CE Financial Observer: As an expert in the technological change in finance sector you advise banks on how they should respond to the disruption. But is it even worth trying? Perhaps traditional banking will simply disappear, and any attempts to save it are like saving candle manufacturers from the light bulb?
Brett King: Every industry whose operation is disrupted by technologies must adapt to it. When I talk to bankers, they seem to believe that their situation is different, that the internet and mobility does not affect them to the same extent as, for example, Uber affects traditional taxis, or Netflix affects the way people watch movies. They are wrong and they are resisting real changes. That is why the process of adjustment in banks is too slow. I think that we may soon see in the world an increased desire for the consolidation of the sector (some banks may collapse) in the face of new and increasingly strong market alternatives. Banks will face problems, not because technology forces them to introduce big changes, but because they are resisting these changes.
So, banks will not survive?
Bill Gates said 20 years ago that while banking is necessary, banks are not. Whether they survive depends on their flexibility. For the time being, companies outside the banking sector are proving that they can provide the same services as banks and that they can do it cheaper, faster, better, and that they’re just as safe.
Let’s note the potential revolution associated with blockchain technology. Right now, in order to set up an account in a bank we have to pass an identity test, typically by going to a branch and showing some proof of identity. This is a necessity built into the system at the level of regulations. But thanks to blockchain this becomes completely unnecessary. You can gain access to banking services without even providing your name and surname.
Therefore, in the future banks will probably no longer spend time on the verification of identity. It will be enough for them to compare the data automatically provided by the blockchain with their own databases where they store information such as the creditworthiness of their clients.
But for that to happen, the banks have to adapt their processes to this change. If Elon Musk or Steve Jobs ruled the world of finance, they would say: „Okay, since we have a lack of compatibility between the old and the new system here, let’s eliminate the causes by rejecting the old”.
But they do not rule it. It is usually ruled by managers in expensive suits, with MBA degrees, and not by innovative entrepreneurs.
That is why the digital transformation in banks is so slow. I’ll give you a simple example. It is obvious that if you are my debtor and you want to repay me, I expect that the bank will send it to me as quickly as possible. In the conditions of the mobile revolution, I want to get my money at the very moment you send it to me. Meanwhile, in the United States the banks refuse to adopt a technology that allows real-time transfers, because their entire business is based on the cheque system. Some 66 percent of all cheques issued each year globally are cheques from the United States. No wonder that systems such as PayPal, or currencies such as bitcoin, were invented as an alternative to bank transfers which take 3-5 days.
In Europe there are fast bank transfers. Where does the difference come from?
It stems from the regulatory philosophy. In Europe, you have systemically adopted solutions enabling the development of fast transfers. You simply enforce certain standards on your institutions. In the United States, we wait for the market to arrive at certain solutions, and things happen on their own and at a different pace. However, the state of affairs in which bank transfer bureaucracy takes more time than is required to send goods from one end of the world to another cannot last long. I also believe that „smart contracts” based on blockchain will eventually replace the letter of credit system in international settlements. It’s simply a matter of time.
There are opinions that an electronic currency controlled by the government should be created from scratch. It is supposed to provide the much awaited deliverance. Do you think that’s possible?
Well, there have already been such attempts. The Canadian government experimented with a currency known as MintChip. The emergence of its subsequent units was associated with a reduction in the number of traditional Canadian dollars in circulation. However, this hybrid idea was not very popular. I think that instead of creating a government’s e-currency, it would be better to use one that already exists. It can be assumed that due to the anti-inflationary and stability-promoting nature of cryptocurrencies, such steps will first be taken by countries whose monetary system has broken down, such as Zimbabwe or Venezuela.
The fastest development of modern finance, which is rather counterintuitive, takes place in developing countries – in Africa, India, and especially in China, in particular in the context of mobile payments.
A few years ago, China lagged behind the United States in this respect. Meanwhile, this year the value of mobile payments in China will amount to USD5.5 trillion, which is 50 times more than in the United States. Larger Chinese agglomerations are almost cashless societies, where 90 per cent of transactions are carried out through Alipay or WeChat .
This figure is still lower than in Sweden, where it reaches 98 per cent.
Yes, but Sweden is an exception, and changes in Asia are taking place faster than anywhere in the United States and Europe.
What is the reason for that?
