How to disrupt Wall Street

Sarah Lacy has a very interesting post on TechCrunch where she argues that the internet is finally starting to disrupt Wall Street. I’d love nothing more than to see Wall Street get disrupted by the Internet.

While I agree on the big picture, I disagree with some of her specifics. She cites Mint and Square as examples of startups that potentially disrupt Wall Street. As I see it, these companies have merely built nice UI’s to Wall Street: Mint connects to your banks and Square to Visa and Mastercard and the bank that issued the credit card. If people at farmers’ markets use credit cards instead of cash, that means more money for Wall Street, not less.

I would argue the best way to try to disrupt Wall Street is to look at how it currently makes money and attack it there. Here are some of the big sources of revenue.

1) Retail banks. Retail banks make money on fees and by paying low interest rates on deposits and then doing stuff with those deposits (buying stocks, mortgages, issuing credit cards, etc) that gets them a much higher return. To disrupt them you need to get people to stop depositing money in them. Zopa and Prosper are trying to do that. Unfortunately the regulatory system seems to strongly favor the incumbents.

2) Credit cards. Charging 20% interest rates (banks) and skimming pennies off every transaction (Visa and Mastercard) is a very profitable business. Starting a new payment company that doesn’t depend on the existing banks and credit card companies could be disruptive. Paypal seems to have come the closest to doing this.

3) Proprietary trading. A big trend over the last decade is for more of big banks’ profits to come from “proprietary trading” – which basically means operating big hedge funds inside banks (this trend is one of the main causes of the financial crisis and why the new “Volcker rule” is potentially a very good thing). For example, most of Goldman Sachs’ recent massive profits came from proprietary trading. Basically what they do is hire lots of programmers and scientists to make money on fancy trading algorithms.  (Regrettably, I spent the first four years of my career writing software to help people like Goldman do this).  Given that the stock market was flat over the last decade and hedge funds made boatloads of money, the loser in this game are mostly unsophisticated investors (e.g. my parents in Ohio). Any website that encourages unsophisticated investors to buy specific stocks is helping Wall Street. Regular people should buy some treasury bonds or maybe an S&P 500 ETF and be done with it. That would be a huge blow to Wall Street.

4) Trading. The more you trade stocks, the more Wall Street makes money. The obvious beneficiaries are the exchanges – NYSE, NASDAQ etc. There were attempts to build new exchanges in the 90′s like Island ECN. The next obvious beneficiaries are brokers like Fidelity or E-Trade. But the real beneficiaries aren’t the people who charge you explicit fees; it’s the people who make money on your trading in other ways.  For example, the hot thing on Wall Street is right now is high frequency “micro structure” trading strategies, which is basically a way to skim money off the “bid-ask spread” from trades made by less sophisticated investors.

5) Investment banking. Banks make lots of money on “services” like IPOs and big mergers. A small way to attack this would be to convince tech companies (Facebook?) to IPO without going via Wall Street (this is what Wit Capital tried to do). Regarding mergers, there have been endless studies showing that big mergers only enrich CEOs and bankers, yet they continue unabated. This is part of the massive agency problem on Wall Street and can probably only change with a complete regulatory overhaul.

6) Research. Historically, financial research was a loss leader used to sell investment banking services. After all the scandals of the 90′s, new regulations put in stronger walls between the research and banking. As a result, banks cut way back on research. In its place expert networks like Gerson Lehrman Group rose up. LinkedIn and Stocktwits are possible future disrupters here.

7) Mutual fund management. Endless studies have shown that paying fees to mutual funds is a waste of money. Maybe websites that let your peers help you invest will disrupt these guys. I think a much better way to disrupt them is to either not invest in the stock market or just buy an ETF that gives you a low-fee way to buy the S&P 500 index.

This is by no means an exhaustive list and I have no idea how to solve most of these problems. But I’d love to see the financial industry be one of the next areas of internet innovation.

87 thoughts on “How to disrupt Wall Street

  1. Chris, we’re working on a new startup that covers #3, 4, 5 and 6. We’re located in Brooklyn and Manhattan. If you open to hearing about it, it would be an honor to give you a preview.

  2. Hi Chris. Very very good and honest points made in this article. It’s probably the best I’ve read all week.

    It took me about 6 months of studying and actively trading to discover how money is really made by the big guys. It’s funny that not many people talk about the real facts.

