A series of technological advancement in the financial world recently got me thinking about the future of the banking system as we know it today.
The inherent role of banks is centered on taking deposits, making payments and providing or brokering funding.
Today, their deposit-taking role competes with money market instruments proving better returns for idle money. As such, the deposit growth of the top 5 American banks is negatively correlated to FED rates and the subsequent attractiveness of money markets investment avenues.
Money markets, together with debt capital markets, are also and increasingly duplicating the lending role assumed by the banking system. Lending to large corporates has got increasingly competitive and unprofitable for banks because of the lower interest rates they command. Banks are better off brokering deals for debt markets in return for a fee.
Banks’ transactional role is not better off. Last year has seen for the first time, the amount of global digital payments overtake that of cash payments globally. The evolution of ebanking, mobile money instruments and crypto currencies tend to sideline the traditional banking system. Despite the many criticisms towards its underlying value (some of which I share) the increasing demand for Bitcoins got them valued at over USD 4000.
Six major banks have recently joint forces to create crypto currencies intended to fastback stock exchange settlements. If these are extended to traditional banking operations, the role of central banks could become questionable.
These evolutions are likely to limit banks’ role to that of clearinghouses, servers or merely regulators of a self-running system.
As these roles are just as duplicable by third party institutions overtime, will they be profitable enough to justify the cost of running banks?
In my view, the only role banks are almost surely likely to keep is that of an advisor. The ability to opine and guide clients throughout various market conditions or assist in structuring complex transactions for debt or equity raising is probably the only expertise bankers of tomorrow are going to be sought for.