Good financial innovation
Since the financial crash of 2007/8 millions of words have been written trying to make sense of what went wrong, and what should be done differently. Yet although we remain in a very strange situation - with negative interest rates in some countries, unprecedented quantitative easing and little certainty amongst the experts about what is really happening, in other respects it’s remarkable how little has changed. Most of the incumbents are still there, still propped up by vast quantities of public subsidy (anything from $150-600bn according to the IMF in 2014), unique privileges to create credit, and easy access to power. As many have commented, there has been little rebalancing away from the locusts to the bees, the predators to the creators, and pay levels and rewards of all kinds are a lot higher than any reasonable person could justify.
But while the writers haven’t had much impact, others have been trying to create practical alternatives, starting at the margins. These are often lumped together under the title ‘alternative finance’, and Nesta has been one of the organisations at the forefront of both understanding and supporting these new forms of finance which offer the promise of returning finance to its proper role as a service to the economy and society.
We’ve done this through:
- surveys of more than 14,000 users of alternative finance
- detailed studies (eg using data from Funding Circle)
- direct finance (eg for social venture intermediaries/crowdfunding platforms)
- convening (eg bringing together the new entrants with policy makers and regulators)
- educating (developing practical guides & tips and setting up a crowdfunding directory)
- advocating more radical options
A different landscape for finance is emerging
The former head of the Federal Reserve famously commented that he could think of no useful financial innovations in recent years - other than the ATM. Certainly many innovations did more to capture value than create it. The more recent alternatives mentioned above, by contrast, represent an attempt to direct innovation towards creating as much benefit for customers as for providers.
So far they are still a long way from becoming mainstream. But they are growing fast. Our most recent survey showed them doubling each year, and accounting for around £1.7bn in 2014, projected to over £4bn this year.
That’s probably about the limit in terms of the speed of feasible growth, and the government deserves some credit for doing a lot to help the alternatives to grow, even if the resources that have gone to the incumbents are far larger.
Thanks to this growth a very different landscape for finance is beginning to become visible through the fog. It involves a great expansion of peer to peer finance of all kinds, whether between businesses or consumers or by banks and venture capitalists beginning to invest alongside retail investors; it may in time also involve an expansion of mutual credit and finance, which has long been widespread in other countries, and ensures that tacit knowledge is tapped into, as well as assessment by algorithms. Another strand is the expansion of crowdfunding in all its forms – whether for equity or grants. And a third is the continued expansion of social investment and impact investment.
At their best these are all relatively lean, avoiding the heavy costs of traditional finance. Some weave values and mission into financial considerations. And all aim to offer more transparency and more feedback.
The emergence of new sectors always involves plenty of turbulence and we should expect plenty of failures amidst the successes, as well as waves of consolidation. We should also expect a continuing debate about regulation and how to strike the right balance between protections for consumers and freedoms to innovate.
But this is undoubtedly an exciting field and one which is growing strongly, with plenty of examples of firms that have made the transition from unknown startup to turnovers in the billions. It’s a field where the UK is well-positioned. And it has the promise to re-emphasise finance as a service, generating value for the rest of the economy and society rather than drawing it out.
To build on our work so far at Nesta we are working to create a centre for innovation in finance which will provide reliable information, ideas, and a forum for debate. Watch this space or for more information please email [email protected], [email protected] or [email protected].