    I really love what Prosper/Zopa and their competitors are doing. You mentioned regulatory system problem. What are these ? Can you please detail ?



  3. Disruption as in: 1) offering equivalent value in a given market sector at a fraction of the cost2) or offering superior market value at the same costOne path to disrupt wall street or other parasites of exchange is to decentralize wealth transfer. Functional finance systems need to allow me to store wealth (capital), and borrow/lend. True disruption occurs when I can save, purchase, and borrow from agencies decoupled from entrenched market middlemen.Interestingly enough, current authentication systems (openid, ie I am who I say I am) are applicable to public exchange of wealth.Others have suggested virtual currencies as one bypass to enable micro transactions. Leaders in this area are needed to take the initiative. Simple put we need a new market, with one primary focus: to minimize exchange taxes and bottlenecks. Let wealth flow freely to wherever society deems it is best spent.Central authority on value is ludicrous in this day. We must come together and trust individuals, and communities, not huge organizations. Let local markets feed back their exchange rates to publicly owned/operated exchange servers.This requires a system architecture that gives people an alternative to retaining and using their earned wealth. I don’t think we have a choice yet. But it does appear that such a format is practical.

  4. joshuakarp says:

    I think there’s a play to disrupt Wall Street in how investors (and others) measure and rate risk. I’ve been thinking of a tool that lets someone model elements of a risk, and the data points that determine (in that person’s opinion) if the risk increases or decreases. For example, you may model the risk of real estate speculation of the Sears Tower. You may have a data point of percentage of the Chicago commercial downtown real estate market that is filled, as well as the actual number, say 11%. Then you would “crowdsource” (to a specific crowd, not to the general public) the question of risk based on the data points you provided. The “crowd” would respond, and you would get a risk assessment – and since the underlying data points continue to change – the number might go to 10% or 12%, you could track changes over time. This risk assessment would demand 100% visibility into the data points, and even to how those data points were set, and you’d have to rate each member of the “crowd” as to how much influence they should have for the overall risk assessment. Or something like that…

  5. Joan Smith says:

    You missed one. I just hired an SEC-registered Financial Planner that I found via the web. All encrypted all-email and web communication and his virtual assistant reduce my costs significantly. He is not in my state, not even close. Its a new business model and , yes, my assets will be third party held (Fido) and I’m no rube. I take pleasure in leaving the squid-world, enough blood sucked from my account to pay for Trust Dept mahogany already. Just wait til my kids grow up – the nineteen year old is all-web all the time and takes pleasure in freeware etc. This is all part of the new populism – just internet based. I am thrilled to be free and to be paying 1/2 the .80 bp I paid my paper-based IA previuosly

  6. Lloyd says:

    I’d like to see your average blogger run an IPO process or a trading book. Then our financial system would really be in trouble.

  7. thx! zopa/prosper – there are all sorts of regulations that come into play when you are doing banking like activities. my understanding the regulators are very resistant to new models.

  8. ronald says:

    Isn’t the whole financial market build around manipulation of this market. Otherwise split second trading wouldn’t make any sense.

    Therefor a simple product, cheaper better whatever, will have hard time to change anything. Since in a rigged complex system it will just be absorbed,
    Maybe I need more coffee. But without regulation complex system can take on a live on their own. Build in economy of scale to get “to big to fail” and it really pays.

  9. I really liked that post (and the excellent comments) the first time round. But I don’t see how it affects my point.Take mutual funds. First the indexers disrupted the active managers by offering a similar product at lower cost, and the indexers themselves suffered disruption from ETFs.Wall St. already has a habit of eating its own children.

  10. true. ETFs are one of the most disruptive innovations in finance in a while and benefits the consumer via lower fees. but still there are so many areas where big firms are protected either through market forces or regulation.

  11. yes, I agree that ETFs are a great thing. Especially since most actively managed funds show no outperformance (after deducting mgmgt fees).

    However, I don’t think that’s going to solve the prop trading problem. Props make quite some money from unsophisticated decisions. Also the “herd” behavior of unsophisticated investors is not going to change simply because the investors have diversified portfolios. I would rather suggest to create a even playing field by enabling those investors to play in the same league. This could be done by creating more “crowdfunded” hedge funds that give unsophisticated investors access to those kind of assets. Hopefully created by players other than the major Wallstreet firms.

