It’s been eclipsed by his subsequent entrepreneurial achievements, but Elon Musk has a banking background. Before he brought his talents to the U.S., he was going to school at Queens University in Canada while interning at Bank of Nova Scotia.
Biographer Ashlee Vance writes that while in the employ of one of Canada’s foremost financial institutions, Musk “had an inkling that the bankers were doing finance all wrong and that he could run the business better than anyone else.” Thought of another way, Musk learned a great deal in the presence of people from whom he learned very little.
It helps explain what Musk did after the sale of his first successful startup, Zip2. Well aware of “how lame banks are,” Must plowed $12.5 million of his $22 million from the sale into X.com, which eventually became PayPal. As Musk told PayPal biographer Jimmy Soni (The Founders), if banks are “this bad at innovation, then any company that enters the financial space should not fear that the banks will crush them – because the banks do not innovate.”
Please think about what Musk observed, and the meaning of his observation at the time of X.com’s formation. Soni reports that in “the late 1990s, only 10 percent of all online commerce was conducted digitally – the vast majority of transactions still ended with the buyer sending a check by mail.” Notable here is that traditional banks weren’t leading their customers to a better place simply because they couldn’t see beyond the known. As a J.P. MorganChase executive commented to a Confinity (the company X.com merged with to create PayPal) consultant around the company’s formation, “We just don’t see people being comfortable getting away from cash.”
Oh well, Musk knew of what he spoke with his observation about the stodgy ways of banks. It would take people like him and other non-conformists from well outside of banking to pull a financial system forward that was populated by individuals seemingly intent on restraining its evolution.
That banking has been historically slow to evolve (credit cards similarly reached us from visionaries outside the industry) calls for reduced barriers to entry into the sector. The problem is that the barriers are substantial. To use but one of many examples, Walmart has for the longest time pursued entry to the space, only for each attempt to occur in concert with voluminous letters from industry players fearful of what one bank executive referred to as a “’dangerous and unprecedented concentration of economic power.’” One guesses Walmart’s many critics felt differently in 2008, but time has a way of erasing fear that was once palpable.
Fast forward to the present, the exciting news to convey is that in an increasingly decentralized, digital world, barriers to entry have less and less meaning. By one estimate, 20 percent of the remittance market is taking place on the very “crypto rails” that regulators will find more and more difficult to police. This is a good development. The more entrants, the better.
Better yet, the stasis arguably preferred by U.S. banks promises to be punctured in fits and starts by innovators well outside the U.S., or at the very least copycatted within the U.S. Consider Jack Ma’s MYbank. It brought to Chinese lending the “3-1-0” model whereby those seeking a loan can complete their application in three minutes, gain approval in one second, and have money directed to their accounts without any human interaction. Quoting Bill Gates, “banking is necessary, banks are not.”
Of course, we could likely get to the “banks are not” part sooner if regulators like the Federal Reserve would just get out of the way. What banking requires is more of the non-conformists not shaped by a system of finance rooted in what Musk described as “large buildings” and titles. In other words, the Fed must be willing to allow the institutions it regulates to compete with institutions with no allegiance to how banking was formerly conducted, and that in a sense, still is.
Take Custodia. This Cheyenne, Wyoming financial institution aims to erase the costly act of moving money around the U.S. and the world. The rise of Custodia and other outsiders like it could have a profound impact on commerce and economic growth more broadly in light of the present financial state of affairs defined by most international payments moving through one of fifteen global banks. These financial flows are much less than costless, nor are funds that move at a click of a mouse available right after the click. Custodia would render immediate and inexpensive what is presently days long and expensive.
Large commercial entities aside, think about what costless capital flows could mean for the people in countries like El Salvador. With so much of the money in circulation there a consequence of remittances, imagine what it would be mean for Salvadorans if the costs of receiving funds were greatly reduced. This is the aim of Custodia, and it’s a happy continuation of what Forbes publisher Rich Karlgaard has long referred to as the “cheap revolution.” The innovators will grow rich by reducing costs for the rest of us.
The problem, at least in the near term, is regulatory barriers to entry. Though the Fed has confirmed Custodia as a bank, it’s been sitting on its application to issue digital dollars for 19 months. This is not the stuff of financial dynamism. Quite the opposite, really. Worse for the banks these barriers purport to protect, regulation at best delays the inevitable.
To see why, let’s turn to Musk once again. It’s always read as simplistic this notion that he’s trying to purchase Twitter in order to fulfill his “absolutist” vision of free speech. Musk’s business history points to aggressive reinvestment of wealth created into bigger and – yes - more outlandish ideas. Could the creation of the global bank and financial services giant he had in mind with X.com be part of his vision for a brand with Twitter’s global reach? The bet here is yes. With “Twitter Tips,” users can already transmit value anywhere in the world either in dollars or bitcoin.
In short, progress is on the way and it’s coming at us fast. Rather than delay what’s a certainty, it’s time for the Fed to get on the right side of innovation and let the competition in. The winners will be bank customers, and by extension, banks themselves via aggressive competition. Open the doors and let the outsiders in….