This is Part 1 of our 10-part series on [Banks] of the Future, based on a recent series of presentations to audiences of mostly large financial institutions, multinationals and regulators.
It articulates some of our views on what the banks of the future might look like, what role Bitcoin and/or blockchain are likely to play (if at all), and what data is available to support some of these predictions (spoiler alert: it’s happening faster than you think!).
At BitX we spend a lot of time thinking about what the banks of the future might look like, regardless of whether it might involve Bitcoin and/or ‘blockchain’. Our ultimate goal is to make money totally frictionless and universally accessible, and we continually question our own beliefs on which technologies and business models will be optimal to ensure we can deliver on this promise.
For those that are not familiar with banking’s origins, the word ‘bank’ originates from old German, English, French and Italian words used for ‘table’, ‘bench’ and ‘counter’. It refers to the makeshift desks used as transaction counters by Jewish and Florentine bankers during the Renaissance period. Amongst other things these ‘banks’ essentially represented a place where an intermediary could help make loans and settle transactions on behalf of other parties, and in many ways the existing financial system, even the parts that are online, still works in the same way.
You’ll notice we place the word [Banks] in square brackets throughout this series. People often use square brackets to denote something that is not yet in final form; in this case it emphasises the reality that banks are still evolving and that the banks of tomorrow will be very different from the banks we know today — so much so that we probably shouldn’t even refer to them as ‘banks’.
So, how will the next generation of banking be different?
In our view, in ten major ways, starting with a foundational concept of an endgame we like to call ‘Frictionless Money’.
[Banks] of the Future — Part 1: Frictionless Money.
The internet has totally transformed the way we communicate and consume information on the internet. If I’m in London and want to talk to someone in Singapore I can download Skype and be talking in a matter of minutes. Likewise communicating via email: it’s fast, free, and easy to access and use. It’s frictionless.
Money, however, does not work like that. It’s hard to believe that in this day and age it’s still relatively difficult to open a new bank account, send money to one another locally or in other countries, or connect various products that use our money to one another. Even if it does work it’s a terrible customer experience, not to mention how slow and expensive it can be.
We believe that in the not too distant future, money will work just like most of the rest of the internet: fast, free, easy to access and use.
Thankfully we’re not the only ones that believe this. Virtually every finance or fintech company we’ve ever come across agree that this is the endgame. When there is debate it is more around how it will happen, and how long it will take.
In fact, many companies are already trying to make traditional money ‘frictionless’ — companies like PayPal, WorldRemit, Venmo — they’re all making it a little bit cheaper, faster or more transparent to use money.
Fintech won’t move the needle.
We would argue that the ultimate impact of these types of companies, as well as most of the broader fintech sector, will likely be quite marginal. Yes, they’re doing things better, but in the bigger scheme of things, not materially so.
They mostly still use the same types of architecture to move money, cannot easily interact with one another, and often are dependent on some part of the existing financial infrastructure to get things done on the back-end. Essentially they’re still the ‘benches’ and ‘counters’ of the Renaissance middlemen, albeit slightly prettier ones.
Most of these fintech companies are also still mere specks within the vast ocean that is the current financial system, so the incumbents don’t worry about them too much. They’re moving fast to try and build enough scale to seriously compete, but with high customer acquisition costs and low or no network effects, not fast enough. This gives the banks more than enough time to replicate what they are doing, even if it will take a couple of years.
To make money truly frictionless and universally accessible requires much more than a couple of fintech companies. It requires a complete paradigm shift.
What would a shift like this look like?
In our view, it would more than likely involve a global protocol for value transfer, or some form of global currency. It will be highly optimised for transacting online, anywhere in the world. And it is also highly likely to be decentralised, just like the internet.
If you mentioned all of this criteria a decade ago most people would say that designing or building something like this would completely impossible. And yet today, with Bitcoin, we already have a fully functional and highly secure global decentralised crypto-currency that fits all of this criteria and more.
In short, a system like Bitcoin effectively removes the ‘benches’ and ‘counters’ of the Renaissance banks, eliminating these middle men and allowing people to transact with one another on a truly peer-to-peer basis no matter who they are or where they’re from.
And this is not some idealistic pipe dream — as you are reading this there are already millions of people using and thousands of companies building, testing, and using Bitcoin or some derivative of it to drive their respective versions of this future vision.
