The Disappearing Banks

A world without banks is difficult to imagine, in part because they are so prominent in our daily lives. Any large city’s skyscrapers are likely to be banks. JPMorgan Chase’s Park Avenue headquarters may be seen towering in the background as commuters leave Grand Central Station in New York. In Times Square, Morgan Stanley dominates; in Bryant Park, Bank of America is prominent. The City of London & Canary Wharf dominate London’s skyline with their odd-shaped buildings.

Banks’ physical dominance symbolises their significance. Shopping for everyday necessities is one of the most common ways consumers engage with their banking institutions. Paying employees, suppliers, and mortgages through banks is a common practice. For larger decisions, such as purchasing a home or securing a student loan, banks are also a good resource to turn to. Without banks in the picture, not much could get done in the modern world.

Institutions have provided secure safekeeping for money for almost if there has been money in existence. And, for as long as deposit-taking institutions have existed, their management has recognised that, under normal circumstances, not all depositors would want their money back all at once. Rather than keeping cash on hand for every deposit, they can utilise the money to make loans in lieu of doing so. Banking provides private investors with capital, while earning interest for themselves.

The “fractional reserves” those banks maintain against their depositors render them intrinsically unstable entities. Bank runs and financial crises have left scars on capitalism’s and money’s history throughout its existence.

Over time, the banking industry has evolved dramatically. The biggest banks used to be in London, but now they are positioned in places like New York, Beijing, and Tokyo, among other cities across the world. Most payments are now settled online instead of with cash or checks due to technological advancements. It is also worth noting that the banks are far larger. In 2020, the entire assets of the world’s top 1,000 banks were worth more than $128 trillion, eclipsing the $84.5 trillion global gross output.

However, despite the seemingly omnipresence of banks, a world without banks is coming into view. More than ever, new technologies, financial markets, and even the public sector threaten their dominant position. In recent years, internet companies have developed payment methods that are faster and easier to use. There is widespread concern that digital payments could eventually replace cash. Banks have historically been responsible for financial regulation and monetary policy. Instead, they may have to generate digital central bank money if this mechanism is no longer available.

Many sectors have been disrupted by technology and AI, from real estate to healthcare, and this trend will only increase. The banking industry may appear to be another example of a staid, uncompetitive business that has been rendered obsolete by sleek digital businesses. However, banking is not a regular business.  As a result, they serve as a vigorous link between the government and business.

We are seeing the birth of an entirely new structure, one that promises to bring unprecedented changes. Joseph Schumpeter said in 1939, “Economic action can’t, at least in capitalist society, be enlightened without taking account of money, and practically all economic propositions are relative to the modus operandi of a given monetary system.” The function of banks in the future might be reduced, or perhaps eliminated, as central banks issue digital money and deposits and IT businesses handle financial transactions.

Useful changes?

If such a future change were to exist, would it be beneficial? Banks have several problems that need to be fixed. Unbanked people in large numbers are unable to afford them because of their meagre means. They can often be time-consuming and expensive. Trading and fees are typically where they earn the most money, and not from conventional banking. Boom-and-bust cycles, caused by banks that are imprudent, can lead to economic suffering. Consequently, it is tempting to believe that the potential demise of banks is just another example of how technology has loosened its grip.

There are strong ties between banking and capitalism. Why Britain industrialised first is still argued over, but it’s hard not conclude that banks’ ingenuity in converting inactive savings into investment vehicles had a role. What happens if central banks take on a larger role? Though they might avoid making loans, it’s difficult to imagine how they could avoid interfering with credit markets.

There are also wider implications and risks from these changes which should be considered. Banks are widely dispersed and fragmented, for example,  whereas state-issued digital money and private payment platforms could result in concentrated power in very few institutions.  Such a concentration would also entail more vulnerability via cyber-attacks.

We have witnessed such attacks in recent days and the World Economic Forum has placed special emphasis on this issue, soon to conduct “Cyber Polygon” to raise awareness and preparedness. There will also be concerns about social control due to the data that digital money would provide on users. These concerns extend to the fact that digital money can be programmed and thus potentially place unwanted restrictions on its use.