Over the past 30 years, nearly every industry has been turned on its head by the rise of the Internet. From shopping to manufacturing to catching a taxi, consumers and businesses have enjoyed a revolution in service, productivity, and convenience.
A notable exception is banking and finance.
For most people, applying for a loan still requires sitting down in front of a banker's desk in a physical office. Those bankers still use the same credit reports and underwriting methods that have been in use for decades. Transferring money from one account to another still takes two or three days even though the transaction is all digital and in theory shouldn't take more than a few milliseconds.
Source: Company website
Legendary venture capitalist Marc Andreessen, backer of Uber, Twitter, Facebook, AirBNB, and more, recently sat down with Bloomberg Markets to discuss what he sees as a coming revolution in finance.
"We have a chance to rebuild the system"
To Andreessen, the financial crisis wasn't as much a crisis as it was an opportunity to rethink the way that we fundamentally manage finances in this country.
Why does it take two or three days to transfer money from one bank to the other? Because the current Automated Clearing House (ACH) system was built that way. Current payment processing companies like Visa (V -1.70%) and MasterCard (MA -1.20%) routinely charge 2-3% or more for every transaction on their respective networks. In aggregate, that's billions of dollars in costs to individuals and small businesses every single year. Or consider the recent rash of credit card thefts at major U.S. retailers like Target (TGT -0.67%) or the Home Depot (HD -1.44%). Isn't there a better way to facilitate commerce and protect from identity theft in a robust and effective way?
To Andreessen, these problems point to a way to revolutionize the entire financial sector.
Building a new financial world around convenience, speed, costs, and security
Andreessen has been a vocal proponent of and active investor in cutting edge cryptocurrencies like bitcoin. These technologies have the potential to lower costs, increase speed, and even increase transaction speeds.
Other non-currency technologies are also setting themselves up to disrupt (or even displace) conventional methods. Several start-ups are developing new credit scoring algorithms that include social media, search queries, and other behavioral data to supplement and enhance the existing FICO model that primarily relies on payment history.
Andreessen said:
"We needed a new technology to have the wedge to be able to enter the market, to be able to justify all the work to rebuild the system.
"...think about the scenario of a loan officer talking to a prospective client. To software people, that looks like voodoo. The idea that you can sit across the table from somebody and get a read on their character is just nonsense."
He goes on to liken bitcoin to a technology "from Mars," meaning that it is so fundamentally different to the traditional way of transacting in the economy that it has the potential to make current regulations, banks, and systems irrelevant or even obsolete. That threat to the existing players presents the largest challenge to Andreessen's vision.
"The problem with building a new product or service in the existing financial industry is that tens of thousands of pages of legislation and thousands of lobbyists are going to come down on you very quickly."
But despite the challenges, the upside is simply too great to ignore. Beyond increasing convenience, lowering costs, and speeding up the system, Andreessen makes sure to point to improved security over today's centralized systems as well.
"In a bitcoin world, things like the Target hack are not possible....If you have the numbers on the coins, you own the coins. You can make payments without having to give any information about yourself, and everyone can double-check their transactions. If someone hacked into Target, they would be able to steal all of Target's money -- but they wouldn't be able to steal your money."
The reality of change in finance
Image source: Marc van der Chijs
For Andreessen and other early stage investors, the payout for these investments is likely five years or more in the future. To say that this is an uphill battle puts the challenge lightly. There is the enormity of the industry, the regulatory reality of banking in the U.S. today, and the lobbying power of today's banks and financial providers. Those existing players will without question put up a ferocious fight to protect their own interests.
For consumers, though, the future looks bright. Even if Andreessen and his fellow venture capitalists fail to overturn and rebuild the American financial system, the pressure they are applying today will force the big banks to change, adapt, and, most importantly, improve.
Will we all be using bitcoin and applying for loans via mobile phone in five years? Only time will tell. But we can rest assured that change is coming, and that change will be a positive for consumers.