  12. Aside: in a way the indexers and ETFs are getting a free ride on the coat tails of active managers, without whose trades price discovery breaks down. Even prop desks provide a useful function in this context.I agree with Chris that there are many areas that could be disrupted – the Google IPO was a good example of telling investment bankers where to stuff their fees – but my point is that there are also many parts of Wall St. that are highly-competitive and suffering continual internal disruption.

  13. The underlying ‘known’ risks in an asset are already priced into the market. Crowdsourcing would do little to uncover (legally) ‘hidden’ or ‘unforseeable’ risks, not to mention any discovery would naturally lag behind price movement.

    I do find social sites like covestor and kaching to be really informative and stocktwits is a great community of traders and analysts. But the ‘data’ yielded from these sources is rarely accurate enough to base a position on.

  14. I’m not sure if Wall Street gets disrupted by trying to redefine or reinvent how a particular operation works — but I’m a big believer in decentralizing it and taking power away from the “few”. I think Covestor and kaChing are good starts…Covestor, more so.

    So looking at all of the examples above I think two great questions to ask of each are:

    1. Where is the power currently centralized?
    2. How can we decentralize that in an effective way (transparent, minimal risk, meets regulatory frameworks, etc.)?

  15. Regarding your points about research/trading/investing, I feel that this is also an area where user-generated content / online collaboration are already making an impact. I worked with when they were in stealth, and have also read about start-ups like Covestor, which some have mentioned. But like some commenters have asked, the question is to what extent these sources can be trusted, and how one could develop a way develop certification.

    And even with certification, like current research analysts and fund managers have, there are never guarantees regarding performance, right? I do remember my father telling me from an early age how the majority of actively managed mutual funds never beat the long-term S&P 500 return!

  16. Chris, great as always. Another area that you could tap into is the de-glorification of Wall Street. Many of us (including you) live in America and there is the aspiration of the American Dream…money + freedom. Other than Texas, lots of money is made in America from Wall Street. How can we change our cultural DNA (not simple) to move beyond Wall Street as aspirational?

  17. The research point is particularly close to my heart. 90% of most investment analyst reports are the same spreadsheets with new numbers plugged in, slightly tweaked qualitative analysis, and boilerplate. There must be orders of magnitude better analysis out there that doesn’t see the light of day. I’m assuming it stays with the hedge fund/trading department where the real money is. Similarly, consulting companies do a lot of custom industry analysis that never gets shared. It’s profit maximizing for them, but certainly not customer-surplus-maximizing. feels like a toy right now, so maybe they and their peers have a chance at disrupting this field.

    As for IPOs, those seem like the biggest racket of all to me, but I think the challenge there is a customer mindset one more than a technology or capability one.

  18. square is not planning on fronting existing payments systems forever and i think they could be disruptive if they get it right. it’s a hard category. paypal is one of the few that have built a successful business in payments. but i think we’ll see the dam break this decade and a bunch of new payments systems emerge.

    i like the way you frame this. we’ve looked and and have a few investments in some of these categories.

    i mentioned some of my favorite “disrupting finance” sectors in the disruption talk i gave at google last year

  19. The industries that have been most disrupted by the internet have all been consumer facing industries that aren’t heavily regulated: music, newpapers, retail, movies, TV. Heavily regulated industries such as telecoms and health care, have been much more resistant to disruption by startups. Startups specialize in moving quickly and innovating, while regulation is created in part to control and limit innovation.

    Great post, btw Chris. It hit #1 over at

  20. “Maybe websites that let your peers help you invest will disrupt these guys.”I believe there have been unsuccessful crowd-sourced mutual funds (and VC funds, I think) in the past. “or just buy an ETF that gives you a low-fee way to buy the S&P 500 index.”This is spectacularly bad advice to follow during secular bear markets, but that it is still so firmly established in the conventional wisdom suggests an angle of attack you haven’t mentioned. Countless financial planners continue to preach un-hedged, long-only index investing, despite the awful performance of this strategy over the last ten years (and during the previous secular bear market). The main reason these financial planners continue to promote this brain dead investing paradigm seems to be that it’s easy to follow, and frees up time and energy to hunt for new clients. They also don’t have to compete with many planners using a more intelligent approach. There are better approaches out there. I know someone, for example, who has trounced the indexes over the last ten years using a market neutral approach. He didn’t invent the idea of market neutral investing, but he remains one of a relative handful of professional investors using it. He virtually eliminates market risk this way, and the methods he uses to generate alpha available for all to see in the academic literature. What would be disruptive would be to package this approach, so average investors could more easily follow it.Another disruptive idea would be a way to enable average investors to intelligently hedge themselves against market-, sector-, and company-specific risk. I have put together something along these lines.

