Mohamed El-Erian has an insightful column on Project Syndicate in which he suggests that the technology-driven revolutions that have affected so many sectors are finally coming to finance as well.
After commenting on the most obvious example, Bitcoin, El-Erian notes the following:
More promising examples, albeit less well-known, may be found in Internet-driven lending and borrowing clubs or, more generally, the peer-to-peer initiatives in consumer financial services. By seeking to compress net interest margins, including through lower expenses and more efficient data assessments and aggregation, and by targeting an enhanced consumer experience, such empowerment schemes could serve to reduce the cost of financial intermediation while providing for fairer risk-pooling outcomes and better credit underwriting. Likewise, so-called digital wallets and mobile transfers are efforts to improve payments and settlement in a retail financial sector that gets a lot less attention than its institutional peers.
There has been a lot of left and right-wing angst of late about the “financialization” of society, which means, generally speaking, that it has become almost impossible to live a normal life without having to turn to a set of impersonal financial intermediaries to perform basic tasks like renting an apartment or paying a simple bill. While a lot of this anguish is hyperbole, there is truth to the idea that the financial sector has become too intertwined with government in most modern societies and that, perhaps, the only way that link will be broken is through technology.
This will not be easy, as El-Erian notes:
The challenges of getting this right in finance are considerably more difficult than they are in media; and the consequences are far more profound, given the centrality of finance to broad swaths of the real economy. Anyone who doubts that should recall how last decade’s securitization boom and bust – another example of a disruptive financial innovation that was over-produced and over-consumed – contributed to a credit and liquidity crisis that pushed the global economy to the verge of Great Depression II.
It won’t be easy, but many of the same minds who gave us the wonders of mobile computing and instant information access are not turning their talents to reinventing finance, especially at the consumer level. New currency models, new venture capital models, and new ways to manage risk can all be created, if the same spirit of individual — and democratic — innovation that drives places such as Silicon Valley can also find a place for itself on Wall Street.