I wrote to my bank recently to inform them that I was contemplating starting an e-business. A problem I had with my current account with them is that it takes days after someone makes a deposit before I am able to ‘see’ it in my account – on internet banking.
James Bullard, St. Louis Fed President, is the latest old banker to ring an alarm bell of sorts stating in a fairly emotionally charged use of words that new inventions, such as blockchain technology, cryptocurrencies and ICOs, might “eviscerate” big banks if regulators do not do something about it.
Referring to Dodd-Frank, he said “we are fighting the last war,” before adding that growing competition from fintechs has become the “number one issue.” He says:
“We need to speed up our consideration of the fintech issues and think harder about what is the regulatory environment that is going to be appropriate. I think we have been complacent so far.
That is the battleground for the next ten years. It is not the same as the battleground for the previous ten years.”
By Ryan Dinse – Money Morning.
I got some good feedback from Wednesday’s article on how fintech is a big threat to the banks.
Good feedback in that it was interesting, even if some of it wasn’t positive! There were some very good points, which I think need to be addressed.
‘This article misses the point.
‘The banks do not make most of their money from providing a platform for exchange of funds between governments, businesses and natural people. Blockchain technologies may well replace this role of banks as financial intermediaries but this is a peripheral business.
‘The banks make their real money from their monopoly right to create credit out of thin air, literally nothing, and charge interest on the money thus created that had prior existence whatsoever.
‘Very few people grasp this fact although it is fully explained on the Bank of England’s website in their series “Money in the modern economy”.
‘Until this magical power of money creation is removed from Banks or given to rival organisations who in effect would play the role of banks in money creation, they will always be profitable as long as they remain prudent in their leading practices.’
Let me start by saying that I agree with David’s comments.
To an extent…
To quickly summarise the original article…
I started by saying that Open Data policies, as seen in the UK, could drive an increase in bank switching.
Australia’s big four banks are the most profitable in the world. Their customers are generally not happy. But they stay due to the difficulty in moving banks. Part of this difficulty is rooted in psychology.
Because the original decision to choose a bank requires a lot of effort to research the right information and set up accounts, this ‘sunk cost’ has a value to us. A value that makes us less likely to move banks. Mandated ‘Open Data’ policies and new financial technology reduce the effort required to compare and switch. Thus making customer more likely to switch. This will mean banks have to be more competitive in their pricing. Thus reducing profits.
That was point one and is more to do with fintech putting pressure on the very high — by world standards — profit margins enjoyed by Australia’s big four. But the broader point David makes is that the license to create credit underpins banks’ profitability. And fintech wouldn’t make a dent in this fact. It’s a valid point. And it will not change in a hurry. But it could eventually. How?
Let me explain.
The power of fractional reserve banking
David’s right to point out that the fractional reserve banking system is the key driver of bank profits.
This is the system whereby a bank can lend out a multiple of what it takes in from savers.
A blockchain future that is simply a better ‘piping’ mechanism for making transfers doesn’t dent this advantage.
I’ll get back to this shortly…but first, fractional reserve banking.
By Ryan Dinse – Money Morning.
Fintech is coming…
And the banks are in big trouble. Especially Australia’s big four.
I’m going to put some facts on the table. Then I’ll explain why the big four Aussie banks might have already lost the fintech war to come.
But first, let me briefly recount Kodak’s tale of woe, and explain why it’s so relevant today.
You see, it all stemmed from one moment. The invention of the digital camera. And what’s worse, they invented it!
Founded in 1878, Eastman Kodak [NASDAQ:KODK] was once a global technology powerhouse. Big, dominant, unassailable. The Apple Corp. [NASDAQ:AAPL] of its day.
It had retail film developing locations all over the world, and employed over 145,000 people.
Like me, you might remember the old days of taking photos on holiday, then taking the film to get developed when you got home.
The results were often surprising. My Nana always managed to cut the head off my Dad, her son-in-law. No one was ever sure if it was deliberate or not…
Anyway, with the benefits of digital clear, the Japanese companies took over the camera revolution. This spelled the end for Kodak as we knew it.
It still exists today, but is a shadow of its former self, and was even in Chapter 11 bankruptcy in 2012.
Why didn’t Kodak just switch to selling the very product they invented, digital cameras?
It seems easy in hindsight, but you have to remember this: they made fat profits from the old way of doing things.
They had thousands of branches around the world making regular profits from the development of film. They owned 90% of the film market.
What CEO in their right mind would be brave enough to turn off that lucrative tap?
By the time Kodak realised the digital camera revolution was happening with or without them (and they were losing film sales rapidly), it was too late to change course.
By Ryan Dinse – Money Morning.
Rich investors are going nuts for crypto.
That’s if the number of new crypto hedge funds opening up is anything to go by…
There are more dedicated cryptocurrency hedge funds out there than ever before. And even more are due to start later this year.
Fintech analytics firm Autonomous NEXT, just released a complete list of 55 cryptocurrency hedge funds. Interest in the space is growing. ‘Like wild mushrooms, crypto hedge funds have been taking root in the volatile and unregulated soil of the crypto economy,’ Autonomous NEXT said on their website.
By Simon Black – Soverign Man.
This morning I had the pleasure of spending an hour of my life tracking down a missing wire transfer that had been sent to a large, multinational bank more than two weeks ago.
I’m sure you’ve been there, being passed around various departments like the village bicycle, each time having to re-explain the entire situation to someone brand new.
Finally someone found the missing funds, and the person told me me they would release the money later today. But that it would still take 3-5 business days for the funds to hit the recipient’s account.
This is infuriating. It’s 2017. Seriously. It’s not like they have to load a pallet full of cash onto a cargo ship and float it across the ocean.
Banking is completely digital now, and transfers should be instantaneous. At most it shouldn’t take longer than a few hours.
As we hung up the phone I thought, “I can wait for cryptofinance to put you guys out of business.”