Thoughts on hacking finance (continued)

There is just such a HUGE opportunity to reinvent this stale, corrupt, end of empire business we call finance.

In response to the NYtimes article on the crooked behaviors of financial planners, Sean Park made this wonderful comment. He should know since he has been at the forefront of the financial sector for many years.

In the traditional of this blog, let me continue on my ideas of how to hack finance. If you have further ideas to add on, please leave them in the comments section. We all need better discussions and ideas on how to reinvent this industry.

Covestor for financial planning
Financial planning really isn't all that hard. We can make it easier through online tools. More importantly, if we allow people to start sharing their financial plans, there might be less need for the so call 'professional' planners. After all, if you have spoken with any of them,you know how 'sophisticated' they really are. What we need are just ways to surface the best among us so that we can depend on each other for sound financial advise, rather than some arbitrary third party.

Financial services for new kinds of markets (carbon, power, water etc)
Current financial services are build on thin value. However, the potential of finance is so much more. It can reallocate resources, through markets, to projects and companies that are bringing real value. Now, with the technology and economic infrastructure of the 21st century, it is entirely possible to implement a market-based pricing of intangible externalities. This means the real cost of our activities, including those on the environment, can be properly measured and evaluated. To do that, we need a whole new suite of financial services, from information tools, to risk management and trading.

Better risk assessment models for the so-called high risk groupsI have mentioned before in my first post on hacking finance that we need better ways to serve the under-served. That include groups such as students, low-income and creative folks. The key solution is to develop alternate risk assessment models that better understand the context of these groups and take into account factors that might otherwise be missing from traditional risk models.

Let's take students as an example. Interest rates for students loans are a bit out of whack:

Interest rates on student loans, including on popular federal programs like the unsubsidized Stafford (now nearly 7 percent) and Parent Plus (8.5 percent), are running several percentage points higher than the rates on secured loans, like home equity lines of credit.

One of reason for that is that the FICO model doesn't accurately measure the risk of student loans. Students have no credit history which leads to FICO producing unreasonable credit risk. A better model is to capture the human capital aspect of students' education. A startup called HumanCapitalScore is doing exactly that.

We can learn from that experience and develop better risk models for the rest of the under served groups. With that, we might reinvent how finance can be extended to them successfully without taking on huge amounts of risks.

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Hacking is everywhere

Hacking is our new manifesto. With the marcopocalypse staring in our face, the pressure to hack our current economy is greater than ever. Fortunately, it is also now easier to get our hands on resources and begin hacking the stale industries that need reinvention. Everyday, I see more and more of such examples. I want to share it here and hopefully inspired more smart entrepreneurs to start hacking our industries.

Hacking Uninsured WorkersDr. Ores is also a physician who runs a nonprofit health care cooperative for city restaurant workers that he sees as a model for how national health care could work.

Under the plan, he charges each restaurant a dollar each month for every seat in the establishment and pools the money. In return, any employee from those restaurants can visit him free of charge, whether for a cut finger or the flu.

The need is acute: A 2005 study by the New York State Restaurant Association reported that almost 75 percent of the city’s restaurant workers — about 120,000— have no health insurance.


Hacking Mobile Devices
“Five years ago, there were no counterfeit phones,” says Xiong Ting, a sales manager at Triquint Semiconductor, a maker of mobile phone parts, while visiting Shenzhen. “You needed a design house. You needed software guys. You needed hardware design. But now, a company with five guys can do it. Within 100 miles of here, you can find all your suppliers.”

Technological advances have allowed hundreds of small Chinese companies, some with as few as 10 employees, to churn out what are known here as shanzhai, or black market, cellphones, often for as little as $20 apiece.


Hacking Music"Talking gross numbers that come directly to the band, we have made more money already than we have on the last record in four years," said Mathieu Drouin, the band's co-manager. "Without any intermediary, we're making 77 cents on the dollar for every record we sell" on iTunes. Under a label deal, based on Drouin's estimate, Metric would have earned closer to 22 cents.

Metric also took a page from album rollouts employed by much bigger artists such as Radiohead and Nine Inch Nails. In addition, fans could purchase the album directly from Metric's own site (www.ilovemetric.com), which sold "Fantasies" at five price points, ranging from an $8.99 album download -- with an extra track not available on iTunes -- to a $64.99 "deluxe" package that included autographs, artwork and invitations to exclusive performances.


Hacking Legal
Today, Wilson Sonsini announced the launch of a "term sheet generator." It's basically a web tool that creates draft preferred financing term sheets for startups...So I think this is a brilliant step toward "open source law" which I've been advocating for a while. ....What this tool really wants to evolve to is having an open, wiki-style back end where practitioners can change and comment on the myriad of options and verbiage which would keep the tool evergreen based on the best crowdsourced legal opinions.


