Marc Andreesen (MA) famously said “software is eating the world.” Great quote. Apparently, though, as software gobbles up the world, it’s taken a few bites out of Marc’s sanity.
At least, that’s what I conclude based on a Bloomberg interview with Marc regarding his plans–no, make that delusions–about disrupting financial services.
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MA: “We have a chance to rebuild the system. Financial transactions are just numbers; it’s just information. You shouldn’t need 100,000 people and prime Manhattan real estate and giant data centers full of mainframe computers from the 1970s to give you the ability to do an online payment.”
My take: Actually you do. At least when it comes to the “giant data centers” part (not that the people who work on that prime Manhattan real estate actually share those digs with mainframe computers). Marc is right: Financial transactions are just numbers. But it’s just for that reason that giant data centers are needed: To process the transactions, detect fraud, analyze trends to identify marketing and trading opportunities, etc. That stuff doesn’t happen by itself. It actually takes people to code and program those capabilities and make decisions what to do. Hence, the 100k people.
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MA: “To me, it’s all about unbundling the banks. There are regulatory arbitrage opportunities every step of the way. If the regulators are going to regulate banks, then you’ll have nonbank entities that spring up to do the things that banks can’t do. Bank regulation tends to backfire, and of late that means consumer lending is getting unbundled.”
My take: Back in 2000, while working for another analyst firm, I wrote a report called Atomizing Financial Services. The premise of the report was that trends in technology would lead financial institutions to become smaller, more focused organizations. Let me pass the joint over to you.
Banks aren’t going to be unbundled. The opposite is happening–and will continue to happen. Startups like Simple gain traction, and get acquired by a megabank.
Marc is correct that if regulators regulate banks, non-bank entities will spring up. But in the area of consumer lending, non-bank entities tend to focus more on doing things the banks won’t do–not things they can’t do. Banks choose to not lend to high-risk borrowers. P2P lending sites like Lending Club have certainly seen large numbers of loans (oops, I mean “investments”) pass through their platforms, but in the scheme of things, these loans are a miniscule part of the overall system.
There is no “unbundling” in consumer lending happening–there is some nibbling at the edges, but that’s not unbundling.
Regarding the comment about regulations, as often as regulatory efforts create opportunities for non-banks, they solidify the position of existing banks. Marc is right that bank regulation tends to backfire, but that’s attributable, in large part, to the political motivations of the regulators.
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MA: ‘‘But 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. ‘Lots of industries are changing in a similar way. There’s been a qualitative approach, and now, there’s a quantitative approach. Everybody who grew up in the qualitative approach hates the quantitative approach and considers it a giant threat.” “
My take: Can’t sit across the table from somebody and get a read on their character? Really? That’s probably exactly what Marc and his partners do when hearing investment pitches from entrepreneurs.
Funny, over the past few years, what I’ve heard from people in the industry is that lending decisions are too automated, and that the human element needs to be a bigger part of the process. But, apparently, Marc knows better than nearly everyone in the industry, so I guess we should expect him to come out with the new FICO score any day now.
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MA: “There is a growing idea in Silicon Valley that there are sources of data on consumer behavior we can use to predict creditworthiness. These will be completely different than the traditional approach to credit ratings, which are tremendously imprecise and ‘laggy.’ PayPal can do a real-time credit score in milliseconds, based on your purchase history — and it turns out that’s a better source of information than the stuff used to generate your FICO score.”
My take: Marc is right–there are sources of data on consumer behavior that can be used to predict creditworthiness. But, first of all, this isn’t new news–there are numerous startups already doing this. Second–what those startups have learned–is that new approaches have to be validated and calibrated, and, just as importantly, adopted by the institutions (bank and non-bank) who do the lending.
The bigger point here is that this is more about evolution in the industry than revolution.
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MA: ‘‘Bitcoin is like technology that’s arrived from Mars, and so regulators don’t know what to do with it. That’s a good thing. What a lot of financial technology entrepreneurs will tell you is that if you’re going to innovate in financial services, you want to do something so new and so different that the existing regulatory system doesn’t know how to react to you. That is your window of opportunity.”
My take: This is where I conclude that Marc has gone off the deep end. It’s a “good thing” that regulators don’t know what to do with it? Regulators–the ones in the US, that is–in their zeal to create a more perfect financial system have created so many negative unintended consequences, that you have to wonder if the number of people who would have suffered from no regulation is smaller than the number that have been disadvantaged from the regulations that were supposed to protect them.
The “window of opportunity” in financial services innovation is adding value to the system–not finding holes in the regulatory environment.
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Bottom line: One of the lessons I learned working at Forrester was “no ad hominem”–meaning no personal attacks. I’ve clearly crossed that line by insinuating that software has eaten Marc Andreesen’s sanity. Of course, if he hadn’t made his software-related comment, the title of this post would be different, and far less offensive.
But I’m guessing (assuming) that Marc is a big boy, and can handle some disagreements regarding his comments, and I’m hoping that the people who actually read this will not see this as too offensive.