Innovation in the Financial Marketplace

mark tuminello finance innovationInnovation is an important part of the American psyche.  There’s no doubt that we are seeing a huge amount of innovation around us these days, with news of cloud computing, robots, driverless cars – these movements will transform our lives in ways we can’t quite predict.  We admire innovators for their work, for finding ways to make old systems better and for the economic opportunity that often follows.

So where it this beneficial financial innovation?  This is the subject matter of a recent piece on Businessweek.  Whether financial innovation is an oxymoron or not, it feels like we’re often finding fancier ways for doing the same old thing.  Credit-based derivatives and securities are really just leveraged bets.  On the other hand, dismissing financial innovation is unwise.  Perhaps the issue is that we’re not properly recognizing those in the industry who really are innovating.  Charles Schwab’s discount brokerage, Grameen Bank’s micro lending in developing nations, Kickstarter’s social funding platform – these are innovations that are profitable and have something positive to offer society.

The article goes on to outline ‘social finance.’  Nonprofits out there are looking to receive funding from global markets for funding programs that fight some of the worst problems.  These include homelessness, disease, incarceration, etc.  It’s no secret that many of these causes are underfunded, and some innovators are hoping to find an efficient way to raise money.  The idea started in England and has since been utilized in Australia and North America.

Here’s how it works.  Investors earn their return only if measured goals are hit.  In this way, success of any given program becomes very important to investors.  Successful nonprofits will be able to raise funds more effectively, and money will be directed to programs who are achieving goals.

This is a potentially big marketplace, with plenty of work to do.  Money is tighter than ever, with government budgets bringing round after round of cuts.  If this were to catch on in the mainstream, results could be exciting both for investors and nonprofits.

The idea is still young, with only a few test runs so far.  The earnings are below market-rate, which is currently a big hurdle.  And how exactly these nonprofits pay back dividends is also a question.  For a recent financing by the Center for Employment Opportunities, the government agreed to pay back investors if the program was successful.  They integrated 2,000 former inmates from a prison in to the work force.  It was a huge achievement, and the government was happy to pay back a little more to investors who took the risk.

One of the reasons this is so exciting is that it is believed that big investors will be excited about the idea of values-based investing.  If this could also provide a return – these innovators could be on to something big.

from Mark Tuminello – latest post by Mark Tuminello

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