Hacking University
An Israeli entrepreneur with decades of experience in international education plans to start the first global, tuition-free Internet university, a nonprofit venture he has named the University of the People....“The open-source courseware is there, from universities that have put their courses online, available to the public, free,” Mr. Reshef said. “We know that online peer-to-peer teaching works. Putting it all together, we can make a free university for students all over the world, anyone who speaks English and has an Internet connection.”

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Why our school system needs hacking

(Note: I wrote this post not in a vacuum. My wife is a teacher. 5 of my school mates are as well. My current colleague is an ex teacher. I also dealt with schools as part of our Future School programmes.)

Many many teachers I have talked to have spoken to me about this: our school system sucks. It has evolved into a model where branding and public relations with parents has become more important than teaching. This has sucked money, school resources and attention away from students and towards activities that made the schools look good (winning awards, getting press releases etc). All these has resulted in teachers spending more time on administrative efforts, rather than innovating on how to teach more effectively.

In a teaching focus school, the structure is such that teaching load is heavier than administration duties. Teachers spend more time in innovative course development and online learning. They interact more with students to find out about their learning styles and how to teach more effectively.

Does the above sound familiar to you? It probably don't because that is not how our schools are run.

In reality, teachers spend more time doing a lot of non-teaching related stuff. To make matters worse, they are REWARDED based on that. Did the basketball team you are in charge of win awards? Did our science project got featured in the news? How many committees are you in charge of?

In a time where our education needs reinvention, is the above what our teachers should be focusing on?

Having said that, not all schools behave in this way. There are certainly good schools and teachers that emphasize on a child's learning. The problem is we don't have a way to tell them apart. That is where startups can come in.

- How can you make the resource allocation within schools transparent? Why can outsiders tell whether the school in investing more in students' learning rather than their own marketing. I heard that at some local zone area, special budgets are allocated based on how famous or well known the schools are, which creates more incentives for schools to play the marketing game. We need more transparency.

- Can you create a GetSatisfaction equivalent for schools? GetSatisfaction flipped customer-service on its head by allowing employees to have a voice and help customers solve problems, but also allow customers to solve problems too. In a same manner, can we give voices to the public and help them solve problems with schools?

-RateMyTeachers.sg, the Singapore version anyone?

- Can we create a platform for teachers to break out of the school model and create a virtual one on their own? A wordpress or a topspinmedia equivalent for teachers who are passionate to teach and make a differene to a student's life?

I am sure there are more creative ways you can think of to hack our school system. Let's hear them!

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Thoughts on hacking business schools

Hacking education has been gathering momentum with people like Fred Wilson and Jeff Javier actively arguing for a reinvention of our education system. I have very little to add to their excellent description of the sector's problems and opportunities. However, I want to focus on an area that is not as widely discussed: the failure of our business schools and hence the need to hack it.

There was a terrific article in the NYtimes that says the way business students are taught may have contributed to the most serious economic crisis in decades. I think there are some truth in that statement. Think about it: when we are in b-schools, all we are taught is that "the new logic of shareholder primacy absolved management of any responsibility for anything other than financial results.” Is it any surprise then that we go into the real world focusing on shifting value around in attempts to maxmise shareholders' value while ignoring any real value creation?

One of the reasons that b-schools will not want to change the status quote is the profits they are getting out of running the same broken programme over and over again:

For universities, business education is a kind of cash cow. Business schools are less expensive to operate than graduate schools with elaborate labs and research facilities, and alumni tend to be generous with donations.

How then can we hack the business school system to make it better?

Create transparency
Transparency is almost always the cure of any closed system. Business schools are no exception. One of the interesting idea mentioned in the article is creating an index that ranks schools based on"how well they integrate social and environmental issues into curriculums". This is a great start but given the resistance faced by the survey, we need more grassroots actions. A RateMyProfessor equvialent to rate the programmes of business schools can be interesting.

Create diversity
Outside of the b-schools systems, there are acutally excellent resources on the new economics of businesses. One great example is of course Umair Haque. However, we need to create ways to magnify their voices so that diversed thinking can be encouraged. We all need to think beyond shareholders' value.

(Note: Ethan Burley tweeted a similar thought here)

Create new ways of verification
One of 'benefits' of MBAs is not the course content but the networks and branding that the certificate brings. However, the economics of interactions has now diluted the power of such signaling. The fact that we can now blog, comment, tweet, chat, contribute etc on the Web means we need less certificates to inform the market of our true value. What is more important going forward is to think of ways to measure and capture our social capital that online interactions have bought us.

