The traditional banking sector fails people in two important respects.
Firstly, banking is too expensive. Credit cards charge merchants up to 3 per cent to accept payments, bank wires can cost $50 or more and remittances are charged on average over 7 per cent of the amount sent. Trillions of dollars circulate the globe in such electronic transactions each year. But all that’s moving here is information. Why should it cost more to send a payment across continents than it does to send an email or a text message?
Secondly, roughly 5 billion of the world’s people have poor access to mainstream financial services and must rely on non-traditional forms of banking, often most associated with the disadvantaged. The traditional banking sector simply does not reach enough people.
The reasons behind these failures are twofold.
The technology banks employ is decades old. Physical debit cards were introduced in 1966. The first ATM machine was installed in 1969. Banks still use paper. Technology has advanced at an accelerated rate in recent decades. Many industries have been completely revolutionised (think of telecommunications in the 80s) but the banking industry has changed hardly at all.
Additionally, their business model is out of date. Banks still rely on brick-and-mortar branches and tens or sometimes hundreds of thousands of employees: Wells Fargo has roughly 280,000 employees and over 6,000 branches; the Agricultural Bank of China has approximately 450,000 employees and 24,000 branches. These massive overheads mean that banking is needlessly expensive, risk management is inefficient and much of the world’s population has little access to financial services.
How can these problems be addressed? One answer is to bring banking into the so-called “zero marginal cost economy”. Some famous examples of companies within this economy are Uber and AirBnB. In both cases they use technology to leverage assets outside their core organisations: Uber does not own any taxis and has few salaried employees; AirBnB doesn’t own any hotels, nor do they have many salaried employees. Instead, their services are supplied by intelligent matching within their respective crowds of users. These users can consume services from the network, for example, by taking a taxi or booking a hotel room; they can supply them, earning an income by driving for Uber or letting out a spare room.
The application of this sort of model to the financial world might be called “Crowd-Banking”. This would involve utilising the latest technology to coordinate an enormous network of individuals, merchants and other institutions who would provide banking services to one another. Like Uber, a Crowd-Banking platform would be accessed via an easy-to-use mobile app that facilitated intelligent matching between users. These users could both consume banking services, but also earn fees by supplying services that are ordinarily undertaken by the high street branch of a traditional bank. These services might include the facilitation of deposits and withdrawals from the system or the conduction of KYC (“Know Your Customer”) verifications and other due diligence as part of risk management.
Crowd-Banking offers a series of key advantages over the traditional banking model:
– Massively Reduced Costs: There is no need for thousands of high-street branches, large corporate offices or tens of thousands of salaried employees. – Better Risk Management: Banking is all about risk. By leveraging a crowd of users, the system could draw upon massive resources as part of credit or compliance risk management. It could do more due diligence than any regular bank. Further, since users will tend to be local and know their communities will, a Crowd-Banking system could do it better. – Financial Inclusion: Over two billion people have no access to banking services, while approximately a further three billion people are seriously underbanked. For the traditional banking sector to expand operations in a new area, they need to build branches and hire many salaried employees. By contrast, a Crowd-Banking model can operate wherever people have access to smartphones, and smartphone saturation is growing at a phenomenal rate in emerging markets.
By massively reducing the cost of banking and reaching into the billions those currently left behind, Crowd-Banking offers a solution to the failures of traditional banking noted at the outset. Investment in the financial technology sector is increasing rapidly, and Crowd-Banking offers one of the most promising solutions to address issues with the current banking system. It is the future of the financial world.
About the Author. Dr Andrew Joseph McCarthy is CSO of LakeBanker, a financial technology startup whose mission is to revolutionise the financial industry for the good of everyone.
