Steadfast FinancesFinancial Reformation: Banks, Brokers & Middlemen No More?

Financial Reformation: Banks, Brokers & Middlemen No More?

Filed in Banking , Business Trends , Entrepreneurship , Peer to Peer Lending 0 comments

In an older post that made the rounds with the entrepreneurial and innovation crowd, I touched upon the idea that the Internet is making middlemen obsolete. This isn’t a novel concept, but if you’re in a business where you’re acting as an intermediary — a centralized position where you purposely keep your customers away from your suppliers and charge a premium for your services — then your business model, depending upon your industry, has been decimated or could soon come under fire.

For example, we are no longer limited by the middleman services of…

  • The music/CD/record store –> we can use iTunes, Napster, Pandora or YouTube
  • 6 o’clock news –> we can select from one or more of tens of thousands of different websites.
  • Realtors –> we can use Craigslist for housing swaps, legal websites like LegalZoom for deed swaps, or fee based attorneys in conjunction with title companies at cheaper prices.
  • Banking & Loans –> we now use P2P lending businesses like Lending Club, Prosper, CommunityLend, where investors pool their money to invest in prospective borrower’s loan and simultaneously bypassing traditional banking establishments.

… the list of examples can go on for a while, but you get the gist of the idea.

Disintermediation of the Financial Industry

The financial industry, however, has been relatively immune to disintermediation effects (the rise of online discount brokers aside) thanks to the Herculean efforts by national governments to bail them out at the expense of taxpayers. But, as more entrepreneurs begin to chip away at core business areas, the disintermediation of the finance industry is well on its way.

Highlights from The Financial Reformation:

The 16th century invention of Gutenberg’s Printing Press was revolutionary. Suddenly, vernacular translations of the Latin Bible were widely distributed. The spiritual smokescreen which kept congregations dependent upon on the Church was removed. Seemingly overnight, it unleashed knowledge and power to the people, rendering the traditional role of the high priests and cardinals obsolete. No longer did man need a broker between themselves and God.

The same effects are begin generated by the microprocessor [and the Internet].

As a brief history lesson to cement just how revolutionary an invention the Gutenberg Printing Press, and later, the Gutenberg Bible, really was:

It should also be noted that the dissemination of the Christian Bible written in the vernacular — the language of the land — did not go without serious societal and cultural turmoil. In fact, merely possessing the Bible written in the English language was a serious offense, usually punishable by death for a prolonged period of time.

One revolutionary scholar, William Tyndale, was the first to translate the Latin Bible into English and disseminate the English Bible to the masses much like the illegal bootleggers of the Prohibition era. The Catholic Church, in their hopes to retain their monopoly as the single broker between Heaven and Earth, branded Tyndale a heretic and a criminal, and sentenced him to death as were all religious criminals in western Europe of that time period — to be burned at the stake.

Of course, Tyndale’s public execution was a warning to the people that commoners and members of the lower class should never cross swords — and especially pens — with the interests of the Church. So the next time you read a King James Bible, try to imagine that the gentleman who first translated the majority of it was burned alive so you could worship the Christian God without a centralized authority.

For more detailed information, please review the PBS Documentary: Battle for the Bible.

Obviously, in modern times, such abuses of authority would never be tolerated because we live in a democratic society where people presumably have the power.

But, as those of us who have followed the disturbing trend of Too Big To Fail within western capitalism know all to well, those who hold and control immense centralized powers will not relinquish those powers voluntarily. More than likely, they will likely use any and all legal (or illegal), political, and capitalistic means at their disposal to retain their power.

Moreover, now that formerly nascent financial innovations, such as peer to peer lending, person to person banking transfers, perhaps one day even the “Bank of Facebook“, are becoming more mature and perhaps even going mainstream, banking middlemen will not sit idly by and be completely cut out of the loan origination and lending business (e.g. loan fees, mortgage points, the cash cow of compounding interest, ability to earn the interest rate spreads on deposits, etc.).

Whatever the outcome, it will certainly be fun to watch the status quo dependent banking establishments, now considered as Too Big To Fail, go head to head with constantly evolving financial innovations whose sole purpose is to take away their Golden Goose of using money to create more money. Especially when a growing collective of individual users — you and I — are finding out that it’s in our best financial interests to treat the old banking establishment as nothing but a speed bump on the road to progress.

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Posted by CJ   @   17 January 2011 0 comments
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