There is a lot of noise recently about ‘end of banks’, all of it fueled by amazing advances in technology and a flood of technology startups offering alternative to number of traditional banking services.
Before elaborating the subject, let us start this story with two mental extrapolations:
1) ‘super-artistic supercomputer’ case – let us imagine machine with such a huge capacity that it can digitally store and process all artistic heritage of human civilization, including sculptures, paintings, music, architectures, adverts, movies, … – literally anything humanity has universally accepted as work of art. This super-machine will then use all those data to create new masterpiece analyzing ingenuity patterns and building algorithms for masterpiece creation through latest machine learning technologies. The question is: would you believe new Da Vinci Mona Lisa or Beethoven Symphony No. 9, or Forman’s Hair, or Gaudi’s Casa Batlló or anything alike can be created in such a way?
2) ‘trusted robo-institutions’ case – let us now move to a not so distant future (according to technologists) where automation, robotization and AI in general will allow creation of human unattended utilities and service institutions such as nurseries, hospitals, pet hostels, treasuries, … Questions to be asked here are whether you’ll be ready to entrust your grannies to robotized nurseries? Or maybe your dear cat to be taken care of by robo-hostel while you’re away, or maybe all of your personal wealth to be entrusted to a robo-bank-advisor, or …? Before you accuse me for chauvinism of any kind, let me just clear out that I’m trying only to define boundaries of trust here in this experiment. I’m also sure you agree there are people among us who appreciate their money or pets more than their relatives, and who will gladly put them into some kind of machine.
Case you listen to engineers’ community, it’s a matter of just a few tiny time units when thanks to advances in Artificial Intelligence, computer, bio and other technologies all this will become possible, as implied by infamous Moore’s Law. But we know scientific and engineers’ minds – deterministic and causal they are. And fed by arrogance of recent successes and advances, they seem to forget our world is not so deterministic after all.
Being a technology-savvy myself, with degrees in electrical engineering and computer sciences, somehow I spent most of my professional career in banking industry. Useless to say, but off course I have been and still I am excited with technology advances and opportunities created by technology in financial industry, pioneering and implementing a dozen of new banking services over the past decades, advising leading technology companies, contributing in many ways to changes that are taking place. Over time, I moved from engineering activities solely and acquired competences and deeper understanding of banking, being engaged in sophisticated financial subjects, so I feel comfortable to share some personal viewpoints.
And in my point of view, ‘end of banks’, as they call it, is a heavy overstatement for what is really going on, so I dare t say that FinTechs run by engineers minds will not replace banks for at least one of the following reasons:
1. banks spend disproportional multiple in investments and new technologies implementations compared to FinTechs, and bulk of resources in ICT innovation and development industry are serving banking sector. In a way, banks were, and still are, those to lead the developments. It looks silly and vainglorious that FinTech industry guys are so superior and able to create and deliver solutions and services at fraction of cost and effort of those in the banks.
2. FinTechs are lucky to enjoy comfortable circumstances of being deregulated these days, which impact their cost base directly and make them more competitive at this point. However, it is inevitable that regulators will come after their back if these companies ever reach a scale of systemic importance, and at that point, most of competitiveness will be gone. In any case, we are clearly not anywhere close.
3. equity held in FinTech industry is a tiny corpuscle of that held in banking industry, and after all the bubbles and bursts of Internet era, we do not witness a substantial evidence of equity flow in that direction. With such tiny equity, it is hard to imagine institution with ambition to become a pillar of financial system of the future, able to guarantee for its liabilities and business risks incurred.
4. yet, the major desiderata of FinTechs remain financial knowledge. Up until now, FinTechs have succeeded to digitalize simple, massive and low-risk services like payments or micro-lending. And in fact, this is the area where computers behave better than humans: repetitive tasks, massive calculations. Yes, skills can be automated – but when you move to more sophisticated and less deterministic areas of arts, you don’t really have to go that far, as in our example from the beginning of this text, to figure out that even super super machines won’t get you there. Banking, with all its complexity in managing risks, legal frameworks and regulatory compliance, asset and liability management, markets dynamics, client assessments, security issues, etc. etc…. – is an art, and arts are much harder to automate.
5. last but not least, there is issue of trust – probably biggest shortage FinTechs have to face with. Banking is one of oldest human activities who is surviving test of time for millennia and that’s where its trust is built. It takes time to get trust, and with such rapid changes in technology, most of technology companies don’t even live long enough to deserve any. To play a role in existential matters, which personal finances are, trust is an essential asset, and we are not talking about personal but systemic trust here which is much more difficult to gain.
So, if we don’t approach ‘end of banking’, what is going on then? it is simply progress by means of innovation. In a similar way as invention of card payments gave a birth to a brilliant technology companies such as Visa, MasterCard or American Express by providing seamless and convenient cross-border payments around the globe, it could be reasonably expected that some of FinTechs will find its way to rise through and become essential part of financial systems of the future. But to ensure longevity, FinTechs will have to become symbiotic with banks, as card companies did once upon a time. At the same time, banks will have to transform themselves as well, adopting technologies developed by new players, integrating them in their operations, enriching its services to become better institutions ready to withstand demands coming from new technologically empowered clients.