Finance for the People

Financial innovation: People like to talk a lot about it these days. But what is it? If you read the business press, it’s all about “high frequency trading” and “dark pools,” shadowy new entities few understand and even fewer know how to manipulate.

But never mind the scaremongering. The world—especially the United States—stands on the brink of a new era of democratization of finance, as technology expands access to capital to ever more of us. We could all be capitalists—if the regulators allow it.

Here’s an example. When I was between jobs a little over 10 years ago, I and a couple of like-minded souls had an idea for a new non-profit enterprise. The trouble is that the idea was so esoteric that it was exceedingly difficult to find seed funders (except for one who would match us a modest amount for funds we raised independently). A bank loan would have been difficult given our situations and our lack of track record.

Thankfully, we knew an excellent Web designer who agreed to provide us with a good-looking online portal to showcase our ideas and help us raise funds. The problem was that we needed to accept credit cards. It took us months to find a financial institution that would provide us with merchant account services. By that time, most of us had moved on and had no time to devote to the site. Things fell apart quickly, our little enterprise doomed by its inability to raise funds.

What a long way we’ve come. Today, you can get access to merchant services easily through services like Charge.com and payment capability through companies like Authorize.net. There are many payment processors like First Data that can handle the credit card processing.

Crowdfunding platforms allow people to run a creative idea up the flagpole and see who salutes. as it were, and they provide a great way of raising the funds to get a project off the ground. Many people are familiar with Kickstarter and Indiegogo, and there are platforms specializing in non-profit fundraising, like SimplyRaise.

Peer-to-peer (P2P) lending services like Lending Club match up people who need money with people who are prepared to lend it to them. No more meetings with a stern bank manager.

The best thing about these services is that you don’t need vast amounts of capital or a long track record to use them. The P2P platform CommonBond even enables students to pay off their student loans more easily than the official way of doing so (and thus provided a model that President Obama ignored in his recent action on student loans).

The trouble is that these innovations are now attracting the attention of regulators. The Department of Justice is targeting payment processors in a regulatory crackdown known as Operation Choke Point, on the supposed justification that they have been used by unscrupulous merchants to channel funds defrauded from victims. As a result, banks are dropping relationships with payment processors in order to avoid the extra expense that increased regulatory supervision brings. This will make payment processing more expensive, harder to obtain, or both.

Congress allowed the creation of equity crowdfunding platforms that allow investing in a new venture when it passed the Jumpstart Our Business Startups (JOBS) Act in 2012. However, the Securities and Exchange Commission (SEC) has adopted a narrow interpretation of the act. Under the SEC’s interpretation, “accredited investors” can buy a piece of a company through crowdfunding, but for the rest of us it’s going to be difficult. Worse, companies will find using this financing route difficult, given the likely reporting requirements.

This regulation seems strange considering that one can buy an entire company on eBay, but not a part of one through a portal.

So the biggest obstacle to the democratization of finance at the moment is the regulatory agencies trying to protect people from using their own money to help start a business.

Thankfully, innovators have a very good track record at staying a step ahead of the regulators. And while the regulators are playing catch-up, yet more financial innovation will come into play to change the world.

And how it’s changed! Perhaps I should get the band back together and fund that enterprise through one of these new innovative services.

Remember, Google was founded on maxed out credit cards.