  21. 1) Be careful how much you wish for- remember we have a credit spectrum for a reason. Technically, both stocks and bonds are on the same credit spectrum. You hit one too hard, you will hit the other. I second David’s approach here. You got a very complex machine you need to take down, and you can’t take down every part of it either. (That would mean no credit, no stock movement, nothing).

    2) You could do jujistu on the offerings on wall street. If we move to microcredit and online currency, you will need to back the money away from the underneath companies to secure against the same agency problems. You could just make the bond structure so unappealing because it is so small that is untradable except through some sort of ETF like structure or through holding the bond No one will do it in this type of environment though. Too hostile.

    All this being said- you’ll never full get rid of agency problems/ The internet in some ways make it worse, not better. It isn’t clear how to get quality information, so you are very likely to be stuck in an Akerlof type of World.

  22. It is strange how anger and hardships felt down every main street in America has created an environment for paradigm busting ideas.

    We have launched a start up that will help redefine how consumers use credit. Kutro helps consumers learn how to “Monetize Their credit”.

    The “Move Your Money” concept and movement is a viable idea, however it is only one side of the coin and the other is credit.
    We have the only grassroot effort to help consumers learn how to leverage their credit for maximum benefit.

    The service is absolutely free for all consumers. If you are really serious about shaking things up on wall street. Spend some time on our site educating yourself on the new concept “Monetizing Your Credit” and you will be amazed of the possibilities.

  23. Diogenes says:


    You have a great point re regulated v. non-regulated. Unfortunately most of finance is highly regulated and is skewed to favor incumbents. For example, if you become a fund manager, you have some pretty heavy regulations to check off that supposedly “protect” widows and orphans but mostly they protect places like Goldman Sachs. Funny how Congress works! Actually not so funny. As one poster suggested, why not a rating agency a la Moodys? Great idea except you need the blessing of the SEC. In addition, a lot of the problems in the financial industry aren’t necessarily unsophisticated individual investors but the blindingly stupid institutional investors like most pension funds who are controlled by their equally intelligent consultants. It’s how many boxes you check off and it’s also what’s in vogue as institutional investors chase returns.

  24. Theoretically a prop desk is just that, only that the payments from the desk are unrealized (unless you think of a S & L situation -you gain by not having your bank underwater.)

    Unless there is resolve about how to manage credit risk in the face of the public to the fact that there is an abyss once you hit the wall and the item is “risky” (it becomes infinitely more of illiquid liability as you get further away from the center), it will be extremely hard to answer to give the public a full on view of what a prop desk does and what a hedge fund does. Probably something that could start is explaining to people how credit and money works (or in fact doesn’t).

  25. twittering_as_stocktradr says:

    “how to disrupt wall street”

    investor and traders get nailed because of themselves.

    greed and fear. get rich quick.

    you want to disrupt wall street. make money off them. educate yourself.

    this is america. you have freedom of choice.

    you have the right to lose money.

    you have the choice of where you can deposit your money.

    spend it. save it. it is up to you.

    you can use credit cards or not. what is the problem?

    your own stupidity/ignorance.

    people get fat. no discipline. whose fault is that. the person’s.

    people lost or losing their houses. why? because of them.

    you have to look out for number one. YOU.

    the only one that can look for you is YOU.

    you are where you are because of YOU.

