Banks Should be More Like Marketplaces: Prizl and Financial Innovation

When I was in a PhD studying the economics of bank-sector law (I know: tell me more! tell me more!), for particular regulations there were exemptions for “market-making” activities. So if a bank is making a market for something, then the law wouldn’t apply for that particular activity.

I’d like to share some ideas about Prizl and financial innovation by thinking about this rather philosophical concept of market-making, technological change, and finally, how a new financial infrastructure should arise in the digital world.

I. Banks are Already Like Marketplaces 

To start, why is there a market-making exemption? The reason is because regulatory agents regard market-making as essentially good thing, a public good.

Okay, but why is market-making an essentially good thing? Well, it’s not too complicated: the government believes that “making a market” means somehow connecting buyers and sellers. This is “good” presumably because it means that all parties involved—the buyers, the sellers, and the marketplace itself—benefit, at least in the short-term, from being able to trade a good or service.

In practice, though, as with lots of things with banks, “market making” is super-difficult to define.

For example, consider imagine that you manage a small vintage Volkswagen car dealership. You only sell a few cars per month. So, you might have to hold those cars in inventory for months or years, and you’d be really susceptible to changes in the market price of VW cars So, to be smart about it, you hedge against the loss of value of VW vans (somehow). Is that hedge still part of the market-making exemption?

Maybe, maybe not.  And if that’s seems like a tricky scenario, just wait until we try to understand the payment flows around, for example, hugely complex insurance policies against hugely complex debt securities. Indeed, at the time I’m writing this blog post, US regulators will shortly rule on a major regulation (the Volcker Rule) where the feasibility of enforcing a market-making exemption is hotly debated.

Part II. Technology Makes Innovation Less Expensive

Let’s take a quick detour, and consider the fact that the cost of making things goes down every year. The cost of a pencil today is much less than the cost of a pencil 100 years ago. And even better: we have more useful tools than pencils, like computer word processors. And the cost of word processors today is much less that it was 10 years ago. And even better: we have useful online tools like Google Docs. And so on.

It’s very likely that our ability to manipulate physical materials and human effort into useful consumer goods and services will continue to improve. Furthermore, it’s possible that innovations like the spread of mobile technology, more user-friendly data analysis tools, and the “printing” of physical objects will accelerate this trend.

Coincident with the increase in our technological ability to satisfy consumer needs, the global marketplace will see a major shift in the general tone of commercial interaction. The tone will become more consumer-driven, more demand driven. The tone will shift from How do we do/make/create/deliver XYZ? to the more pertinent question: Do people want XYZ? 

Part III. Banks Should Try to Expedite this Consumer-Centric Shift

The current financial system is ill-suited to adapt to this paradigm shift. While ex-ante funding—the pre-financing of innovative activities—will continue to command tremendous importance, its relative power to induce commercial success will decline.

In its stead, I propose that an alternate form of financing innovation will take hold, and that’s why I started Prizl.

So in this last section, let’s bring this full circle: Prizl is making a market too. Prizl making a market for things that we know we want, but don’t yet exist. I’ve tried to create at minimal cost (like, super, super cheap) a bank-like apparatus that essentially acts as marketplace connecting people who want some future, unrealized outcome, with those who can provide that outcome. We do that by using a kind of “glitch-in-the-matrix” technology: the ability to use escrowed online payments as a legitimized signal of the worth of some future, unrealized outcome.

The cost of enacting something like Prizl, is, in theory, really low. Right now for the typical reader of this blog you really aren’t getting any interest on your savings account. And if you “invest” in CDs, you might yield at most 1-1.5%, even if you surrender your funds for up to 2 or 3 years. Is that really the most useful use of those funds that we can find?

What if instead we were able to earmark those deposits for rewards for things that we want done? Curing cancer; sending a man to Mars; developing a low-cost malaria vaccination; cleanly disposing nuclear waste: how much would you personally pay for each of these outcomes if you were guaranteed that it happened? Maybe a whole, whole lot. Especially if it’s not really costing you anything.

There’s over 9.4 trillion dollars of savings and time deposits in the US. Given the low return on those deposits, I really strongly believe that we’re not addressing these customers’ financial needs in the most socially effective manner. If a few billion dollars of those 9,400 billion dollars were simply reallocated (or really, re-imagined) as putting prices on things which we know we want, but don’t yet exist, then I think the social benefit gained from this minute recalibration of the financial system would be immense. But what if there were, indeed, a trillion dollar prize for curing cancer? Would we try more unorthodox and braver approaches? I think so.

We know it’s not so easy. There had to be an institutional infrastructure to create these outcome-investment-reward combinations (let’s call them Prizls), contribute to them, and adjudicate them. I believe that this infrastructure must arise in the most organic way possible. It’s not possible to dictate what this will look like.

And what do we want done? Will people put their money where their mouth is? Who says whether its been done? Will anybody do it? I‘m not sure. But I know we should try.

Cheers,

Tony