But I only care about blockchain.
But what about the ‘blockchain’? Won’t that have the same outcome, or an even better one? In our view, and specifically in the context of financial services, not even close.
We recently gave our views on Bitcoin vs. Blockchain in a piece entitled Beyond the Blockchain that explains in a fair amount of detail why Bitcoin or some open and decentralised crypto-currency is likely to displace the rest.
In short, the major issues with ‘blockchain’ thinking are:
Blockchain initiatives are typically not open, meaning it requires co-ordination and can’t benefit from permissionless innovation, as the internet has.
By design they are likely to have much higher counterparty risk.
They have low or no human incentives to implement and operate, mostly providing firm-level benefits rather than company or individual ones.
In most cases, it’s a suboptimal technology to use versus other existing solutions.
The times they are a changin’.
A global financial protocol? A global decentralised currency not backed by governments? It just can’t happen, it’s just way too crazy!
Well, if you look at the history of money, we’d beg to differ.
We’re definitely not professing to be experts on the history of money, and it can be a somewhat contested and controversial topic, but at a very simplistic level, money has seen many evolutions since the birth of humanity — from using sea shells or commodities to gold and silver coins, moving on to paper money and eventually to digital money and online banking.
These changes were predominantly driven by two things: consumer needs — the fact that people will always want to have things more convenient, faster and cheaper, with more transparency and control, and the technology that is available to serve those needs. For example, we can’t use paper money if there isn’t some technology like watermarking to make sure it is hard to fake, or computers with secure internet access to make online banking possible.
The way money is structured (e.g. linked to a scarce commodity like gold or backed by a government) will of course also play a critical role in how it is used and presented, but it suffices to say that this has also changed substantially over time, and that the means of exchange (rather than the way it derives its value) is still largely driven by individual consumer needs as well as the collective need for society to minimise costs and increase efficiency.
So if one considers technological breakthroughs as an enabler to serve inherent consumer needs, and given we’ve already seen similar trends on the internet in many other industries, the idea that a technological breakthrough like the Bitcoin protocol leading to the fast adoption of an open and decentralised global financial system doesn’t seem that far-fetched at all.
In fact, we simply see it as the natural evolution of money.
On a recent trip to Amsterdam I recalled some of my childhood holidays there, being quite fascinated at first that we had to pay for everything in a different currency — Dutch Guilder at the time. Then another family holiday a few years later something even stranger: everything in the supermarket now had both a Guilder and a Euro price. I remember people complaining a lot about it then, but today (for most of the younger generation) it’s pretty much long lost history, and while there might be some contention over whether a common currency for the EU was a success or not, in terms of ‘user adoption’ it happened relatively seamlessly in the end.
Yes, it was enforced by government, which makes a big difference. But the key takeaway here is that with the right direction and/or incentives, such a transition is a lot easier for people than what they might believe. So when I now have the option to pay for my beer in Amsterdam with Euro or Bitcoin, it’s nothing strange, more déjà vu than anything else.
Don’t judge a book by its cover.
One last, and very important point: when we consider the idea of a global payment system or currency, it can mean either people using that system or currency directly, or indirectly, i.e. people still use local currencies but the global currency becomes the de facto clearing mechanism, also sometimes popularly referred to as ‘Bitcoin as a rails’.
Money that works in this way can potentially also form a means of absolute interoperability between all the disparate components of the existing financial system, becoming ‘the glue that sticks it together’.
Remember: making money frictionless is the goal, and technology is just a means to that end.
At the end of the day the consumer shouldn’t care how it is done — whether through what they already know and trust, or something brand new — as long as it serves their needs.
In fact, when you look at the marketing of many existing Bitcoin companies you’ll see they are already positioning their products with that same messaging:
Circle: “Sending or receiving money should be as easy as email or texting.”
ABRA: “Free your money. Global. Instant, secure and private. No transfer fees. No bank account required.”
Xapo: “Welcome to digital money.”
And even some of our own marketing materials like our recent BitX videos, highlighting things like “No entering card details, no endless forms. Just simple, quick online payments.”
With this end-goal of making money frictionless as context, next week we’ll begin our deeper dive into some of the key enablers in getting there; starting with a look at open vs. closed platforms and technologies in Banks of the Future — Part 2: Open Systems.