“Financial markets in the United States are the largest and most liquid in the world.” Which makes sense. After becoming back-to-back World War Champs, America set up the system of international finance that endures to this day. Except that we’re no longer on the gold standard (this is an argument for another piece). You would think that America, then, has the greatest offerings of financial products and abilities in the world. You’d be right. If you were looking at it from the viewpoint of an established player.
Right, so this recent article about Supertroopers two sheds some light here on the issue:
“We need $100 million comedies starring Johnny Depp, Will Ferrell, Ben Stiller, or Vince Vaughn. That’s it. That’s the list. That’s what we want.” I smiled, “People resent $100 million comedies. They feel bloated and not of the underground. What if, instead, we made a few $20 million comedies?” (Low budget for a studio). He shrugged, and what he said shocked me. “The most a $20 million film will make is, what? A $100 million?” I nodded. He shook his head, “That’s a double. I need grand slams. I need movies that can gross $250-$400 million worldwide. I need movies that can move the stock price.”
If that isn’t backasswards logic, I don’t know what it. Studios are refusing to diversify their risk, instead retrenching and going after niche products which have performed well in the past. These projects they’re pursuing are ginormous, sexy projects to please their overlords.
The finance industry is sort of in the same spot. While the movie industry blames piracy and digital content delivery for the decline of their business, consumers blame the movies being put out. I haven’t been to the movies since The Secret Life of Walter Mitty because the movies being produced today are exactly as that studio wanted! I know a lot of people saying the same thing, essentially, “Yea, the movies are visually stunning and there’s great VFX, but there’s nothing else there. It’s all fluff and effects. There’s nothing genuine in those movies.” And, I similarly find nothing genuine about the finance industry today.
But let’s back up, to Dodd-Frank, and understand how we get to today’s financial markets. This graphic shows the morass of conflicting authorities over a bank. One implementation of the Volcker-Rule ran 1,100 pages. For just ONE rule.
But the really big issue that Dodd-Frank raises isn’t about the institutions it creates, how they operate, how much they cost or how they are funded. It is the risk that they and other parts of the Dodd-Frank apparatus will smother financial institutions in so much red tape that innovation is stifled and America’s economy suffers. Officials are being given the power to regulate more intrusively and to make arbitrary or capricious rulings. The lack of clarity which follows from the sheer complexity of the scheme will sometimes, perhaps often, provide cover for such capriciousness. (source)
Three years after the above quoted article, The Economist penned this thought: “The financial arguments for global banks no longer appear convincing. Yet unscrambling these firms would be hellish.” The issue? Two-fold.
First, the larger the banks are, the larger the deals they chase. Larger deals are starting to become scarcer and scarcer (see, e.g., Buffet’s annual letter “does not tackle the questions that hang over Berkshire’s conglomerate model and its durability.”) because any activity will hit diminishing returns. It is for this reason that the investment banks are so keen on winning the tech IPOs – there are fewer and fewer companies going public, as most would rather sell themselves to their largest competitor. Second, just as predicted, the more complicated the regulatory environment, the larger your business must be in order to have the cash flow and efficiencies of scale so as to comply with the regulations – the regulatory burden is the same for the bank in Sheboigan with $1m on deposit for Citigroup with $3.9 trillion on deposit. Was the intention of Congress to make the laws so unbelievably complicated so as to create barriers to entry for new entrants and to push smaller players out of the market? I don’t know, but I do know when Congress empowers a science denier with oversight of Congressionally-funded science, logic and reason don’t fucking matter when trying to understand their legislative schemes.
The point is that banks are stagnant. Their newest products are increasingly complicated and opaque financial instruments which are all-but completely inaccessible to the non-sophisticated investor. They are more and more concerned with simply staying in line with the regulator’s demands and theories such that they haven’t bothered to innovate for the American consumer.
So, realizing that Congress had more-or-less caused Wall Street’s finance to abandon Main Street, indiegogo opened their website in 2008. A lot of other alternative financing has popped up since then to fill other gaps that contemporary finance has abandoned: bitcoin, dogecoin, gofundme, kickstarter, paypal, Apple Pay, and Facebook recently announced their Messenger platform will send money. It bears repeating: every single item on that list was a missed opportunity for banks to offer better service to their customers.
Since then, Indiegogo has conducted more than 200,000 funding campaigns, and has around 8,000 campaigns in action at any one time. They’ve raised more than $56 million from private citizens. Every country in the world apparently gets some sort of indiegogo money each month. Surely indiegogo must be doing something that the banks aren’t, but what is it?
They are being responsible corporate citizens in a country wherein some of the most visible and financially successful brands legitimately cannot be bothered with that concept: Verizon, AT&T, Comcast, Time Warner, Koch Industries, Monsanto, et al. If you can think of a bank, besides USAA, that you regard as a good corporate citizen, please bring it to this blog’s attention.
In an interview, Slava Rubin (CEO and Co-founder, Indiegogo), described his company’s values: FACE. Fearless Authenticity, and Collaboration and Empowerment. Indiegogo’s mission: to democratize funding. Why should you use his company? Because Indiegogo’s barrier to entry is whether you and your project is trustworthy, there are not other barriers to entry for people seeking or giving funding. Why will his company succeed? “You can’t keep going after the same customers with the same pitch, you’ll be stagnant.” Indiegogo’s model relies on trust, an amazing amount of trust, between the person asking for money and the person giving up some money – Indiegogo has figured out how to engender such trust in their stakeholders that the SEC sought out Indiegogo’s guidance on trust and how to return truth to the financial sectors.
Indiegogo examined their funders, and found 4 mains reasons for people to fund campaigns: People and Participation (which aren’t well-defined beyond being altruistic motives) and Passion and Perks (again, not well-defined beyond selfish motives). The lack of definition doesn’t matter much, because half of the reasons that people use Indiegogo are completely incompatible with national banks: altruistic motives are not terribly cognizable to banks. Banks are interested in monetary returns on investment; indiegogo can have an entire campaign focused on societal goods. Indiegogo can allow a community to raise money for a community leader’s cancer treatments – banks will literally at the idea of giving money to people simply to increase that gift giver’s and gift receiver’s happiness.
Sidebar: the preceding two paragraphs are the anti-thesis of business as conducted by that list of companies people generally despise. The demand-side market is telling the supply-side market: You are bad legal persons, we do not like you, and only patronize you because we don’t have an effective choice. Point in case: the FCC received more than 4m comments, an overwhelming record for public response, in favor of Net Neutrality and opposed to all generally all companies providing internet uplinks besides Google.
The success of crowdfunding generally, and indiegogo specifically, shows that the financial industry is not reacting to the marketplace and is not providing the tools desired. This is more likely than not the fault of the regulatory environment – witness the economist’s lead story recently about how compliance costs are sucking up more and more of global banks G&A costs – than volitional acts by the banks to abandon certain sectors. I must be clear here: it is not regulations in and of themselves, it is shittily designed, never fixed, and the sheer number of regulations that cripple large-scale financial houses.
Well done, indiegogo. I am overjoyed to see American finance, while mostly floundering under the terrible, no good, very bad stewardship of Congress, is still innovating for the good of the world-wide consumer.
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