Imagine life as a the patriarchal head of a fiat currency banking empire. Life is good, with the ability to create fiat currency out of thin air, thanks to fractional reserve banking practices which effectively legalizes counterfeiting money. You compare notes with other billionaires. Your donations and campaign influence have politicians wrapped around your finger when it is time regulate new competitors or new technologies. With effective control of politicians, regulators, and consumers sending you multiple streams of income, life couldn’t be better. With one exception.
What if there was something, like Bitcoin, which the establishment’s bankers couldn’t wish into the corn fields?
Controlling politicians, regulators, the general public, and national economies is pretty sweet, but can all that power protect you from new technologies? What if people had an option where they didn’t have to cut the banks in on every loan, transaction, or new economic measure passed through government? What if people start to figure out you don’t need a bank to live a prosperous life? What if a new technology removed the banks from the equation, leaving people to manage their own money, without a corporate middleman with their hand in your pocket? If you were a billionaire who owned a massive national bank, that might cause you to lose some sleep over the potential erosion of your empire.
Uday Kotak is the founder and executive vice chairman of Kotak Mahindra Bank in India, and he has a problem. Digital currency innovations like bitcoin, mobile payment apps like the recently announced Android Pay and Apple Pay offer great opportunity, but a great risk for a traditional banker like Kotak, currently worth over $7 billion. Where do these new financial technologies fit in with a banking industry that is built around the status quo?
“I am excited, but very challenged. I keep wondering at night ‘Will I have a bank the next morning?’ or will some technology company be doing banking without needing a bank?” Kotak told CNBC. “As long as there are cash and the economy is running, all is well. But as a bank, we’ll have to test, experiment, try a hundred different things. A few may work, a few may fail, but we have to experiment and try.”
He said something very important there that could be easily missed. Kotak said “As long as there is cash….”, but cash is under attack by governments and even bankers worldwide. It is becoming more and more illegal to use cash. And we all can see that national economies worldwide are hardly “moving” in the direction he’s talking about. Many have stagnated if not collapsed recently. The days of cash are soon coming to an end, from all indications, and this can be a boon or a bust for banks everywhere. Kotak obviously feels pressure to innovate in an industry that’s about as innovative as wicker basket making.
Unless you consider negative interest rates an innovation. With them becoming all the rage in European bankings sector and beyond, coupled with bans on cash, this can push consumers into banks and out of banks, creating a fork in the road. Banning cash will force people to either become even more dependent on their debit cards and credit cards for all of their shopping needs, at the expense of all privacy. There was a time not long ago when a consumer could make 6% a year on a Certificate of Deposit annually. Now, consumers may be paying banks to keep money in savings after negative interest rates become the new standard. This may drive revenue into banks in the short-term, but cost millions of customers in the long-term.
Or consumers can rebel against this obvious manipulation of the financial system, and move towards trustless, peer-to-peer options like bitcoin, where the consumer acts as his own bank. The market may be heading towards having to make a choice between the total economic control of each transaction by the establishment’s bankers, or the ability to control one’s own money of from now on with digital currencies like bitcoin.
Is Kotak just learning from history? Blockbuster video couldn’t imagine an online company like Netflix not only controlling the market within a matter of a few years, but bankrupting the legendary video franchise. Kodak was once the #1 camera maker in the world, until a phone company, Nokia, passed them seemingly overnight. Stranger things have happened.
Are superior online options, both centralized and decentralized, coming to remove the average bank from the landscape by giving consumers the freedom and convenience they desire? The rapidly changing landscape in lending, spending and regulations may alter the financial world forever. And since money makes the world go round, all of this new technology may change us all forever. Maybe Kotak just sees the handwriting on the wall? Is Circle the next Netflix?
New technologies had beaten the establishment before and banished them into the corn fields. Is traditional banking next? It has billionaires like Kotak thinking about what’s next every night.
How worried should billionaire bankers be about powerful new technologies dwindling their business model? Share above and comment below.