# Obsolete financial services

- Author: Joichi Ito
- Date: 2008-09-27T07:30:47Z




I get a sense that this sudden "wait a sec, do we really need investment banks anymore?" is the tip of the iceberg of a collapsing of a whole genre of financial services and products that are just obsolete once you have easy access to information and low transaction costs.
While derivatives and securitization of risk so other people can buy it makes sense, the incentive of a company full of people getting paid a crapload of money to do this is to make products that they can sell for more than they're worth. Even with regulation, risk information is omitted and the focus is on selling, not on providing the buyer/user with complete information and low transaction costs. Instead, information is hidden and there is transaction friction everywhere from management fees and transaction fees.
Hand made markets like this made sense when transaction costs costs were high and all this stuff needed to be aggregated and managed, but it doesn't REALLY make that much sense anymore.
This is similar to academic publishers who charge professors to print their papers in journals that the publishers then charge schools and libraries to read. What the professor wants is to be most widely read. Before the Internet, this made sense and was worth the hefty ($10K+ for a single physics journal subscription) price because having physical distribution to libraries was the only way to make sure your paper was distributed to every school. With the Internet, it just doesn't make sense anymore. Now the copyrighted materials can't be viewed without subscriptions and a huge percentage of our academic works are "dark" to developing nations and non-academics.
I think there are a lot of industries and services which were once super important, but have yet to face the reality of our low-cost digitally connected world.
My guess is that even in financial services, there is a bunch more stuff to go. As I bounce from bank to bank trying to find the cheapest exchange rate, I just can't imagine why things like foreign exchange just can't happen with less friction and more information. Banks want to charge a ridiculous percentage/spread/transaction fee and I have so much incentive and ability to avoid this. In fact, I bet MOST things banks do could be redesigned to happen without them.
I can imagine a sort of Web 2.0 for financial services with paypal-like services that store your money and all kinds of financial transactions provided by a huge number of global providers. This would drive competition to increase quality, lower price and would also foster an industry of analysts and information providers who independently helped you make the right decisions. If all of this could be integrated, much like how a lot of the consumer Internet services are grouping up around open standards and specifications, you could get rid of a huge chunk of costs and skewed interests where the people who are giving you advice are also the people who are trying to make money off of your transactions.
Of course we need regulation and fraud protection, but I'm sure there is a more effective way to do this than having some bureaucracy oversee a bunch of overpaid suits who don't understand technology.
My apology in advance to my friends who work at banks. I don't think banks will go away, but I think they need to aggressively adapt to technical changes and rethink why they exist and what people need them for and stop relying on legacy notions and government regulation to protect them from competition. As we have just recently witnessed, things can change VERY quickly.
I'm not a banker or an economist, so what do I know... but just some thoughts from an amateur.

banking