How Innovation In Financial Services Can Be Saved

San Francisco mapped through geotagging

Internet Through The Ages

The launch of the Mosaic browser by Marc Andreessen in 1993 paved the way for Netscape which announced its browser in late 1994. The World Wide Web would fundamentally change the way global information was structured and accessed. Credit Suisse saw early on the benefits of the internet in changing the way retail clients brought and sold shares. The incorporation of Donaldson, Lufkin & Jenrette’s online brokerage business DLJDirect was a sign of the ways in which traditional financial brokerage functions were going online and become electronic.

The fundamental difference between Web 1.0 and today’s Web 2.0 era is the establishment of social media platforms that have allowed for user generated content and greater online social interaction. The internet today is not just seen as a research tool for one to access information, but has also become a place for the dissemination of user generated content. Thus, in the absolute the biggest change that web 2.0 social has brought is a key decentralization in the ways in which information is generated and shared. This distributed internet architecture today has led to an explosion of user data, which holds immense opportunities to revolutionize the core businesses for various aspects of the financial services industry.

Data Explosion

Today’s social media platforms have benefitted from network effects derived from two structural changes in internet usage. Growing penetration of high speed internet in developed and developing countries have increased exponentially in the last decade and this trend has been complemented by an increased willingness to put authentic personal information online. According to the Cisco VNI index, monthly internet traffic will expand fourfold globally from 2010 to 2015, while the number of smartphones globally could well hit five billion by 2015 according to Marc Andreessen. Growth of the internet from the first internet bubble to today has been immense and remains strong going into the remainder of this decade.

The result of these two structural shifts in internet usage combined with smartphone penetration has led to an explosion of personal data. Social media sites like Facebook or Twitter have been immensely powerful in convincing people to willingly hand over their personal information, friendship associations, interests, as well visual identifications of themselves and friends. This treasure trove of data is immensely valuable.

As heavier regulation comes down on more risky securities businesses, core commercial lending businesses will take on more importance in revenue contribution for universal and commercial banks. Better Bayesian prior updates have the potential to revolutionize the traditionally rigid commercial banking services to customized services for more nuanced customer segments. Hunting for signals of particular customer needs can now be done through large scale data mining on social media portals. For instance, a client tweets a photos of an apartment that she has inspected for purchase to ask for feedback. This information once picked up can be used for targeted marketing of home loan services to this particular client.

The realization that social media is an intelligence platform for financial institutions is crucial. Better intelligence gathering leads to more robust competitive strategies, but also leads to quicker product feedback. Setting up social media profiles is one step, but machine learning and data science specialists must be employed to fully capture the richness of personal information and opinions disseminated through social media.

Data Driven Decision Making

As proprietary trading is being clamped down for universal and investment banks, flow trading for clients will become increasingly important. The distributed architecture of the internet today means that a lot more people can become citizen journalists reporting on events around them. The sheer size of the global social graph means that this information has the ability to reach a wide variety of people and companies – including trading desks.

The ability now for everyday citizens to disseminate information has to some extent been very disruptive to traditional media which have relied on a limited number of journalists to cover a wide range of events. Oftentimes, natural disasters or unexpected events are more quickly reported by direct witnesses through social media platforms like Facebook or Twitter. A notable example of such social media use was during the Egyptian revolution of 2011, where citizens were able to paint a clearer picture of the unrest through localized social media reporting. This information when aggregated can be of immense value to flow trading desks. For instance, a hypothetical confrontation in the Strait of Hormuz reported by eyewitnesses on Twitter could hit the internet quicker than the reporting from various news agencies. Given the electronic execution of today’s trading desks, an integrated social media listening tool could be utilized to gain an information advantage and thus execute trades for clients on more favorable market terms.

Similarly, such an information advantage could also be exploited to generate trading signals for investment managers. The concept of using the immense amount of information available is not unfamiliar to investment banks. For instance, UBS has used satellite images of Wal-Mart store parking lots to get a more accurate estimate on quarterly earnings. An obvious extension of such intelligence gathering techniques is to the realm of social media. A string of time-stamped Twitter updates on a new product launch could be aggregated to get an idea of the perception of a new product amongst a diverse group people. This information could then be used to make a decision on the position to take for the given company. This is especially relevant given that more people are covering events via Twitter. Social media thus provides in some cases an information advantage, but also interesting signals that could be utilized by sell-side flow trading desks, but also independent proprietary desks at hedge funds and asset managers.

Crowdfunding – The Future?

For every day citizens, the capital raising process is something very esoteric and relegated to the ranks of financial services firms and institutional investors. The distributed internet architecture has made the prospect of crowdfunding large private or government projects a possibility.

As developed cities face an increasing financial strain to repair or build new infrastructure, crowdfunded solutions could be the solution. Rather than raise taxes, small infrastructure repairs or upgrades could be hosted on a crowdfunding site owned by a securities firm. This solution provides inherently more clarity in the end use of a constituent’s capital contribution versus paying taxes to the city or state government. A hypothetical scenario would be the ability for citizens to upload visual images of derelict sites in their neighborhood to a crowdfunding platform. Citizens whom share a similar interest in the infrastructure overhaul could contribute online to such a project, where the pooled funds are overseen by a securities firm which then transfers this crowdfunded pool of capital to the city council to implement the necessary repairs. This is one example of possible crowdfunding in the public finance space, there may be other very interesting applications. The key takeaway is that as these low hanging infrastructure projects and repairs are moved to the crowdfunding platform, city planners can focus on allocating capital to bigger projects given their tighter budgets.

In the U.S., the JOBS Act is a bill that could potentially open up even large scale statewide projects to citizen investors who will be allowed to invest up to 10,000 USD online. Though initially for startup funding, it is conceivable that infrastructure projects could soon be allowed to be partially funded through such a platform.

Though crowdfunding sites like Kickstarter or Indiegogo exist, the backing of a global financial adds credibility. The entrance of financial services firms to crowdfunding is a complement to existing donation based sites and would provide their institutional clients a new source of potential investors.