Banking is at an inflection point. Most people think that banking is being reshaped by regulations since the global financial crisis. But that's only half the story. The other half is about technology.
Financial innovation is the dominant theme at technology centres around the world. Banking is an almost entirely digital business and innovation using technology is an obvious choice.
The financial services industry is being disrupted and digitally re-imagined, and some of the disruptors could become mainstream. Yet, most banks — facing increasing pressures on returns, while challenged by regulators to simplify their business models, and hampered by legacy systems — are relative by-standers in this arena.
Enabling customers to manage their money on their smartphones or tablets is helpful and adds marginal value to the existing system. However, nimble disruptors are working to revolutionise current business models from the ground up.
The rapid growth of peer-to-peer lending in the US is an example of that. The stellar response to Lending Club's initial public offering demonstrates how consumer attitudes to once-niche activities such as peer-to-peer lending have changed.
Bitcoin and blockchain
Another example of the change gripping the financial services industry is blockchain technology.
Blockchain is the underlying DNA of cryptocurrency Bitcoin. In simple terms, the blockchain is a decentralised ownership record or distributed public ledger of all transactions, which is mathematically signed to prevent unauthorised tampering.
Bitcoin has been viewed uneasily as an exotic alternative currency. Recent press headlines have focused on its volatile price, the dramatic crash of one of its exchanges (Mt Gox) and concerns that it could be misused as a means of illicit payment. But the banking industry is starting to see the many potential benefits of its underlying technology.
For banks, the blockchain has the potential to become a technology model for a low-cost and transparent transaction infrastructure.
While Bitcoin is unlikely to dislodge paper money, its greatest legacy would be the benefits of the underlying blockchain technology to the security of banks and the integrity of the financial system — which remain closely intertwined.
If this takes off, prices for trading, money transfers, remittances, credit cards and other products could potentially be undercut drastically to the benefit of consumers.
This infrastructure could be adopted to make financial transactions more secure and traceable for customers, banks and regulators.
One of the biggest challenges facing financial institutions is the need to prevent their systems being used to transfer funds for criminal activity such as the drugs trade or terrorism.
Banks are investing heavily in new systems and processes to prevent money laundering and blockchain could help.
With the use of blockchain technology, each leg of the transaction can be recorded and traced, making the ultimate destination and use of the funds clearer. This means combating financial crime such as money laundering also becomes easier.
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