Social systems change because of a ‘thousand small cuts’. These cuts are initiatives that develop in parallel to an existing system and challenge it based on the use of new technologies, new social constructs, or the emergence of different customer needs. Some of these initiatives survive, grow, join-up and ultimately replace the existing system. Keeping an eye on small changes on the margins of existing systems allows us to examine solutions to problems and to predict future shifts to the mainstream.
There are a number of examples of small changes that are currently occurring outside of the traditional financial system. These initiatives point to the potential for a future revolution in financial services. They provide challenge (albeit of the David vs Goliath kind) to established mainstream institutions. Challenges include:
Customers are opting for different types of banking institutions – and voting with their deposits. In October more than $4billon was deposited in new accounts at the Credit Union National Association in the US. This increase of 700% above the previous year is attributed to the ‘move your money’ and ‘bank transfer day’ initiatives linked to the global occupy movement. It encourages banking customers to move their bank accounts from large institutions to local institutions and co-operatives. It may encourage new entrants and provide existing players with the business case to review their current lending to develop new offerings. Challenge: Should traditional banks look back to a more co-operative model for members?
New ventures are redefining the way that money is shared. The financial system, at its base, is a mechanism to facilitate transactions between neighbours. Indeed the now over-complex system is being simplified back to these roots – there has been a rise in organisations offering peer to peer lending. These include: Kiva, Zopa, Funding Circle and Civilised Money. Each of these initiatives offer a platform for participants to fund other members of a defined community. Zopa, winner of a service award through Moneywise, connects borrowers and lenders through a loan marketplace removing the need for a traditional bank acting as a facilitator. Ultimately the transparency of this lending is a challenge to the traditional banking business model. Challenge: Could we see a shift in future where banks serve as direct connectors that need to provide valuable services beyond a mere differential between saving and lending rates?
Currency is fragmenting/Spend is localising. One of the issues with a globalising economy is that money from small far flung locations in centralised away from the place it is spent. For example, revenues earned by Tesco in the small town of Totnes return to shareholders in other places. Totnes, in the meantime loses its local revenue-generating capability as small shops can’t compete with Tesco prices. Alongside this it loses jobs for both operational staff and suppliers. In a bid to keep money circulating locally, many small towns have created their own currency. The Totnes Pound is now accepted in over 100 local businesses (See http://www.transitiontowntotnes.org/totnespound/home). Among other objectives, it aims to build resilience in the local economy and to encourage more local trade. Challenge: If the survival of a thriving community is important to the survival of traditional banks, how could they decentralise to match the need for local resilience?
The financial system is being ‘gamed’. There are more than 8000 hedge funds globally. Most look to invest (and often speculate) on market activity through a pool of private investment. Only a handful work on a social agenda. Karma Banque positions itself as an activist hedge fund. It profits from short-selling companies that are vulnerable to attention from activist groups through poor social or environmental conduct. It then channels profits into pressure groups that can further drive down the price. Targets have included Coca-Cola and McDonald’s. Challenge: Where else is the financial system vulnerable to an emerging social agenda? Is this an opportunity for the mainstream to re-evaluate socially responsible investment?
These initiatives are all small and relatively inconsequential against the scale and stretch of the large globalised financial system. Some will survive and others will disappear. However, it is through these initiatives and others like them that new business models, relationships, organisations – and ultimately new systems are born. If we want to address the obvious market failure of the current system, we need as individuals, companies and governments to look beyond the traditional to find and stimulate emerging answers ‘in the margins’.