This stems from the fact that in the West we have become very accustomed to the bank as an institution. We trust banks. In a certain way, they are an important part of our traditions, customs and the entire socio-economic system. This has never been the case in China, so new technologies are achieving the economies of scale much faster. You will show your neighbor that you pay for something with a mobile application, and he will immediately follow. He will not wonder whether this is safer than a traditional bank transfer. In the West, we are still „married” to traditional banks and more resistant to change. With us, in order to build something, you must first destroy something.
But, as I understand, the divorce process has already begun?
Yes. For example, the model of universal banking is disappearing. Nowadays, it is often the case that when you turn 18 years of age you set up a bank account, then – still using the services of that same bank – at the age of 30 you take out a mortgage, a car loan, and you save money for your retirement in that same bank. In the future, we will receive individual services from various entities based on our needs, and not because we are accustomed to one institution.
Another thing is that banking, like trade, is undergoing internationalization. Let’s go back to the issue of the identity of bank’s clients. Currently, we are pretty much attached to the banks we have in our own country, but imagine a change similar to what Estonia has done with residency. They have digitized it. You can now be a digital resident of that country no matter where you are from and regardless of the fact that you have never been to Estonia. And being a resident is associated with certain rights, it is beneficial. The same will happen with banks – it will ultimately turn out that a Polish person can open a bank account, for example, in Argentina, without having to go to that country and sign papers, etc.
Should banks be afraid of a genuine international competition for clients?
Yes, but how long can you hold on to a relic of the 20th century? At present, there are no technical reasons forcing us to establish geographical limitations in banking. It’s only a matter of time when some country decides to let its banks acquire customers from outside its borders.
Other countries will then prohibit their citizens from opening bank accounts abroad.
It’s possible that this will be the regulatory reaction, that there will be prohibitions, additional taxes and other restrictions, but these are processes that cannot be stopped in the long run. They take place on the internet. It would be necessary to shut down the internet in order to prevent them. Of course, legal regulations concerning banking and finance must be adapted to the technological changes to ensure that it’s not a free-for-all, and that consumers and their savings are adequately protected. I believe that the banks of the future will share functions but not forms of activity with the banks that we know today. Physical branches will disappear, but banks will continue to deal with international transactions, risk assessment. Everything will be done virtually, however.
Christine Lagarde, the head of the International Monetary Fund, said in one of her recent speeches, that mobile technologies and cryptocurrencies – if they are not sufficiently quickly tamed by the current banking and financial system – could threaten its existence in the simplest way possible: by making it superfluous.
That’s a good point. Let’s take a look at the changes that are taking place in international trade. It is becoming more and more intense and globalized even at the consumer level. Living in the United States, I can be a customer of the Chinese store Alibaba, because the goods purchased there will be delivered to me relatively quickly. This creates the need to further reduce transaction costs. That is why the currency of the future, as I imagine it, will be more like bitcoin than the USD. Physical money issued by the state fulfilled its function when trade was carried out within national economies. Currently, the economic and technological progress within the framework of globalization forces currencies to be mobile and transactions to be carried out in real time. This is not so easy with traditional national currencies, even in their electronic versions.
However, there are more and more reports that, for example, bitcoin is simply another speculative bubble.
Maybe, but let’s look at the context. How do markets behave around the world? They are changing in favor of digital technologies. Digital assets are currently growing in value, and the valuation of traditional assets, for example raw materials such as oil, is falling. If this trend continues, cryptocurrencies will have more and more place in trade.
Is the cash era coming to an end? The studies do not confirm that.
Electronic money will be so convenient that no one will even consider returning to the old system. Yes, there are certain reservations that we will no longer have financial privacy then, but I think that within the network many alternative, independent value systems will emerge that will provide privacy to all interested parties.
Various financial gurus like to talk about financial independence. Will the technological revolution make it easier for people to navigate the world of finances?
Some time ago it was argued that the path to financial freedom was financial education, understanding of the principles of budgeting, the operation of the capital market, etc. This approach is already anachronistic. By 2025, another 3 billion people will join the financial system thanks to the internet and mobile technologies. This is an enormous number that no formal, traditional educational program could handle. Fortunately, the new financial technologies have an educational value themselves. They offer the possibility of introducing so-called gamification to the process of financial education. Financial tools are designed to engage the user similarly to video games, so that they provide pleasure and entertainment. In such a case, the challenges associated with money management are treated as interesting situations to be solved, rather than big, insurmountable problems.
Brett King is an Australian entrepreneur developing mobile banking, and an author of books on the technological revolution in the world of money, such as „The Bank 2.0”, and „Augmented: Life In The Smart Lane”.