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Risks Loom Large as Financial Innovation Accelerates

Travel back in time a decade and you’ll find a world awash in game-changing innovation that was supposed to make life less expensive, more efficient and better for all. Instead of apps and data analytics there were mortgage-backed securities, credit default swaps and other derivatives. There were specialty lenders. And there were massive hedge funds and sovereign wealth funds to keep money flowing through a web of companies, consumers and investors.

Then it all collapsed, as we know, because regulators didn’t pay attention to the risky activities at the margins. They didn’t understand all of the innovation that had sprung up in odd corners. Sometimes they didn’t know it was happening. And they didn’t force banks and non-banks to set aside emergency money for the risks that they did see. Eventually risk at the margins became risk at the system’s core.

Now financial innovation has recovered along with the banking sector and lots of new activity is springing up in a place often overlooked by the watchdogs in Washington D.C.: the world of venture-backed startups.

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It’s important not to squelch innovation, but it’s also important to make sure that Washington D.C. is in the Valley, and that lawmakers understand what’s going on. Entrepreneurs are human, and innovation, business practices and startups are only as safe and ethical as the people who call the shots.

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Max Levchin, Micky Malka and 3 others commented on this article.
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“It is both important and challenging to separate and identify real consumer finance innovation from just slapping a pretty website on a fundamentally broken business.”