    “i would argue the best way to try to disrupt wall street is to look at how it currently makes money and attack it there. “

    wall street is not the problem. ignorant people are.


    are you a sucker.

    retail banks. use them or not.

    credit cards. use them or not.

    proprietary trading. who cares.

    high frequency trading, dark pools. who cares.

    if you trade with a complete trading plan you will continuously make more money than you loses.

    i do.

    if one makes money trading despite all that you cite. what does it matter.

    why are or were people’s trading account down 30, 40, 50% or more.

    no complete trading plan.

    outsourced their investments.

    if you do not know how to trade/invest, do not put your money in the market. pretty simple.

    a retail trader can continuously make more money than one loses with a complete trading plan.

    my trading buddy. a retail trader. from a bedroom trading from went from $50,000 to $6,000,000.

    investment banking. who cares?

    research. who cares. financial tv shows, financial talking heads/touts. who cares.

    research. phony baloney. believe them or not. your choice.

    mutual funds. use them or not. your choice.

    “this is by no means an exhaustive list and i have no idea how to solve most of these problems. ”

    you are correct. you “have no idea” you are clueless.


    you have the right to loses money. please do not abuses that right.

    want to learn how to trade and make money.

    open source stock trading.

    admission: a trading account.

    everything else is free on the internet or from the library.

    twittering as stocktradr

  26. jgalore says:

    Great post Chris re Mutual Funds – their fees can be DOUBLE what investors think. Mutual fund shareholders are often in the dark about capital gains taxes embedded in funds or the wasteful use of “soft dollars” – two effectively-hidden fees that eat up a significant share of returns. We touched on this on a recent blog post… Bottom line: it’s an inefficient industry that hasn’t been impacted by the web (in fact it hasn’t seen any innovation in 25 years). It’s time to disintermediate it.

  27. buying stock market indexes over the last century has generally been the best strategy for non-professional investors. maybe that will be different in the future but i would bet that they should probably first decide what % to allocate for stocks vs bonds and then put the stock portion in S&P ETFs and the bond portion in laddered treasuries.

  28. The last century included secular bull and secular bear markets (or secular range-bound markets, as Vitaliy Katsenelson calls them). We are in a secular bear (or range-bound) market now. It’s not a good time to invest in an S&P ETF for the long haul. There is a whole industry of retail investment advice built on the strategy of un-hedged, long-only index investing that is ripe for disruption.

    I’d also be wary of allocating money to Treasuries when yields are near historic lows.

  29. Good post and interesting comments. Just some thinking about this whole disruption thing — maybe we can challenge common wisdom as to whether most people should hold equity in their portfolios. We’ve been taught that buying stock (or actively managed mutual funds or index funds/ETFs) is what the smart people do. Who says so?
    If we can’t accurately assess the risk, who says that people should own stocks or more diversified, cheaply-managed ETFs? Most retail investors only sense what risk is when their portfolios go down like they did in 2008. As Chris says, this may be a way to counter Wall Street marketing muscle.
    Bonds have seen inflation-beating results throughout history. Why isn’t there more info on investing in bonds for retail investors?
    Greed drives markets and Wall Street profits off greed. As long as there is potential for big returns, people will make risky mistakes.
    I am an financial advisor by profession –so, full disclosure — and risking that I may be called to task, I just don’t believe that all financial professionals are over-priced, under-valued dead weight. There are numerous examples to the contrary, but there are many professionals who have done right by their clients for decades. There is definitely a dark-underbelly to empowering everyone to self-manage their finances. Some people need advice and help to steer clear of disastrous mistakes.

  30. vbd says:

    The majority of the populations in Western economies want to nail their Wall Street equivalents. As a reader said earlier, the finance industry is heavily regulated and the regulation works in Wall Streets favor instead of the rest of the population. This makes it hard to nail Wall Street as the cost of (or barrier to) entry are high. The startups mentioned will make a difference but I wonder if they’ll really make the huge difference that the population wants to see and to see it now.

    I don’t have answers but I do believe that we need the Volker’s of this world to re-instate the Glass-Steagal structure, to begin to change regulation of the financial system in the populations favor, to encourage people-owned co-operative styles of financial organizations.

    Unfortunately, this requires massive and regular protests on Wall Street by people of all political persuasions until change happens.

  31. Observer says:

    “2) Credit cards. Charging 20% interest rates (banks) and skimming pennies off every transaction (Visa and Mastercard) is a very profitable business. Starting a new payment company that doesn’t depend on the existing banks and credit card companies could be disruptive. Paypal seems to have come the closest to doing this.”

