Reinventing the Financial Services Industry
Restoring long-term confidence in the financial services industry in the U.S. and other industrialized nations will require more than government intervention and new rules. What’s needed is a new modus operandi for the financial services industry, one where all of the key players (banks, insurers, investment brokers, rating agencies and regulators) embrace the web, and transparency and other wikinomics principles in order to develop credible practices and policies that will ensure the crisis doesn’t reoccur. If the investment community and the broader public understand the true causes of the financial disaster, perhaps they can protect themselves against financial adventurers in the future.
A digital response involving collaboration on a mass scale may be the best way to properly evaluate and assess the value and risk of new financial instruments as they are produced. New models based on openness, transparency and participation are already changing many parts of the industry from venture capital to mutual funds and even lending, so why not to apply the same thinking to the obscure mathematical models that value the risk and expected returns of the most complex instruments: expose them to the scrutiny of the thousands of experts who have the knowledge to vet the underlying assumptions?
Wikinomics can also be applied to virtually every other aspect of the industry. Venture Capital, the engine of entrepreneurship is stalled and this is a big problem for everyone as most new jobs come from new companies. But it turns out that networked talent outside the boundaries of venture investors can help break the logjam. Most banks are still loathe to lend money so in some parts of the world peers are taking the law into their own hands and initiating peer to peer lending schemes. But will existing institutions tie into these heaving new initiatives effectively, the way that say, IBM embraced Linux for revenue profit and competitive advantage?
Arguably, this is the perfect time for fresh and even radical thinking. When it comes to evaluating risk, this interconnected digital crowd comprises people who are financially sophisticated and can provide the fresh and innovative insight that will clarify the questionable dealings in the financial services business. A more open and collaborative approach would restore trust in banks, kick start venture capital, unfreeze the paralysis of lending markets and lay a foundation for a financial service industry that continues to underpin the growth and prosperity of the world’s economies.