A powerful last quote from the article as a departing note:

Instead of being viewed as long-term economic stewards,.... managers came to be seen as mainly as the agents of the owners — the shareholders — and responsible for maximizing shareholder wealth

Related:
Thoughts on hacking legal
Thoughts on hacking finance

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Thoughts on hacking legal

I have been thinking a lot of the legal industry lately as one of my friends has the unfortunate experience of being retrenched. When we were talking about the industry in general, it occurs to me how deeply out of sync it is with the way our economy is going. I decided to post some of our conversations and my thinking here for further sharing and discussions.

Legal practice
The practice itself will become more consumer oriented, with greater emphasis on personalised and affordable services made possible by web technologies. We will see virtual lawyers and a pull platform that gathers the necessary expertise across the network to help the consumer. All these means taking down the walls that have make lawyers immune to the restructuring of the economy.

Legal research
Legal research is now costly and time consuming. The entire industry needs to learn from Google Print. We need services that index all the legal case materials, make them searchable and allow any users to tap into legal materials as easily as a Google search. Fastcase is one approach to tackling this problem. There will be room for many more.

Related to research is the area of legal publishing. We know now that publishing (in particular newspapaers) is on its last legs. The same will happen to legal publishing, which suffers from even more price discrimination. A new model will be needed for legal publishing.

Legal education
Like the rest of the education sector, there is a disconnect between what was taught and what students eventually find when entering the legal workforce. In order words, legal education don't prepare students to practice law. Add to this the high cost of a law degree and you can see how ripe this area is for disruption.

One area that might be interesting to think about is micro law schools. We have seen the success of micro breweries and micro lending, why not micro schools? In fact, I am starting to see early steps being taken right now...

Electronic legal documents
Many legal transactions can actually be made without lawyers. That is the reason why elawyering will start to replace lawyers that don't provide much value beyond preparing templated documents. This is a great example of how electronic legal documents is more efficient than costly lawyers.

Refining economics of contracts
The biggest opportunity may be to eliminate the cost of contracting all together by reinventing less costly contracts. This may inevitably means creating market exchanges in areas where contracts are the most costly, where information is made artificially scare. This is a big big opportunity...

Related:
Thoughts on hacking finance

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Thoughts on hacking finance

Finance has almost been part of my life. My education was in financial economics as in my first job. However, I have a great distaste for the industry and therefore left it to pursue my current interest in digital or new media. Now that Wall Street has self exploded, and we can see clearly how rotten the system is, it is time for startups and entrepreneurs to start reimagining how finance can be made better.

A light weight and responsive investment banking model
Traditional investment banks thrive on information arbitrage and limited disclosure, not to mention exploiting customers to the fullest. Next generation investment banks will use technology to empower the customer; giving the customer as much information as possible as well as the tools for them to easily determine and manage his/her investment portfolio or risk. Case example: WeatherBill.

New models of financing
Traditional financing has shown to be unable to adapt to new models of lending. That is why we are seeing stuff like microfinancing coming up from places that are far away from where traditional banks are. Social lending, debt exchanges, community currencies are all new approaches where financing can be raised.

Serving the under-served
We need better ways to provide financing to those who need it: students, low income groups, creatives, people with poor credits. These are all markets that needs disruption. There are lots of opportunities to provide easy to use, low cost alternatives to what traditional banks are failing to offer.

Peer to peer financial advice
It is clear that the centralised way of managing the financial industry will not be sustainable. We have seen how industry after industry has been disrupted through empowering the individuals: blogs disrupting publishing, social music disrupting labels, SaaS disrupting entreprise software etc. Very soon, financial advice will be sought from your peers rather than from investment or personal bankers. There will be tools that help 'amateurs' and peers become 'professional' investment bankers and wealth advisors. Covestor is the leading example.

Financial research will be bottoms-up
StockTwit is a manifestation of an idea expressed by Umair Haque two years old. By unleashing the information bottleneck created by private networks, Stocktwits will make the market more inefficient and levels the playing level for everyone. The bigger picture is to recognise that financial information and research will be distributed. That creates opportunities for intelligent aggregation and filtering.

Advances in risk quarks
Through technology, we will be able to identify risks and make them plastic. We can then better manage them to reduce our exposure and limit financial damages. This article gives great examples of how these risk managment tools can look like.

Rating agencies will be replaced
The crisis has shown us that our current rating agencies are inadequate. Why do we need centralised authorities to tell us what is investment worthy and what is not? At Etech2009, there is an interesting startup that attempts to decentralise the rating process. It wants to give everyone the ability to assess risks using open source tools. More can be done in this area.

Financial literacy needs to be improved
I have blogged about the need for financial literacy before, reflecting on this Economist article that states the inadequacy of how we teach finance to the masses. I continue to think that this is an area that desperately needs our attention to make it better.


Making banking service more human and personalsied
Customer service in finance is not the most enjoyable experience. With the Web and some clever software, I wonder if a new kind of retail financial services experience can be created that would beat the pants off most of the mainstream high street banks.

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