As of Saturday, January 13, all EU member states were to fully implement the revised Payment Services Directive, known as PSD2.1) Among other things, PSD2 allows third-party payment service providers to gain access to customers’ bank accounts (with the customers’ consent, of course), and customers’ banks are required to provide API connection for identity verification. Its potential impact should not be underestimated. For example, under PSD2, customers and merchants can, in principle, cut credit cards and debit cards out of their transactions, saving significant costs along the way. In addition, banks can no longer “own” their customers’ account data or prevent competitors from accessing them.
The EU’s PSD2 is a major development in payments and financial market infrastructure, a once-sleepy “back-office” function that is now alive and kicking. The essence of PSD2 is to encourage competition and reduce the information advantages of incumbent banks. Likewise, the Bank of England announced in July 2017 that non-bank payment service providers can become direct settlement participants in the UK’s payment system, as long as certain requirements are met.
Access to financial market infrastructure such as payment systems has important implications for market competition. The study of industrial organization shows that competition is reduced by vertical integration. A vertically integrated incumbent that produces both “upstream” and “downstream” goods can effectively reduce competition in the downstream market if its stand-alone competitors rely on the incumbent for providing the upstream good.2) Financial market infrastructure is the ultimate upstream good for almost all economic activities. Privileged access to market infrastructure makes banks “special” and, in some situations, may encourage anticompetitive behavior. Good examples to keep in mind include two antitrust class lawsuits in over-the-counter derivatives markets in which investors accused dealer banks of, among other things, using their unique positions as clearing members in OTC derivatives to shut off new entrants that aim to compete with dealer banks in the transaction of these derivatives.3) One of these lawsuits has been settled, with dealer banks paying $1.86 billion.Read More »
Lax mortgage lending by banks has long been recognized as a major cause of the financial crisis. But banks played another, lesser-known role in the crisis. In much the same way that banks failed to verify the creditworthiness of people buying homes, banks also neglected to verify financial qualifications of those building homes — developers, contractors and other firms in the construction industry.
Last week, Amazon acquired Whole Foods in a move that has many wondering what this means for the direction of the economy. In my view, Amazon’s acquisition of Whole Foods does to organics what Uber did to the sharing economy: it takes something that was born out of a different economic logic (a grocery store dedicated to healthy food) and then molds and morphs it to fit into an economic operating system that is firmly based in the old paradigm—i.e. in a paradigm that aims for world domination rather than serving a goal of shared prosperity and well-being for all.
In this post, inspired by a number of gatherings with change makers across sectors in China, Europe, and the Americas during the past few weeks, I outline a framework for understanding how the current limits of capitalism we are bumping up against in sectors such as food, finance, health, education and business are all related to the same outdated economic logic or “operating system” (OS). We need a new economic operating system, one that reinvents how we work together as neighbors, as businesses, as cities and as larger systems. Below I describe briefly the evolution of these five sectors from OS 1.0 to where we are today, which in most cases is OS 2.0 or 3.0.
The pressing challenges of our time, i.e. the challenge of losing our environment (ecological divide), our societal whole (social divide), and our humanity (spiritual divide) calls for reinventing our systems of food, health, education, finance and management towards 4.0. This essay lays out the rationale for OS 4.0 and a possible way to get us there through an Asian-American-European initiative called 4.0 Lab.
Five Sectors, One Problem
As the labels of the new economy have gone mainstream (green, organic, sharing economies) the underlying economic reality stays the same. That is to say, the immense buying power of giants like Amazon squeeze the supply chain, workers, farmers, and the planet through the same patterns of exploitation and structural violence that gave rise to the movement for a new economy in the first place.
On one level you could describe the problem by saying that companies like Amazon and Uber misperceive the new economy as just another app that runs on their old corporate operating system (i.e. world domination through economies of scale). In reality, though, the new economy is not just another app—it’s a radical upgrade of their entire operating system. The difference between the old and the new paradigms can be summarized in three words: ego vs. eco. Ego-system awareness means “me first”, while eco-system awareness means an awareness that focuses on the well-being of all.
There is a profound systemic barrier that exists in all major sectors today. It’s not only the mainstream players like Amazon and Uber that are stuck in their current economic operating systems; many of the innovators who once broke through that model are now also stuck. The global food system is still profoundly destructive. The health system is still sick. The educational system is unable to learn. The global financial system is heading full throttle into the next crash—as if 2008 never happened. Foundations and philanthropists still place their assets in the old economy, thereby harming people and planet, in order to use some of the profits to fund projects that alleviate symptoms but don’t deal with root causes. The innovators in all these spaces are stuck in the niches that first gave them space to develop something new. But now these niches are increasingly crowded, and mainstream players adopt the new labels and sound bites while often perpetuating the old models.
The resignation under duress of the CEO of Wells Fargo, after being pummeled in a Congressional hearing, raises a fundamental question: how can corporate boards hold management accountable for performance problems? One trendy answer from several governance mavens — limit the terms of independent directors so they do not become unduly deferential to the CEO.
The most typical limit on independent directors is mandatory retirement at age 72. This is the tenure limit for the Wells Fargo board. It is a significant limit because most directors do not join large company boards until age 60.
The world we live in asks us to make an abundance of financial decisions every day. These range from the inane, such as whether to risk a parking ticket when you stop for one minute to drop off your dry-cleaning; to the highly complex, such as which funds and investment products to pick for your retirement savings.
All of these decisions require risk-return tradeoffs. Unfortunately, while people have many opportunities in life to perfect their strategy concerning parking tickets, the same is not true for the complex and all-important decisions of how to invest retirement savings. By the time you learn whether a retirement strategy was the right choice, it is usually too late to change it.