Electronic Finance: The Future

by: John M. Mason


Finance is just information, and so, the evolution of financial institutions will have a lot to do with what information technology will allow financial organizations to do.

In the area of transferring funds, PayPal is going to have a lot to do with how people hold their money and how they use their money.

Firms operating within this space are going to be creating the future, and there will be plenty of investment opportunities among these companies.

In a post last week, "The World In Transition: Little Economic Growth, But Plenty Of Investment Opportunities," I wrote the following:

"I believe the idea of stocks that follow the economic cycle does not work very well in a time of transition like this. To really make money in such an environment, I believe that there are two places to look. First, one needs to try and pick industries or subsectors of industries that will participate in the transition and become winners in the advancing information age. Second, one needs to identify the areas where credit inflation is "goosing up" asset prices. Here we need to watch what hedge funds, private equity funds, and other accumulators of wealth are doing."

In this post, I want to focus on the first of these areas, on an industry that, I believe, "will participate in the transition and become winners in the advancing information age."

I am focusing on the innovative subsection of the financial industry.

Finance is nothing more than information. Finance is really nothing more than 0s and 1s.

Furthermore, information spreads. Its spread can be postponed, but eventually, information spreads. And, this means that information technology spreads as well.

Our financial system has become more electronically advanced, but you haven't really seen anything yet.

Analysts keep looking for how the big banks, the "too big to fail" banks, are evolving and what they are going to look like in the future.

I would like to suggest that we start to look at how pieces of the future are being built and how they might transform the banking system.

So, instead of looking at the conglomerate banks themselves, let's look at components of banking.

First, let's look at the payments system. This is the essence of the "deposit" system. Demand deposits are what our commercial banking system revolves around and our regulatory system is based upon.

Full disclosure: For my personal account, I don't have a "demand deposit" account, yet I can write all the checks I want.

To start off here, what about PayPal? This system has been growing and growing, and others, like Google (GOOG, GOOGL), have tried (unsuccessfully) to create a system to compete with it. The owner of PayPal, eBay (NASDAQ:EBAY), probably made the deal of the 21st century when it acquired PayPal in 2002.

However, there are many other initiatives going on here. For example, other companies to look into are Square and LevelUp, both dealing in payment systems and mobile payments.

Then there is the emerging Merchant Customer Exchange, a mobile payments system being developed by Wal-Mart (NYSE:WMT), CVS (NYSE:CVS) and Exxon Mobil (NYSE:XOM).

Then there is the effort called Isis, that includes AT&T (NYSE:T), T-Mobile (NASDAQ:TMUS) and Verizon (NYSE:VZ), to build a mobile payments and virtual wallet system.

Others are developing prepaid cards that deposit checks, make and receive electronic payments and use cash machines. These are called "Open Loop" systems.

And, there are more initiatives in the works. Oh, and don't forget initiatives like Bitcoin.

Second, there are many developments in the lending area as well. Basically, these initiatives revolve around peer-to-peer or crowd-funding efforts. Leaders here include Lending Club and Prosper in the United States, and Funding Circle in England. We have even seen banks and other depository institutions begin to get into this space.

The idea here is to bring people with money into contact with people who want to borrow money. I have written about merchant funding, for example. The companies I'm familiar with have one office in New York City and lend in all 50 states. They are very sophisticated in the use of information technology and data analysis. They are making strong inroads into markets not currently being serviced by commercial banks.

Then there are merchant banks. These banks make "commercial loans", but they don't take deposits.

Then there are the hedge funds and private equity funds and others that have moved into the area of making "business" loans.

Third, moving from lending to trading, many financial organizations are working to create trading platforms and investments products. BlackRock (NYSE:BLK) is one of the more prominent organizations that are attempting this.

There are some additional points I would like to make on this. Please note that a lot of these efforts are being made in just one area of banking which, of course, gets away from what commercial banks tried to build for years… "one-stop" banking. This often happens in innovative fields.

This is not an unusual development for an industry that's changing. Very often, the larger organizations are so focused on the "whole" of the institution that they let some of this "stuff on the edge" escape their plans or, at least, try to make the new things integral with what they are doing now, which may hinder their ability to fully develop the new innovation.

Second, this does not mean that conglomerates or "one-stop" banking will not evolve. For example, we have Amazon (NASDAQ:AMZN) and the rapidly emerging Alibaba Group to represent the IT "conglomerate" idea. I just believe that the large banks don't quite know where they are going right now in this space because of their size and because the regulators are keeping their focus elsewhere.

Third, this whole area is one of the investment areas that I will be writing about more and more in the future. I believe this sector is going to be massively important in the evolution of the financial system, and I believe that it is going to be a very profitable and exciting area to be connected with. The important thing is to try and identify the leaders and companies that are going to produce the winners.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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