Time For Open Source Banking

Banking appears to be trying to protect itself from the creative destruction that occurs most other places in the U.S. economy.  Rather than trying to protect the existing system, let’s open source it.  Truth is, the only thing that has prevented an open source revolution in banking over the past fifteen years of electronic advance has been significant efforts by the industry to limit competition.

UPDATES: At end of post

50 years ago one might have been able to make the argument that a huge, national/international bank held significant advantages for its customers.  It could speed the flow of money utilizing internal routes not available to smaller banks. It could network customers and marshal resources. But today, those connections are, or should be, available through other channels.

A bit on language – I’m using the term banking generically to mean any kind of money movement.

So Open Source Banking –

• Company need a loan that’s too big for one bank? – put the word out and a network will form (this already happens with banks-that-are-too-big-to-fail, they just like putting the network together in secret)
• Want your money to be spread around a variety of investments? – put the word out and a network will form (once again, this already happens, but the bank prefers to set up their own difficult to understand compensation deals)
• Want to get a mortgage for your house?  – put the word out and a network will form.  (Lendingtree.com tried this – but I got the impression that the bids were less than open. Proof of concept, yes, but not yet consumer-centric)

I don’t think there is any question that open source banking is on its way.  So many aspects of banking have become such essential aspects of everyday commerce that one wonders if they shouldn’t be handled more like infrastructure and less like financial institutions.  Wouldn’t it be nice if the ATM worked more on the principle of a highway – where access is based on use more than by who owns the concrete? 

How could the creative destruction of open source occur?  First, I think the only reason it hasn’t is due to a lack of real competition in the industry (Most true competition was absorbed to create scale and oligopolies among target consumers).  Second, the current crises will reform how all money institutions due business – how this ends up looking depends on whether the government allows for creative competition or declares top down solutions.  (Forward thinking creative destruction or backward thinking protectionism). One idea that caught my eye was the idea of creating Good Banks (rather than taking all the bad decisions off the hands of the old banks, and put them through government FDIC intervention. Use the bail out money to create new banks with no bad decisions in their history. This way additional capital destruction caused by credit default swaps is limited to the existing institutions and taxpayers don’t look like chumps) 

The comments I like the best concerning how each bank should be judged is: 

“If a company is to big to fail, it is too big to exist.”  
(Quote: Sen. Sanders)

and its corollary:

“The only thing you can count on is that all things fail sooner or later.”  
(Quote: me and anyone who owns a hard drive)

Anti-trust laws were put in place a hundred years ago to protect the economy and country from corporations that had become too strong for the economy’s own good. I’m not one to love government regulation, however, an open source environment might allow for more innovation with less risk and regulation for the overall economy than what will happen if banks are nationalized for years to come.  

Through the Open Source process we can create a banking system that provides the old ‘benefits’ that mega-banks offered while limiting the danger that they have become.

UPDATE: 3/27/09 – Seems this idea might not be just a shot in the wilderness. Here are some new Open Source Banking discussions I’ve just come across:  Introducing the Open Source Hardware Central Bank at the Liquidware Antipasto blog.  

UPDATE 3/27/09 – And an early discussion about the Open Source Bank idea started by Davey Winder at IT Pro Take that to the Open Source bank.

UPDATE 3/27/09 – And regulatory issues that may stymie an open bank by Michel Bauwens at the P2P foundation: Regulatory hurdles for the open source hardware bank?