The cashless society may end runs on banks
For most of modern history, national and global economic crises have been accompanied by a run on the banks.
Dating back to the 16th century, banking runs have accompanied the British South Sea Bubble, the Great Depression, and even the 2007 financial crisis included market-liquidity failures that were comparable to a bank run.
While people's impulse to get their money out before the banking system or economy collapses is understandable, this kind of panic usually exacerbates the situation. It should hardly be surprising then that banks and governments alike have tried to prevent or mitigate the impact of panic-induced runs on banks. But as society becomes increasingly cashless, could the classic bank run become a thing of the past? Advances in technology mean that banks and consumers alike are safer from the impact of bank runs than ever.
The ever-increasing number of customers who have direct access to their bank accounts through digital portals and mobile interfaces, might accelerate the possibility of early redemptions in a stressed environment. Nevertheless, banks can always implement maximum transfer limits per account, which has the same effect as limiting cash withdrawal at ATMs.
It is worth noting that alternatives to that issue exist. Indeed, securities such as bonds or equities can be segregated on the bank balance sheet and could be a good way of protecting assets. In fact, some of the big changes driven by fintech dovetail neatly with the evolution of existing financial systems. For decades, our financial system has relied on banks to lend more than they hold as collateral. This is known as the money multiplier effect. A purely cashless environment wouldn't drastically worsen the current imbalance.
The entire financial system is based on trust. Recent paradigm shifts such as the evolution of Blockchain technology make value transfers among counter-parties who ordinarily wouldn't trust each other much easier.
At the individual level, meanwhile, technology is making people less dependent on banks, further reducing the risk of a banking panic. Bitcoin, for example, is a decentralised network where each coin holder controls an asset that no state can have access to.
New technologies are bringing hyper-transparency and instantaneous transactions. As a result, the traditional banking system is under pressure to cope with the fully digitalised processes and let go of paperwork safekeeping. Fortunately, that does appear to be happening.
Most financial institutions are working on increasing the speed of value transfer and reducing the number of required intermediaries. Ultimately, this will lead to a brand new way of doing things, integrating profiles in the Blockchain and digital ledgers, rather than obsolete forms of support, such as paperwork, fax confirmation, mails, and validation checks.
So, rather than accelerating financial crises as some pessimists might think, technology could well make the global financial system more stable while empowering people like you and me, who depend on its infrastructure in our daily lives.
Mathieu Saint-Cyr is the managing director and head of asset management at Geneva Management Group.