Comment: Exchanges can crowdfund recovery "Disruptive technology" offers a chance to move savings from investors to entrepreneurs Find a winning strategy and copy it could be the simplest business advice ever cited. But for the financial infrastructure industry, it's proved more of a challenge. As Clayton Christensen described in his book The Innovator's Dilemma, successful companies can put too much emphasis on customers" current needs, and fail to adopt new technology or business models that will meet their unstated or future needs. This is precisely the problem with the incumbent financial infrastructure industry, which is failing on two critical points. At a technical level, primary issuance and business funding is woeful and particularly so for small and medium enterprises. More fundamentally, the industry is yet to answer properly the question of its overall social utility. There are many reasons for this. Frequently cited regulatory burdens that go with a listing; quarterly reporting; excessive costs; an arcane and intermediary-rich environment that blunts contacts between savers and entrepreneurs are all good excuses. At a macro level, the overall business environment is often cited with a shrug of despair. However, there are other reasons, like the failure of established incumbents to recognise changes in the demographics and behaviour of their ultimate customers, which are less forgivable. Stock exchanges across Europe have adapted reasonably well to the challenges of cheaper, faster, smarter trading systems but they continue to mistake their ultimate customer base as secondary traders, not primary issuers or investors. The failure by the European public markets to address the funding needs of businesses is particularly concerning for policy makers and politicians, who rightly believe that SMEs are an important engine for growth, innovation and employment. The EU estimates its 21.7m SMEs account for more than two-thirds of employment. But where public markets are failing to get the SME market gripped, the private sector is doing a fine job in raising funds, providing capital and allowing entrepreneurs to flourish. Crowdfunding could affect the primary segment of the stock exchanges in the same way file sharing radically altered the music industry. It is a classic example of the disruptive technology that Christensen identifies: it appeals to a different demographic, uses a different modus operandi and is essentially a social response to the failure of public markets to provide cost effective and appropriate primary services. Crowdfunding is rooted in a structural shift in the markets and is not merely a reaction to tight funding and multiyear highs in stock markets, which is why it presents a real challenge. In the US, politicians are waking up to this. Last year's Jumpstart our Business Startups (Jobs) Act is a series of measures designed to modernise many of the rules that were put in place almost 100 years ago to regulate public subscription into corporations. Among them is facilitating use of online services to make investments in small companies. Europe lacks a similar regulatory agenda but given the dimensions of the SME funding issue, it is only a matter of time before a measure of this kind will attract political attention. It is not without its drawbacks. The multiplicity of crowdfunding platforms lack standard definitions, there are rarely opportunities for shareholders to be able to offer on their holdings to other participants save for by private treaty, and investor protection is based solely on caveat emptor. So what does the incumbent financial services infrastructure need to do to reclaim the initiative? Crowdfunding could affect the primary segment of the stock exchanges in the same way file sharing radically altered the music industry It could do well to start by studying the history books. In the early 1980s the dominant business machine was the IBM electric typewriter. At the same time entrepreneurs around the world, often from their homes, started to perfect personal computers that could replace core IBM products like typewriters, comptometers and mimeographs. It prompted a rapid and serious response from IBM, including its own personal computer. It also made the design aspects that it employed available to all. That led to the growth of an IBM PC-compatible marketplace, based on the IBM brand, and in time, the growth of an entirely new business sector. Stock exchanges should then consider building a fully integrated service complete with brand reputation and crowdfunding cost structures. In offering services directly to entrepreneurs and investors as a "trusted third party," incumbents could circumvent wildly expensive and self-defeating compliance costs. This is not to advocate a wild and abandoned approach to investor protection: rather to recognise that one of the biggest challenges of our times is to get savings from investors to entrepreneurs in a timely, cheap and efficient way. Social media have already developed many tools to deal with rogue sellers. They are familiar, efficient and work well. Join these with a trusted brand like a recognised stock exchange and open standards like cost-effective market data for investors. Provide central oversight from a money laundering and know-your-customer perspective. This would address some of the most trenchant criticism of the financial services industry over the past five years, that it lacks a purpose that is socially useful. Raising money to finance recovery and offering investors a chance to participate in this recovery is a laudable goal and one that is readily attainable. Peter Randall is the former chief executive of Chi-X Europe and Equiduct