In 2009, Paul Volcker, former chairman of the US Federal Reserve Bank, addressed the Wall Street Journal Future of Finance Initiative and voiced his disdain for the lack of innovation in banking and finance.
“The most important financial innovation that I have seen the past 20 years is the automatic teller machine - that really helps people and prevents visits to the bank and it is a real convenience. How many other innovations can you tell me of that have been as important to the individual as the automatic teller machine, which is more of a mechanical innovation than a financial one?” said Volcker.
Volcker is not entirely correct - financial institutions were hard at work inventing new financial products and services such as credit default swops, collateralised debt obligations and synthetic CDOs. But these innovations were simply a way of repackaging risk to mine new types of returns.
Seven years later and Volcker might give a different speech. In June, Canada’s ATB Financial sent $1 000 (R13 560) to ReiseBank in Germany using Ripple’s blockchain platform. The banks claim that it was the first international interbank transfer using blockchain technology. The transaction was completed in eight seconds rather than the three to six days that it takes using the current Swift system.
Blockchain is one of many technologies upsetting large banks and financial institutions from their historical security. Simply put, blockchain is a ledger simultaneously stored across thousands of private computers around the world. Verification of the transaction and its participants is immediate and impossible to falsify due to constant crosschecking between computers where the ledger is stored. A central authority or bank is no longer needed to certify ownership and clear transactions, resulting in faster transfers.
Innovations
The drivers of change are not large institutions, but garage coders playing with mobile phones. ATB Financial, ReiseBank and Ripple did not invent Blockchain - an unidentified coder called Satoshi Nakamoto created it in order to provide a platform for transactions of his or her other invention; the digital currency, Bitcoin.
Other innovations are driven by the use of smartphones as financial transaction devices. Juniper Research expects the value of global mobile payments to grow from $35 billion in 2015 to $95bn in 2018.
Apple Pay is a service that stores debit and credit card details on your phone or other Apple device and allows you to pay for purchases by simply holding the device over a standard contactless payment terminal. Masterpass is a Mastercard product that provides the same functionality for Android devices.
Paym and Pingit in the United Kingdom allow users to link their banking details to their mobile phone number. Thereafter, users can send money to others with the Paym or Pingit app in the same way that they send an SMS.
These new types of services are causing consumers to demand seamless services from their banks. In 2018, the EU will introduce the Payments Services Directive 2. The new legislation will require all banks to allow a third party to access banking details and transactions of their clients, if the account holder approves it.
The implication is that companies unrelated to the bank will be able to offer independent banking services to any account holder. A mobile application built in Silicon Valley or Sutherland will be able to offer specialised services by linking to your accounts. For example, services could include automated payments across all your accounts or software that helps you budget your business spending. Detailed analytics could create reports on your spending patterns and help you optimise expenses or investments. Other apps could compare banking fees across companies and accounts and recommend the product best suited to your individual needs.
If the banks do not evolve with technological change, they will simply become the infrastructure that holds the money while other companies drive innovation in services.
* Pierre Heistein is the instructor of UCT’s Applied Economics for Smart Decision Making course. Follow him on Twitter @PierreHeistein.
* The views expressed here do not necessarily reflect those of Independent Media.
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