As the founder of a technology-based financial services company, I’ve been thinking a lot about the Occupy Wall Street movement. All financial services startups have. The movement is a bit of vindication — seeing others realize that the current system is not working — and there is a real need for the innovative financial products these startups are building.
Creating smarter, more innovative products is not enough. The big banks on Wall Street are not going away. So, what changes are needed?
With three simple changes by all financial services institutions — produce, protect, and play fair — the financial services industry can get on track to working for the 100%.
Produce. Financial services companies must make meaningful products that fill a consumer need.
As a consultant, I witnessed the predatory banking practices of an Ohio bank that made 80% of its profits off of fees on checking accounts — mostly overdraft fees. The average consumer-facing bank makes about 50% of its profits on fees, 50% on interest. So this might seem like bad business — who would go to such a bank, with such fees? But they were growing fast, putting up branches faster than their rivals.
The trick? They targeted the poorest neighborhoods and customers. Their average customer over-drafted 3-5 times a month, paying $120-$200 in fees. They marketed to the customers who could least afford it, those who should not have had overdraft “privileges,” and then “strip-mined” their wallets. Building a checking account with high overdraft fees is not filling a customer need — it’s exploiting loopholes in regulation and preying on customer weakness.
Protect. Financial services companies should be held to a fiduciary standard — the same way doctors take the Hippocratic Oath and lawyers must pass the bar.
I also worked for a broker, and found that 90% of customers lost all of the money they invested. The broker would take the opposite side of their trades, and would profit when they were wiped out. That was their business model. This kind of business is unproductive and predatory, and would be best controlled by introducing a fiduciary standard for brokers (which the SEC has proposed, and the industry is resisting). We have to trust the companies that provide us these products — like we trust doctors, lawyers, or the pilot of our airplane when we need to rely on them — and yet financial services vendors often have no requirement (or incentive) to act in our best interests, like those others. As an Investment Advisor, Betterment.com does have to act in its customers’ best interest. This is a good thing, and should be extended to all financial services companies.
Play Fair. There needs to be a level playing field for all market participants.
A lot of people feel like the deck is stacked against them when it comes to investing. They think the big banks make all the profits, and the little guy doesn’t have the same chance. They’re not far off. The big banks will do things like co-locate with the exchanges, so they get to see your orders before they get to the exchange. And they can then buy the stock, and sell it back to you at a higher price — all without your knowing about it or being able to do anything about it. That’s the deck being stacked against you.
So how do we ensure that these principles are put into practice? It’s time for like-minded financial services companies to rally around them, and, to come up with their own principles for what they stand for and how they treat their customers. And, it’s time for consumers to demand this level of accountability.
A number of young, innovative financial services companies are already embracing this change, and creating a much needed level of transparency in the industry. For example, at www.slashdeclare.org, you can see financial services organizations that have made a declaration to their customers of what they deserve. Each of these companies has launched a page on their site — i.e. www.betterment.com/declare — with these promises.
As consumers of financial services products, start to demand that your bank, investment advisor and brokerage join this movement. If they aren’t willing to publicly declare what you deserve, you deserve a better company. I bet you could find one at SlashDeclare.org.