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Will Fintech kill the banks?

By FinBuzz


Over the last few decades, big banks have benefited enormously from technological innovations and digitalisation. But will “distributed ledger” technology prove to be their undoing?

A new report by an analyst at Citi suggests that one of most celebrated Fintech innovations of recent years could prove a double-edged sword for the big banks. The innovation in question is “distributed ledger” technology such as blockchain, the technology invented to underpin bitcoin.

Blockchain is a “permissionless distributed database” that uses complex encryptions to allow people to safely transact directly with one another online without the need for an intermediary. By making these intermediaries obsolete, financial experts believe that the technology could significantly reduce the costs of financial transactions.

There are huge savings to be made here, with subsequently vast increases in the banks’ profits: a report published by Santander last year in June estimated that blockchain technology could reduce banks’ infrastructure costs by up to $20 billion a year.

Nevertheless, not all analysts are euphoric about the consequences of technology such as blockchain.

In his immensely influential book, The Great Disruption, Francis Fukuyama compared the impact of late-20th-century information technologies on economic and social life with the no-stone-left-unturned revolution unleashed by industrialisation in the late 18th century.


An instructive example of the “great disruption” at work is what has happened to the telecoms industry. Ever since the mid-19th-century invention of the telegram, private and public corporations have spent billions laying out the wires which made telecommunications possible. Yet along with the internet came VoIP services such as Skype, which could take advantage of existing infrastructure to carve out vast swathes of market share within the space of a few years.

It is the spectre of this historical analogy that some analysts are raising in regards to blockchain. Just as with Skype, if Fintech startups can cut out the need for the services of the big banks while simply piggy-backing on their existing infrastructure, the banks could find themselves losing market share to more streamlined and user-friendly digital services. “Banking is necessary – banks are not”, warns the homepage of one Fintech startup founded by the young German entrepreneur Alexander Graubner-Müller.

Citi analyst Keith Horowitz thus warns that technologies such as blockchain risk turning the banks into “dumb pipes, forming only the infrastructure through which money flows, but with most of the benefits accruing to service providers”. In such a scenario, the $20 billion of savings identified by Santander could be far outweighed by lost custom from existing clients.

Horowitz tries to stay upbeat in his report by noting that the banks still have certain advantages, such as their experience in dealing with government regulation and their existing large client bases. So far, indeed, banks have benefited from technological advances, generating huge profits from engaging in the high-speed and high-volume trading which digital technology has made possible. Yet whether or not the big banks can ultimately resist the sweeping transformations brought about by the internet’s “great disruption” still remains to be seen.

This article first appeared in FinBuzz

Photo: Alan English CPA 

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