Too small to fail; is idea agility the new competitive advantage after Financial Regulatory Reform?

As Financial Regulatory Reform is signed into law, there’s “a kind of hush, all over the world”*. The banking and financial community has been called into the principal’s office for bad behavior. And now the rules have changed.

While there is little argument that change was needed, there is obvious resistance to the idea that the government is going to have the right solution, despite the fact that Obama said, “reform will help foster innovation, not hamper it.”

Experts are concerned about unintended consequences, the ability to conduct business profitably, and the impacts on Main street’s access to financial services post reform. However, the argument is over and the bill is law. So now what?

Stop Whining and Start Innovating

It is the government’s job to look in the rearview mirror, find out what went wrong, and prevent it from happening again. That job has been fulfilled, for better or worse.

On the other hand it is private industry’s job to figure out what the real needs are in the market and how to satisfy and monetize them. As a society, we have invented some pretty big things in the last several hundred years.

What makes us think that we cannot continue to offer valuable financial services to people who need them in a way that is profitable, logical and doesn’t rely on bubbles, getting people in over their heads, or creating “win/lose” scenarios? There are other ways to make money.

The wailing and gnashing of teeth is just giving your new competition a running start.

And who is the new competition?

Medium May Be The New Extra Large

While there's a lot of focus on the tightened rules for large banks on use of capital, perhaps giving smaller banks an advantage, some are concerned about the impacts on consumers and smaller business.

Some experts are saying that smaller firms may be at a disadvantage because credit will be harder to come by, I say that small to midsize firms are going to be even more incented to use “idea capital” as a currency for doing business in the future. And smaller firms are unencumbered by bureaucracy, and can be more agile in testing and learning in markets.

Over the course of my twenty six year financial services career I've worked in small, medium and large companies. While creativity and innovation was valued to one degree or another in all of them, the smaller firms always had a major agility advantage. It isn’t just that they are flying under the radar, it’s also because larger firms don’t readily see them as competition. And sometimes the opportunities that are attractive to the smaller firms are less attractive to the major players due to economies of scale.

So What Are Some of Those Opportunities?

There may be hundreds or thousands of innovation ideas that could come out of the new regulation. Here are a few that are directly related to immediately visible unmet needs:

1. For Everyday Consumers – Credit is tightening under the new rules. Households living on “paycheck fumes” will no longer be able to borrow like they could in the past. Is there a “discipline product or service” that can be offered to allow them to put their financial goals on track, get out of debt and/or start saving responsibly?
2. For Investors – Credit rating agencies (like S&P and Moody’s) will be held more accountable for their outputs. Investors are encouraged to do their own due diligence. But how many investors really know how to do that? Is their room for an “advice product” or service for everyday investors that can help them do their own due diligence?
3. For Financial Advisors – There are new fiduciary standards that brokers must comply with. Some predict it will be onerous and drive them away from certain sectors. If that's true, there will be unmet needs in those sectors that previously depended on broker services. Could someone invent an “confidence product or service” that would help brokers feel strong living within the new fiduciary rules, perhaps creating a whole new approach to giving advice in the market?

Where are the other unmet needs that can be filled with new products, services and business models as a result of FinReg? Who will be first to fill them? What’s your process for stacking the success deck in your favor?

*(the YouTube reference has nothing to do with FinReg or Innovation, I just like the Carpenters; one of those guilty pleasures)

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