Written by Mark Cotter on Friday 4 March 2016
“A series of Uber-style disruptions in the industry could shrink headcount at traditional big banks by 50%...profitability could collapse by over 60%....The problem? Financial Technology, better known as fintech. A new wave of tech-savvy startups that can do things better, faster, and cheaper than the big banks. ”Former CEO of Barclays Bank Anthony Jenkins
Heading through town in the morning on my way to the office, smartphone in hand reading various articles, catching up on emails, social networks and streaming music, I can be forgiven for feeling that the world is a pretty ‘hi-tech’ place compared to a few years previously. I head in to grab a coffee, flash my card, and I am back out and on my way in seconds, Grande Americano in hand. Technology and money working together in harmony! Or should that be ‘synced’ perhaps?
Technology and the ease of making payments and financial transactions – i.e money itself – appears to be closely linked and complementary. Just think Amazon, PayPal, Pingit, Apple Pay, mobile wallets, contactless payments, mobile banking and financial planning apps. On the surface at least it seems that ‘tech’ and ‘money’ are on the same inevitable upward trajectory – and it is with this in mind that many would read the above quote, most likely on their smartphones, and wonder what all the fuss is about?
Well, for a starter let’s look back at buying that cup of coffee in the morning. Although superficially the transaction nowadays is near-instant and simple, in reality the process behind the scenes is far more complicated and involves a complex series of steps and checks with a variety of parties (on average 7 different individuals in the chain) to reconcile and clear the funds from buyer to seller. This means that a payment takes 3 or 4 days to complete, and there is of course a cost (average of 3% borne by you) as all of the parties involved in clearing the transaction that have to be paid. Thus accounting for some of that huge mark-up on your Grande Latte!
Turning from this rather superficial example above, if we look at the situation in the developing world, the current system is a lot more than simply ‘inefficient’. A recent study by The World Bank found that over 2 billion people (over a quarter of the world’s population) do not have access to traditional banking. Our current monetary and banking system requires such strict levels of identification, proof of ownership of assets, etc that a huge swathe of the world are denied access. And if by some miracle, they are granted access to traditional banking and lending facilities, they will pay extortionate rates of interest to protect the lender against the risk.
It is for this kind of reason that many have looked more critically at the nature of money itself and a system that has, at the most fundamental level, barely changed in 500 years with the banks at its epicentre. Is there a better way maybe to move money around? In particular can technology and mathematics replace banks and ‘trust’ and provide a viable alternative to the traditional monetary system? If we accept that money is largely digital already, is the monetary system itself long overdue a ‘digital upgrade’?
This kind of thinking was accelerated in 2008 by the financial crisis which fostered a growing public distrust with the monetary system and the big banks who preside over it. And it is in this context that the first major digital currency ‘Bitcoin’ was launched, with its potentially revolutionary ‘Blockchain’ decentralised general ledger system. Without going into the more technical aspects, this essentially offers the possibility of a global digital ‘currency’, which is completely virtual, would allow near-instant and incredibly cheap transactions from one party to another and crucially involve no central bank or counterparty to clear the funds.
There are for certain, more questions than answers at this early stage in the technology’s development, and Bitcoin in particular is perhaps just as well known for its controversies (volatility, hackers, links to illegal black markets and organised crime etc) as it is for its potential as a disruptive technology. However, what I think is more interesting, is this definite trend towards monetary decentralisation itself and the opportunities these kind of developments may bring. Money could well be heading the way of Uber, Twitter and Airbnb in ‘cutting out the middleman’, in this case the banks. Or as perhaps Bill Gates recently said, “Banking is essential but banks are not”.
Whatever your views may be on all this, a global, cheap, efficient, digital monetary system really seems to open up all sorts of interesting possibilities. In the developing and developed world a huge volume of currently ‘unbanked’ people could be connected for the first time to the greater economy, being able to direct their vast pool of labour, innovation and resources into the global system.
The potential ‘digitization’ and decentralisation of the monetary system also represents a big opportunity in areas which were previously seen as economically unviable or impractical. Innovations in microfinance, crowdfunding, peer to peer lending and the so called Internet of things (IOT) become more viable in a ‘Bitcoin-Blockchain-like’ digital economy. If we give money itself an upgrade fit for the modern age it can potentially shift from being an obstacle to innovation and growth in fintech and instead become a facilitator for it.
Looking further ahead, the technology need not stop at ‘cash’ only transactions. There is already work in the wings on a new type of stock exchange based on a Blockchain type system. In terms of transfers of physical property and even Wills and legal documents of exchange, the use of so called ‘smart contracts’ - which would allow instant, digital and automatic transfers of ownership - are already theoretically possible and indeed being worked on. Money it seems may be getting ‘smart’.
With this all in mind then, and returning to that initial quote, perhaps it is not just the banks that should worry about fintech innovation, but indeed all ‘middlemen’, from lawyers, investment bankers, and stock brokers to estate agents and accountants? A truly decentralised and digital monetary system points to a future where nearly all of our jobs have a potential ‘Uber’ lurking in the wings…