There seems to be no limit to the exciting possibilities that come from combining technical innovations, the Internet, and social media. It is a phenomenon that has been revolutionising journalism and entertainment; and, by helping to overcome coordination challenges, it has also had political consequences in a growing number of countries—all of which means an ever-evolving set of opportunities and risks.
What is less appreciated, however, is the extent to which a broadly similar phenomenon may be starting to play out in finance, via a democratisation process that could gradually reconfigure a notable part of the institutional landscape, particularly in consumer finance, while challenging regulators to adapt.
Bitcoin is the most visible—albeit far from a good—example of this nascent development, having attracted attention from specialists, regulators, and, slowly but surely, the public. But the crypto-currency phenomenon is far from the only example, and it is certainly not the most consequential one. Its impact, both actual and potential, is relatively limited when compared to ongoing attempts to enhance and democratise lending, borrowing, investing, and payments and settlements.
The underlying sequence of disruptive technology is historically familiar. A bold innovation suddenly lowers entry barriers for certain activities. Mechanisms emerge to enable a larger part of the population to participate in what is deemed desirable but, until now, had been hard to access. As the disruptive forces gain traction, existing business models face difficult adaptation challenges, and regulators begin to fall behind. The situation is often amplified by a natural human tendency to overproduce and over-consume hitherto restricted goods and services.
This, of course, is what has been occurring in media for several years. The result is a proliferation of platforms for producing, aggregating, disseminating, and consuming content. Falling entry barriers and lower access costs have significantly democratised participation, whether in production or consumption. And, as hard as they try, many traditional media outlets—especially those unable to claim quite distinctive content—find it increasingly difficult to compete.
Now, something somewhat similar is starting to happen in finance as well, albeit at a less frantic pace and—at least until now—in a less disruptive manner. And, as with media, the main innovations are being spearheaded by those outside the traditional institutional setup. Most consequentially, an emerging cohort of technology entrepreneurs understand the power of online/social media innovation to disrupt components of traditional finance, and are now leading efforts that include behavioural scientists and finance experts.
Recall that Bitcoin started in 2009 as