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Where Would We Be Without Banks?

In the seven centuries they've existed, modern finance houses have created and undergone a lot of change. This is probably the only thing about them that in future won't change.

Without banks, we wouldn't have loans to buy a house or a car. We wouldn't have paper money to buy the things we need. We wouldn't have cash machines to roll out paper money on demand from our account. We wouldn't have that toaster-oven the bank gave as a freebie for opening said account. Seriously, in their time, all of these were novelties, introduced by banks. They were part of an ongoing financial evolution – today it might even be a revolution. Whichever, there is a whole lot of shaking going on in the main banking functions, and this has major implications for how banks – or whatever we call them in future – are regulated.

Transactions: An Add-on Offered by Retailers?

Imagine having to barter your way through life: how on earth does one make change when you're swapping eight and a half goats for a single cow? Banks long ago smoothed away such complications, starting with banknotes, then cheques, then plastic that made buying-and-selling ever easier. 'One-click' buying is the latest wheeze, which has led to speculation that its pioneers – the likes of Amazon & Co., eBay and Google – will set up banks under their own brands, and that these will muscle traditional banks out of the transaction process. A report titled 'Why Google Bank Won't Happen' by IT-market-researcher Forrester dismisses the first conjecture, yet contends the second one could well happen. "It's not another bank that people want," argues lead author Oliwia Berdak. Instead, people want to buy things in the easiest (and securest) way possible (for the same reasons they wanted to move beyond barter.) Likewise, it's not that Amazon & Co. want to become bankers. Instead, they want to sell things in the easiest way possible. Moreover, they would love to have a ledger of each buyer's transactions, so they can figure out what to sell him or her next. So, their incentive is to throw in transaction-processing as more customer-bait – like free shipping or gift-wrapping. They would not be and don't want to be banks, but they could still take over a significant portion of transaction-handling.

Asset Management: Robots and Crowds Crowd in on Humans

A vault sure beats a mattress as a place to store cash. So banks started by keeping money safer, and gradually graduated into helping customers generate a return on their stash. Traditionally this was the preserve of private bankers and stock brokers, whose turf is now being encroached from two directions. One is the 'automated advice' approach pioneered by Acorns, Betterment, FutureAdvisor, Nutmeg, TrueWealth and WealthFront. Just as human travel agents have been replaced by computers, these companies replace human bankers with software that, based on customer profiling and market analysis, make investment decisions. As robot managers, they avoid human error, act instantaneously, work 24/7 and keep a perfect 'paper trail' of advice and decisions. The other encroaching banker flanker is 'crowd sourced' investing. Practitioners such as Estimize, Robinhood, Seeking Alpha and Wikifolio act as a sort of market for markets, pooling ideas of the many into a distilled 'Wisdom of Crowds' as extolled by James Surowiecki in a 2004 book of the same title. The jury is still out as to whether either of these approaches generates better results than human bankers or brokers, but clearly, costs are lower. That explains why not only dot.coms are pursuing this; conventional banks are in on it as well. Credit Suisse, for instance, is adopting both elements in its customer portal – the digital Private Banking Platform. Automation is racing ahead where possible, notes Head of Digital Private Banking, Marco Abele, and social networking among customers is being built in.

Loans: Friends With Benefits

Before banks got into lending, borrowing had to be done from family, friends or thugs, which often ends in tears, punches or a combination of the two. Loan officers introduced an objective, risk-dispersed intermediary between givers and takers. But even this successful approach could be encroached by novel ways of lending, driven again by – you guessed it – robots and crowds. Pioneering the first approach, notes Credit Suisse's Global Head of Equity and Credit Research, Christine Schmid, is a company called Lenddo. The Philippines-based firm is a credit agency empowered by the Internet. Prospective borrowers turn over their entire digital lives to a Lenddo review, which combs through their social networks, bank statements, health reports, emails and any other online evidence to assess their creditworthiness. A company called Zopa is working the other approach, offering 'peer-to-peer' loans that in effect are no different than a bank's, but without the cost burden of a branch network, bank infrastructure and regulations. It's only a matter of time until the two approaches come together in one company, say observers, and certainly the Lenddo approach to screening borrowers is being studied by banks.

Creating Money: Not For Not-Banks

It took centuries of trial and error for most countries to come around to their modern systems of money. Central banks today monopolise national currencies, and they steer availability mainly through commercial banks that, as economists often put it, 'create money out of thin air'. That is, centrals expand or contract supply by lending to and imposing reserve requirements on commercial banks. All well and good by most accounts (well, at least better than the previous systems). However, as University of Southampton economics Professor Richard Werner points out, this also means non-banks don't create money. They merely transfer it, as he showed in a 2014 peer-reviewed paper entitled "How do banks create money, and why can other firms not do the same?" So, while companies from Acorns to Zopa are challenging banks in offering banking functions from transactions to asset management to loans, they cannot create money – a central lever of most governments' financial policy.

This, then, is the question that lingers behind these exciting innovations in banking. More specifically: can the safety and transparency of banks be imposed on non-banks, and if non-banks take over the main banking functions, how can governments steer national finances? In coming years, we just might find out.