen’s predictions prove true.)

Institutional sales forces and equity research are nice side shows. And really, the equity market is small potatoes. Do you really want to make big changes the Entire Thing? Then the place to look is the bond market, which is valued at something like $30 Trillion in the US alone. Despite its size and importance, the bond market is about as inefficient as a market can get. There is no central exchange, no floor to ring a bell on, no easy way to keep track of prices. Everything is a negotiated sale on imperfect information. It has festered this way for years because of a variety of conflicted interests and massive inertia. Everyone knows it has to change, but few people want to say it. That is starting to change. Last month, the world’s biggest investor Black Rock issued a white paper calling for reform[PDF] of the corporate bond market. They suggest a number of technical changes to bond market practices, but I think some good software could extend the changes much further. As with much of finance, there are all sorts of regulatory hurdles, and it is hard to see a five person start-up going against that, but then again maybe what the world needs is to see an attractive alternative.  I have tried to avoid using the word ‘disrupt’ in this piece, it gets overused, but I think it applies to the potential for change here.

Like I said, that Bloomberg interview is a good start, but there’s a lot more that can be done.


One response to “Adding to the “Entire Thing”

  1. Pingback: New Financial Models: Alibaba’s Micro Loan Business – DIGITS to DOLLARS·

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