    There’s a trade-off here. The fees charged by credit card companies offset their losses among customers who do not pay back the loans they take (which is what a credit card purchase is). Regardless of our opinion of the size of those fees and how they are assessed, they are necessary- in some form- if so many customers are to have access to credit and this very convenient payment system.

    While we may dicker over who should pay those fees, and under what circumstances, the overall level of fees must remain constant if the same number of consumers are to enjoy the benefit of credit cards. Bank profit margins are not as thick as Congress would like to believe. Re-arrangement of such fees is possible, but if their total amount decreases, some consumers will lose access to this service.

    PayPal does not magically make this reality go away.

  32. I’m not trying to pick on Square (I think it’s a beautifully executed product). I’m just more making the point that to really go at Wall Street you need to cut them out of the transaction. I think the ones that succeed won’t look beautiful and useful at first – they’ll look a bit like a toy like Zopa or Covestor (i mean that as a compliment).

  33. Agreed you need to charge interest for credit. The problem with the credit card industry today is they thrive on confusion and trickery. There is so much fine print on my credit card I have no idea what’s going on. And their “best customers” are people who don’t pay off the cards but just pay the interest.

  34. dandykens says:

    Great post Chris. Newsley makes a great point…the capital markets are highly regulated. As such entrepreneurs often have to align themselves with entrenched market participants in order to properly execute their plans. The best way for innovative FinTech companies to take on Wall Street is by finding inefficient niches, deploying technology and taking market share from established players by increasing efficiency and lowering fees.

    Success for us will mean that we (Meet the Street) will shrink our own market in a big way (in dollar terms) but as a result will capture a very big slice of this newly redefined and more efficient market. The byproduct of that success is that more trading volume will accrue to the established market players that we are about to align ourselves with. This volume will replace higher commission volume which is currently being traded elsewhere. The resulting fee reduction will be realized by institutional investor counter parties and ultimately passed on to investors (mom & pop) in the form of higher realized returns.

    My point is that this can not happen in a vacuum and that our partners (established market participants) will be instrumental in making all of this happen. Success is not a zero sum game and our partners will also benefit from a large shift in market share….and I am fine with that.

  35. this article says:

    The Internet is the very reason why Wall Street banks are so big. Prior to cheap computers and the Internet, we had lots of regional banks.

    The Internet brought significant economies of scale in terms of cheaply on-boarding and processing loans and credit cards, as well as developing and executing sophisticated institutional trading schemes.

    Even if there were open source suites of financial software for running a small regional banks, they would still have difficulty competing on price. Big international banks are be able to offer lower borrowing rates due to their larger asset pools and diversified risk.

    At the end of the day, people want the best deal. Thank consumers for international conglomerates like WalMart, Amazon, and Bank of America. We only have ourselves to blame.

  36. Finance is a heavily regulated industry (as you already mention), both at the state and federal level. This is especially true when it comes to consumer finance. I also know a lot of investors who don’t like regulatory risk in businesses – unless you’ve tackled it before it can feel like a big black box. Everyone in the P2P lending space has run smack into it and that (coupled with loan loss rates) seem to make that business look fairly challenged.

    We routinely see small investment banking / advisory emerge to offer clients lower fees and higher quality service (at least that is the pitch) compared to the big Wall Street firms. But as those boutique firms grow, they tend to look and behave like their larger peers. That’s a long preamble to two questions:

    1. It seems to me like the regulatory burden is very high for someone who wants to strike at the core of financial services products marketed directly consumers (savings, credit cards, retail banking products, mortgages, etc). As you and other remark, things like Mint are a nice UI and presentation layer on top of other people’s data. Do you think there are investors out there who would fund early-stage people attacking the regulated core parts of consumer finance?

    2. I think we’ve already seen lots of innovation within the core of wall street – things like Island, high frequency trading, etc. Problem is that they don’t create value for traditional consumers – they create value for the people who own and use them. Who are the customers who should benefit from this Wall Street reform? Institutions? End customers?

