Yesterday, at my personal blog, I expressed extreme gratitude to Christian Michel for letting me talk last Friday, at his home, on a subject which, when I first floated it to him, must have seemed very vague and vacuous, although judging by what he said about my talk afterwards, he was almost as pleased by it as I was.
Tonight, I will be attending another meeting organised by Christian Michel, partly out of gratitude for last Friday’s meeting. There is a London tube strike happening today, and I am pretty sure that Christian is now feeling a bit nervous about attendance, so I will make a point of being there.
The title of tonight’s talk is “The Collision of Fintech and Traditional Banking”. The speaker will be Sasha Karim. (I’m guessing that this is the Sasha Karim mentioned here.)
I am hoping that what Sasha Karim will say is, among other things, that, by radically lowering transaction costs and thereby making the life of a “financier” (formerly only available to ultra-clever (but not necessarily ultra-wise) people who had access to or who were attached by ultra-rich (but again, not always ultra-wise) employers to expensive machines in expensive buildings) “fintech”, aka the new world of financial transactions on mobile phones, now available to all people who are above dirt poor, is creating a world in which the old dream dreamed by the likes of Friedrich Hayek of denationalised money, can become a reality and rescue us all from the great catastrophe that has been governmentalised fiat paper currencies, of the sort denounced by another friend of mine, Detlev Schlichter. We shall see. But maybe I am being too optimistic, both about the talk and about the world. Concerning the talk, I will report further.
Hayek’s crucial little book on denationalised money has long been available on the www as a free .pdf download, but I only just found out that Detlev Schlichter’s book is now available as a free-to-download .pdf file also. Blog and learn.
As F.A. Hayek understood when he was young (but sadly forgot when he got old) “index money” and so on does not actually work – one can not really have a currency based on an “index” of all sorts of commodities. Actually even two commodities is one too many for money – which is why when-the-exchange-rate-was-fixed either gold or silver were driven out of circulation.
One CAN have different commodities serving as money at the same time – but not the SAME money, they must be different monies. And contracts should specify whether payment is to be made in gold (of a certain purity) or in silver (ditto) or whatever commodity is agree between buyer and seller.
As for banking….
There is nothing wrong with money lending (“usury”) for productive investment. With people lending out their REAL SAVINGS of CASH money – or lending out the REAL SAVINGS of other people entrusted to them.
As for the Credit Bubble tricks – they always end badly, whether they are done by private “bankers” (as opposed to people content to be money lenders) or governments. And lots of high tech stuff does not change this. Although YES technology can be used to transfer ownership of a commodity (so one does not have to go around with a lot of gold or silver coins in one’s pocket – not that there is anything wrong with that, after all my father used gold and silver coins as payment for goods and services and I am not that ancient).
The high tech stuff does not change this because it is not really a technological question – it is not really a matter of technology it is a matter of basic logic.
If (by book keeping tricks) people lend out more money than they actually have, a credit bubble is created – and that bubble must eventually bust.
It does not really matter whether one is dealing leather bound account books, or high tech wizardry. Technology is not the issue.
Producing more money (or “easy credit”) does NOT reduce long term poverty – actually it increases it over what it otherwise would be.
Lending must be from Real Savings – and interest rates a matter of Time Preference and risk.
Technology changes none of this.
You do realize there MAY be those of
(well, OK,ME)that only see folly in not assessing, then watching, actual cash dwindle from the “allowance” in our wallets?
Credit cards, now let’s make them even MORE invisible, until it’s too late, at the speed of traveling electrons!
Kinda’ like those pesky affordable, buy now, pay later, higher “education” loans.
Almost as if there were a whole industry
wrapped around culling “fees” for generating/repairing a “favorable credit rating”, enabling you to go deeper into long term debt!
Speaking of Schlichter: He seems to have gone pretty quiet. Does anyone know if he’s still writing/blogging?
“The high tech stuff does not change this because it is not really a technological question – it is not really a matter of technology it is a matter of basic logic.”
Correct, as always.
All this fancy “fintech” is built on credit cards – i.e. on the current banking infrastructure.
Quite so Jacob – and quite so CaptDMO.
Schlichter has been quiet since he shut down his website. If he’s blogging elsewhere I’d like to know it, too.
Anyone who hasn’t read his book should do so, especially now since (apparently) it’s free to download. I paid him for my (hardback) copy, and feel it was well worth the price.
The question seems to imply that “fintech-for-all” is indeed “for all”, is somehow something new and that it might somehow “save us”, or something.
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From experience of variously developing/implementing/using and teaching about the use of financial systems technology – including forex and other market trading systems, financial modelling and linear programming methods, AI systems (Automated Intelligence) and econometric modelling – one can safely say that:
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1. Technology and the progressive reduction in the marginal cost of computational tools has greatly assisted in the implementation, availability, and ubiquitous distribution and use of such tools.
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2. Such technology was/is generally/usually welcomed by (say) trading and commercial bankers and business economists and accountants alike (once they understood the potential future usefulness of such technology), as such technology stood to enable them to thereby improve the quality of their business process outputs in some way – e.g., in forecasting/planning), or improve cost-effectiveness and/or optimise profitability or production.
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However, there were those who seemed to have been unwilling or unable to understand or perceive the potential use of such technology, and they generally fell into one of two camps:
(a) Those that simply could not understand/imagine it, or
(b) Those that could imagine it only too well, but perceived it as a potential existential threat to their occupational/professional sinecure – e.g., for an actuary, where (say) an AI tool automated the actuarial assessment of a standard life risk for a life insurance policy, at the Point-of-Sale.
