Could rapid innovation in the fintech space lead to the end of banks as we know them? A recent report from Massachusetts Institute of Technology (MIT) titled Digital Banking Manifesto: The End of Banks explores these possibilities.
Innovation has resulted in revolutionary changes and new leaders emerging in multiple industries including retail (Amazon), travel (Expedia), communications (Skype, Whatsapp), and so on.
However, the banking industry has been less affected, with centuries-old banks still remaining market leaders. While there have been some changes in the ways they function, with ATMs, mobile banking and internet banking being implemented, their fundamental business model has not changed.
The most important asset of a bank is its licence to operate. This high regulatory barrier has traditionally prevented a rapid increase in competition.
So in spite of poor service levels and the risk of bank defaults, customers used their local banks due to the lack of alternatives.
The paltry interest rates offered by banks on deposits hardly compensated customers for the risk that they were taking. Banks, with their legacy systems, number of branches and large number of employees, could not offer better rates of return on deposits.
Like putting lipstick on a pig
Current banks are burdened by their legacy infrastructure. While some of the advancements in technology have been implemented in banks, they have shied away from making large scale changes.
As Mark Mullen, the Chief Executive of Atom, said in 2015:
“Banks are trying to be cool and hip and build super cool digital front ends. But it’s like putting lipstick on a pig - ultimately it’s still a pig and the new front end is still running into an awful digital back end."
A truly new-age digital bank would be able to implement latest technologies including cryptography, distributed ledger technologies, artificial intelligence, etc. across the organization. Comprehensive automation and digitization of the middle and back office would make the new-age banks highly efficient and agile.
Bitcoin may not be the currency of choice
It is acknowledged that digital currencies will play an integral part in digital banks of the future. However, while Bitcoin is the best known digital currency, the report asserts that it is not suitable for high volume transactions because of its low transactions per second (TPS) capacity.
While this can theoretically be solved by increasing the blocksize, consensus is required for changing the Bitcoin protocol.
Hence, other digital currencies, including those promoted by central banks, could become the preferred currency of new-age banks.