3 Iconic Financial Pillars That are Overdue Disruption
Recently had a discussion about the function of money as a commodity, such as in the debt market where the price of money is the interest you pay, or in the equity market where the price of money is that you give away an equity stake of your company. This is true in both the private market (angel investment into Uber) or the public equity market (Vodafone stocks). The outcome of this discussion was that the equity market allows you to sell shares in your company but treat that as an asset. An investor (Venture Capital) for example, could accelerate your time to market (finding product/ market fit), access to capital and resources — adding value to your startup (and it’s shares). On the other hand the debt market requires you to pay interest on a schedule and you have a liability to make those payments on time or you are penalised (e.g. Credit Card for personal debt).
This is not ground breaking news, but it got me thinking about three ancient systems at the core of the financial markets that are broken.
- Insurance: Insurance companies create the policies, we pay for it, and awesome mathematicians (actuaries) are hired to ensure what we are paid out for a claim is a tiny % of what they make as profit. How?…. When an insurer collects premiums they put that money into an investment pool. They use the premiums collected to fund investments (generally sure bets or low risk securities). When a claim has been made, money is then taken from that pool and put into a cash account to pay the claimant once the adjustment of it is completed. Where insurers make their money is on the interest and return on investment (ROI) earned from those premium pounds while they are in the investment pool. The ideal is to have enough premiums coming in to keep the investment pool fully funded but the profit itself comes from the return on investment. I believe it really plays on fear and lack of wealth, e.g. one day I may have a medical accident I can’t afford to cover. Therefore if you were fearless and wealthy, you wouldn’t consider insurance as you could afford to live without it. There are 46 insurance companies in the Fortune 500, with an average age of around 95 years. This industry is old, slow and it shows. This system is broken and in need of being fixed!
- Pensions: Never really been a fan of hedging my bets against life and hoping I reach 65 to receive £10,000 a year if I invest £200 a month for the next 25 years to a pension whilst the investment manager at the pension company is investing into a range of asset classes to profit off your pension pot. What has become apparent is that the generation before Gen-Y in the 70’s and 80’s are not able to retire properly as living costs outstrip their pension. Therefore the pension system is broken! As the whole point of a pension is that it provides you income when you retire, yet so many people cannot afford to retire. Many people are downgrading when they retire as a result or relying on their children. Therefore this system is failing us and needs to be fixed.
- Private Debt Markets: When applying for a mortgage or a Credit Card or even some careers you are required to obtain a credit report. It’s ludicrous to think we are paying companies for a report about ourselves, our own data and our own credit reports. Furthermore you are being scored on your ability to borrow credit (debt) and the higher your score the more debt you are allowed to carry. Debt is a liability and something you should want to minimise or eliminate where possible. The reward for a good credit score is that you are eligible to take on more debt (liabilities). This system is comical and so broken and in need of being fixed!
Rant over….but have a think about the three systems above. Fortunately there are more and more routes to build your own infrastructure and not have to rely on the three systems above (e.g. build a successful company, freelance, earn from royalties etc.). Nevertheless these are huge systemic problems that have been protected by a few people at the top who benefit from the trillions these systems generate. However they are ripe for disruption and within the next 10 years I would be surprised if we do not see more organisations such as Kiva, Guevara,Funding Circle and Lemonade.
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FYI: This originally appeared on my website: www.andyshvc.com