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The latter camp could potentially (and actually sometimes do) act as gatekeepers of technology and may try to shut the gate on technology that they feel is not to be made available for general use. (I have had direct experience of this.)
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There are arguably valid reasons of national security for withholding some computational technology from general use – for example, the US Dept. of Defense used to be the arbiter of allowable encryption methods in telecommunications and would mandate only low standards of encryption in things such as, for example, commercial-grade modems. This extends to the illegality of encrypted email systems in some supposedly “free” nations today.
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However, because Money (fiat or otherwise) is effectively made an essential commodity as the sole legal medium of exchange, it is tightly secured and controlled through regulation by the State. The State uses it as a tool to exercise State power, so the Treasury, bankers and usurers are delegated with special responsibility and dispensation for making financial systems and processes as secure, transparent and loophole-free as possible. This of course is a monopoly on Money, and effectively helps to prohibit the start-up of independent, competing money-systems (which is why Bitcoin is so interesting).
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So, as @Paul Marks suggests, the technology seems to change little (if anything) in terms of economic theory/practice and money-usage, per se. What it does enable is an improvement in the effectiveness of financial processes – e.g., the speeding-up (make more cost-efficient and sustainable) of the management of the huge volumes of transactions flowing through those processes used as payment and interchange systems. Those systems include EFT-POS, interbank settlement and exchange, and international gross settlement and exchange (which could effectively now be real-time).
Though one might suppose that at least one “economics” effect of this could potentially be to speed up the velocity of circulation of the money supply, that would probably be debateable.
Fintech cannot “save us” if the State exerts, or tries to exert, monopoly control over money. What it can do is, as is often the case, pick up the slack created by daft government regulations. For example, much conventional banking in the West has been affected by the imposition of tougher international capital rules, set by central bankers meeting in Basel, Switzerland (hence why these standards are called “Basel capital rules”). This, combined with a huge rise in regulatory compliance costs on banks after the financial crisis, has encouraged many banks to stop lending to individuals and small/medium firms. Such a gap in lending has, however, been filled to various degrees by “fintech” platforms such as peer-to-peer lenders, funds that lend money (sometimes known as private credit) and so on. A term also used is “alternative finance”. It is a growing sector.
With P2P lending, a feature that needs to be appreciated is that there is no state-mandated depositor protection for those lending money; that means said lenders are in a position to command a higher rate of interest than the paltry amounts with banks. P2P lending is, in some ways, a sort of “pure lending” and removes some of the intermediary costs.
Fintech cannot stop the derangement of capital markets by central bank manipulation of fiat money, or prevent other problems. What it can do is improve the experience of consumers, borrowers and lenders, remove some middle-men costs, and plug some gaps caused by government regulations.
There are risks, of course. In mainland China, several P2P platforms have been exposed as scams; the sector has yet to be tested by a major financial recession. And anyone using fintech platforms to lend money etc should exert due diligence and use common sense.
Would be great if this talk could be made available in some format!
The WWW was initially designed/perceived as some kind of a scientific information and knowledge exchange system.
As usual, when given a new tool, enterprising people started testing the technology for other, commercial use. So it was EDI (Electronic Document Interchange), B2B (Business to Business) and then B2C (Business to Consumer) and then C2C (e.g., as in buy/sell auction sites) and P2P (Peer-to-Peer) – the latter covering a group of human and computer interchanges.
The main effect was disruptive – disintermediation and the collapse of the Value-Chain. The advent of Google accelerated things along at a rapid rate, and, for a while, “monetisation” was the ambiguous catchword of the day, giving hope to all the suckers who hadn’t realised yet that the “trickle-down theory” was about diarrhea. However, most of this was otherwise arguably generally good news for the consumers and businesses alike.
If “infotech” on mobile phones is now available to the man in the street, or “all people who are above dirt poor”, I am unsure how them being able to use an app to perform “financial transactions” will necessarily magically unseat the squatting “financiers” or the squatting elite, or indeed give the less well-off some kind of access and income that they didn’t have before, as they are and will remain economically non-viable unless they magically start a business that makes them rich, or magically get a well-paid job where – even if they were qualified – there are no such job opportunities available to them.
The “financiers” are all effectively in sinecures by virtue of being State-appointed or State-sanctioned financial toll-gate keepers – and they know it and will thus be most reluctant to permit a change to the status quo. This is particularly so with international financial exchanges/transactions, where S.W.I.F.T. will have to be involved, and where the transaction will be hit by quite high exchange fees and transaction fees charged by the banks. Country A charges a fee for sending the funds to country B, and country B charges a fee for receiving the funds from country A. There is also a currency exchange conversion fee. These are arguably anachronisms, which might have been necessary or cost-justifiable in the old manual telegraphic transfer days, but which are largely automated now, but the banks will not easily let go of them because they are profitable ticket-clipping fees – money-for-nothing – and the banks control the process.
The only way one might be able to avoid such fees is by disintermediating the banks – but that probably isn’t going to happen any day soon as they are in a very secure position. They are State-sanctioned and authorised/instructed by their State masters to perform these “services” – including tax-gathering from interest-bearing deposit accounts – and the banks happen to own the technology. They effectively operate as a cartel and set/agree the operational rules and non-competitive fees for operating the transaction payments and interchange systems (including S.W.I.F.T.).
So that explains a lot. Like who does the State give umpteen billions of taxpayer dollars to in times of economic collapse or other economically/financially troubled times? That’d be the homeless people, the unemployed, and the hard-pressed couples trying to make ends meet with a job layoff, bugger-all income, a young family and a high-cost mortgage about to default – right?
Yeah, right.