Private regulation is a concept I have been writing about lately -- the idea that businesses can be regulated by other businesses that provide information about them. Examples are Zagats, Consumer Reports, Morningstar, Brightscope.
But markets also regulate themselves, and dynamically self-correct through competition and new entrants. We wrote back in September about Bank of America introducing "basic" products for customers sick of gimmickry and red tape from their banks. Now comes a Web site with word of a new bank, BankSimple, that promises "A simpler bank that is easy to use....No extraneous features....No hidden fees."
One of the bank's founders, Josh Reich, writes on his blog: "Banking should be simple, boring & cheap. We look forward to launching a new type of bank, fueled by new technology, and shaking up the status quo."
He also writes, "There are over 8,000 banks in America. The top four control 41% of deposits, up from 11% in 1995. On the investment banking side, margins are getting thinner and thinner as capital markets get more efficient. When hedge funds lever up, take on risks and explode, they disappear. Creative destruction at work. On the retail and commercial banking side, banks don't die, they consolidate. With a consolidated voice in Washington, banks see financial failures yet lobby the message they know best: That the status quo is fine."
This is the way capitalism should work -- instead of the government coming along and telling banks they can't charge excessive fees and take advantage of complexity to give their customers bad deals, some entrepreneur should come along and see the other banks' bad behavior as a business opportunity to offer customers a better deal. I don't know Josh Reich and can't vouch for his bona fides, but if he follows through on what he is promising to provide, he has the chance to make a lot of money. I hope he does. That's a positive incentive to do what's good for customers rather than the negative incentive provided by the threat of government punishment.
It will also be interesting to see how the mere presence of BankSimple in the market -- or the threat of it -- will press the other banks to clean up their act.
In the absence of ObamaCare, maybe someone would have seen the same opportunity and acted on it in the health insurance market.
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