A lot has been discussed about the challenges in the financial services sector – the subprime crisis, the credit crunch, collapse of the banking sector as a whole, Stimulus packages to keep the institutions alive etc. We all know that over the last 25 years, the large financial institutions around the world have been built on layers of unregulated greed and profits, which have led to not just their own fall out, but literally bringing down the entire global economy into a major recession.

As signs of this recession come to an end, and optimists like me feel that the worst is behind us, I have become to reflect on, how can things be different moving forward? Yes, we all know that governments around the world are doing a lot with tax-payers money and generous stimulus grants. But, is there a big opportunity for entrepreneurs to fundamentally retool this entire industry? Is there a fundamental dislocation happening in the financial services industry? And how can venture capitalists, entrepreneurs, and business leaders benefit from this tectonic shift?

Opportunity #1: New Regulations grip large Institutions

Globally, large financial institutions like Citigroup, Goldman Sachs, Bank of America, UBS, ICICI and others are now dealing with increased overload of regulations and oversight. This is a hundred billion dollar problem for them – the amount that these firms are directly or indirectly spending to manage to this greater scrutiny and regulation. The era of “free” and unbridled financial services is now history. Hedge funds, private equity firms, consumer credit card divisions, all are now under greater accountability to the regulators. The good part of this new climate is for entrepreneurs to now, look at ways in which they can fundamentally design their own startups, to take advantage of this industry dislocation. One can come up with software tools (like what we are doing at Metricstream.com ), consumer web 2.0 financial services (like prosper.com, kiva.org ) etc. which are designed from the ground up to help these large slow moving financial institutions in their reform process. Changes of this magnitude bode well for entrepreneurs as history has shown.

Opportunity #2: New class of financial services needed

In US, Obama administration is putting a tight grip on the credit card industry, on how credit has been made available to consumers. There will be strong scrutiny on what these large institutions can do or not. Entrepreneurs can now create more efficient “web only” financial institutions which can profitably and amicably operate in this new regulatory environment. Consumers are tired of the fine prints on their credit cards, they want simple “credit card” options with low interest rates, and I can see number of social network based startups attempting to solve these problems. Consumer to consumer lending startups like prosper.com is good example of such attempts.

Opportunity #3: New Risks emerge in the post bubble era

Financial services sector is now reviewing risks through a different lens. At a large bank recently, I noticed two dozen executives who are now worrying about risks. They talk about foreign exchange risks, derivative risks, credit risks, counterparty risks; the list goes on and on. In an environment, where the large incumbents and financial institutions are paralyzed analyzing risks, it seems natural that smart entrepreneurs can now venture out to identify areas and actually take some calculated risks. There is nothing wrong in risk, except, one has to quantify and manage risks proactively. A new class of companies will emerge in my judgment, which will take advantage of shift in financial risks. For example, I saw one of the VC’s invest in a company (http://www.xchanged.com/ ), which is creating an exchange for private company stock, therefore providing ways to manage “liquidity” risks for this asset class of private stock. You can expect to see more companies get created, helping consumers and businesses manage risks differently.

In today’s world, traditional banks are not nimble enough in the current environment to move fast on these emerging opportunities and trends – especially when they are under the gun from the regulators. Now, is the time for smart entrepreneurs to make their foray in this space! I would love to hear more ideas and thoughts on this subject from all of you.