At school or university, we’re told that money is created by the central bank. But that is not actually the case: the commercial banks are the ones creating money. The same banks that love to take risks and helped cause a global financial crisis a few years ago. Could fintech companies save us from the instability they create?, reads an article written by Ben Dyson, founder of Positive Money, in the issue #04 of Tea after twelve magazine.
Here’s a short extract:
Could Fintech or blockchain be an alternative?
This is where fintech comes in. Fintech companies want to apply innovations in technology to financial services (where the current technology is often obsolete and user-experience is poor).
At the heart of it, banks provide two services – a way of making payments, and a way of making loans. Peer-to-peer lenders are starting to take away some of the banks’ loan-making business, cutting out the banks as middlemen. But we need the same thing to happen on the payments side too; we need fintech firms to compete with the banks to provide better and safer payment accounts. This would start to separate payments from lending.
Most traditional payment providers are already banks or want to become banks. But we’ve spoken to fintech payment providers who say that they don’t want to take any risk with customers’ money (or get buried under all the regulation that comes with the territory); they just want to provide the best payment services possible.
However, there are obstacles and barriers that make it hard for fintech firms to go into the payments industry. Because they’re not allowed to open accounts at the Bank of England (or their own central banks), regulations requires them to ‘safeguard’ customers’ funds by storing them at an existing bank – even though those existing banks will take risks with those funds, whereas the fintech firm would not. The banks decide which fintech firms they’re willing to open an account for, and how much those firms have to pay for each transaction. Sometimes the fintech firm ends up paying 6 times the real cost of a transaction, making it almost impossible to compete with the existing banks.
The good news, in the UK at least, is the authorities have been working to expose the banks to competition. The Bank of England is reviewing who should have access to its all-important settlement accounts, and may allow fintech firms to open payment accounts with it, so they will have access to the main national payment systems. The Payment Services Regulator is trying to remove other barriers, and European legislation coming into force next year will radically break apart the banks’ stranglehold on payment accounts.
Even more radical steps may be on the table. The Bank of England is currently researching the potential for a new payment system based on the blockchain-technology that has grown out of Bitcoin. Although we’re a few years away from seeing anything like this in action, it could make it far easier for the Bank of England to let everyone – including you and me – to hold our money ‘at’ the Bank of England instead of at one of the commercial banks. This would open the door to a load more innovation from fintech.
Nearly a decade after the crisis started, it’s clear that banking is still broken. In the next few years, fintech has the opportunity to fix it, or even better, simply replace it.
Read the whole article here.