  37. Diogenes says:

    It is possible to overcome regulatory challenges as Paypal did, but it’s also quite possible that’s going to be increasingly harder as well given crisis-enhanced regulatory zeal. For a glance at the regulatory challenges, see below:
    anuary 20, 2009
    PayPal Regulatory and Licensing Compliance
    By: Ina Steiner
    Tue Jan 20 2009 14:21:08
    The issue of which regulations apply to PayPal came up in a recent AuctionBytes article. PayPal spokesperson Michael Oldenburg outlined for AuctionBytes today the rules and regulations to which PayPal is subject and adheres:

    PayPal is licensed as a money transmitter on a state by state basis. Currently PayPal has 43 state licenses (not all states require a license). Although PayPal is not a bank (we don’t offer loans or take deposits), PayPal is still subject to and adheres to all of the rules and regulations governing the financial industry including:
    the Bank Secrecy Act and the USA Patriot Act anti-money laundering requirements
    Regulation E consumer protections
    Office of Foreign Asset Control
    the Fair Credit Reporting Act
    Gramm-Leach-Biley privacy requirements
    Credit Card Association Guidelines
    Also, although the Know Your Customer requirements for money transmitters are different than banks, we do have the same requirement as banks to maintain an effective Anti Money Laundering program. Some merchant processors do escape these regulations, but not PayPal. Compliance with these regulations is a top priority for PayPal and eBay and is handled by a large, dedicated team within the company.

  38. Chris, awesome subject; I look forward to seeing how your thinking and commentary on this subject progresses over the coming months. At a dinner last night where I was explaining to some friends why Senator Dodd’s attack on Reg D and angel investing could be so devastating to the startup ecosystem, it suddenly occurred to me that these moves to regulate startupers, if they pass, are only going to end up serving the interests of Wall Street and that whole system by which people at the grass roots are kept out. It almost makes me despair: eliminate angel investing, then entrepreneurs only have bootstrapping/self-funding left as an alternative to prof’l financiers.

  39. Observer says:

    That is all irrelevant to my point. For the sake of argument, let’s grant that what you say is true. There remains the reality that the total number of customers who have access to credit as a service is directly related to the amount of surcharge collected. Reducing the average amount collected per credit card customer can only happen by reducing the population of credit card customers to those who are less risky. Possibly, as a society, less access to credit for risky customers is something we can live with (or possibly even want). Regardless, it is what we will get, if the average fee collected per customer is reduced.

  40. slessard says:

    in Re: suggestion 5 “Investment Banking”

    Whether you’re a fan or not of wallstreet, investment banks serve a necessary function in the capital markets. The United States securities regulatory regime assign investment banks the role of “gatekeepers”; as such they are charged with reviewing the merits of a securities offering during the pre-filing days.

    This has been hardwired into the 1933 Securities Act and 1934 Exchange Act. Congress enacted a regulatory regime that presumes that mandatory disclosure by corporations will prompt truth telling. Gatekeepers ensure that issuers are acting in compliance with this assumption, since they review review issuers disclosure statements and “cleanse” this information.

    As you can see, our regulatory system is premised on the existence of these intermediaries, and to a large degree the functioning of a efficient market is also dependent upon the existence of “gatekeepers.”(the idea is that investment banks are mechanisms of market efficiency).

  41. Phil Strazzulla says: is worth checking out. New company mostly focusing on equity research as far as I can tell. Their big thing are these interactive models where you can change assumptions and see how the stock price “would be effected” in real time.

  42. Diogenes says:


    Investment banks as gatekeepers? Please spin that tale to kindergarten kids. During the ’70s to ’80s, H&Q was the handmaiden of ruin for a lot of investors by IPOing crap. During the dotcom era, it was Robinson Stephens, Montgomery, Goldman, Lehman and a few others. Investment banks aren’t gatekeepers any more than Moodys is a gatekeeper. They are stock shills, no more, no less.

  43. jgalore says:

    I’m sorry – I should have been more accurate. I was referring primarily to Actively managed mutual funds (regarding both fees and innovation).
    ETFs were indeed a significant innovation in the field of passively managed funds.

  44. Great stuff Chris. I just discovered your blog via Mark Suster. Other products disruptive to Wall St:
    -barter systems that subvert monetary exchange entirely
    -sites like the failed that facilitate ad hoc group buying amongst strangers
    -sites like Craigslist and eBay who disintermediate the exchange of commodities
    -whistleblower sites like wikileaks that expose sensitive info previously known to select few anonymously
    -sites like “the funded” that enable pitching companies to connect and compare notes on funding sources

    subbing your blog now- great set of posts on the homepage.


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