Venture Capitalist—and graphical Web browser creator—Marc Andreessen is looking at the payments space as an area that needs to—and can—be fully recrafted.
“We have a chance to rebuild the system. Financial transactions are just numbers, it’s just information. You shouldn’t need 100,000 people and prime Manhattan real estate and giant data centers full of mainframe computers from the 1970s to give you the ability to do an online payment,” Andreessen said in a Bloomberg story.
“You would not today, starting from scratch, invent any of these financial businesses in the same way. To me, it’s all about unbundling the banks. There are regulatory arbitrage opportunities every step of the way,” he said. “If the regulators are going to regulate banks, then you’ll have nonbank entities that spring up to do the things that banks can’t do. Bank regulation tends to backfire, and of late that means consumer lending is getting unbundled.”
Andreessen said part of the challenge of changing payments and finance is that it’s a very large and very old set of institutions. Such groups tend to cling to the old ways, whether or not it makes any business sense to do so.
“We’re not going to go backward. When people start doing things a better way, it kind of doesn’t matter what the old way was. You can find people who will say that this is all just an arbitrage on the current trouble in the financial system, and I’m sure the big traditional banks will fight back and try to get things outlawed,” he said. “But think about the scenario of a loan officer talking to a prospective client. To software people, that looks like voodoo. The idea that you can sit across the table from somebody and get a read on their character is just nonsense. ‘Lots of industries are changing in a similar way. There’s been a qualitative approach, and now, there’s a quantitative approach. Everybody who grew up in the qualitative approach hates the quantitative approach and considers it a giant threat.”
He argued that data will have to be the heart of the new way.
“There is a growing idea in Silicon Valley that there are sources of data on consumer behavior we can use to predict creditworthiness. These will be completely different than the traditional approach to credit ratings, which are tremendously imprecise and ‘laggy.’ PayPal can do a real-time credit score in milliseconds, based on your EBay purchase history. And it turns out that’s a better source of information than the stuff used to generate your FICO score,” Andreessen said. “The hypothesis is that there are many other similar sources of consumer data: credit card bills, social-network behavior, potentially even search history. Lots of people, both in the big Internet companies and at startups, are trying to get at these large pools of data and figure out new ways to do scoring. What they all have in common is that they are all being done outside of banks. The minute any of these new credit vehicles can show any level of repeatability and reliability, the hedge funds come in and provide the funding. Hedge funds are very comfortable with analytic models. If you have sufficient stability, you can get leverage.”