Coming Soon: A World Without Banks

They’re going the way of the landline phone and fax machine. People will ask ‘why do they even exist?’

The only people dumb enough to use them will be companies likeDodo who asked me to plug in my landline phone to ‘test the line’ when my internet stopped working. I don’t know anyone in Sydney with a landline phone.

Banks know they’re going the way of the dodo too.

Some banks in Australia have already done away with branches. I can now pay anyone anytime using my mobile phone. All I need is their mobile number. None of this fiddling around with BSBs and accounts. Of course people in Africa have been using this technology for years longer than we Aussies have had it.

But the biggest change is in the world of lending

I predict that in 20 years time, banks won’t lend money. They might exist in some form to facilitate transactions like Visa and Mastercard do. But I think their monopoly on taking deposits and lending out those deposits will disappear.

Something called ‘peer to peer lending’ is on the cusp of going mainstream.

And from mainstream it will go dominant because it’s better. Much better.

Who needs banksters?

P2P lending is very simple. Think of it as the Uber of loans. Uber matches drivers with passengers. P2P lenders match savers and borrowers. All online through a website that does the hard yards for you. No bankers allowed — they’re too greedy and untrustworthy.

The website takes a cut for checking the credit-worthiness of the borrower, creating a provision fund in case your borrower defaults, and managing the matching system.

But why would you choose to do this over keeping your cash in the bank? The obvious answer is that you could earn up to five times the interest of a savings deposit at a big four bank. It all depends on how risky the borrower is.

‘Surely this is fraught with danger?’ I hear you ask. The answer is, ‘I don’t know, based on early results, it appears not’.

The P2P providers seem to have everything thoroughly figured out. From default insurance to lenders having direct access to borrowers’ credit documentation; everything has been done to make this thing work.

And it is working, early results suggest. Very well indeed.

Let me put it this way. Would you prefer to lend some money to your local bakery at 10% or deposit it at your bank for 3%? To be honest, most bakeries’ financial statements would probably make me less nervous than most banks’. But I think you can understand what’s going on here.

There is one significant problem with all this. The lender has to part with their money for the term of the loan. That can be years. Overseas, there’s already what’s called a secondary market. Which means you can sell the loan to someone else who wants to lend that money. They simply buy you out and the borrower repays the new lender instead.

So P2P lending could be safe and very profitable. Just think about the middle man you’ve cut out. They couldn’t be bigger and more parasitic.

Coming soon: a world without banks

The remarkable thing about this is how it will affect the world around us. Banks own the prime real estate in any CBD. Bankers are the richest employees in most CBDs. And bankers employ all the best trophy wives.

What will happen without them? Maybe they’ll find something useful to do like cure cancer, instead of funding pharmaceutical companies who make a living off cancer.

Retirees could take an enormous hit if banks disappear. Imagine a stock market with no bank shares to invest in — they’re the biggest chunk of our market.

Perhaps the strangest thing about the disappearance of banks is losing the fractional reserve system. This gets a bit theoretical and technical, but my mind was totally blown when I realised just what the implications are.

You see, when you borrow money from a bank, the bank doesn’t actually have that money to give you. It creates those funds in the moment of lending. Your deposit account gets $500,000 put in it and your mortgage balance goes up $500,000. The $500,000 didn’t exist before that. It wasn’t moved from somewhere. The bank creates it.

This act means the amount of money floating around an economy is determined by how much people are borrowing and repaying. Even when you use a credit card, that IOU is created in the moment of the spending at the grocery store. It’s just that an IOU from a bank is considered so safe it’s equivalent to money anyway.

But peer to peer lending can’t create money out of thin air. Individual lenders actually have to have the money they lend in the first place. So if P2P suddenly takes off, the amount of money coursing through our economy won’t fluctuate based on how much borrowing and lending is taking place. Money will be something real again, not a symbolic accounting trick.

This is brand new ground in thousands of years of banking. And it’s crucially important because it’s lending booms and busts that cause economic cycles and financial crises like the GFC.

In 2008 the debt markets froze and so the amount of money in the economy tumbled. I know that sounds weird, but if borrowers overall repay more loans than they borrow new loans, the amount of money available to the economy actually does shrink. And less money makes it harder to repay loans, which is a vicious circle.

P2P lending ends this chicanery of banks creating money out of nothing. Some say it was the very chicanery that caused Jesus to have a tantrum over some money lenders. But that’s another story.

The story today is that banks days are numbered, pun intended.


Nick Hubble Signature
Nick Hubble
Retirement Editor, The Escapologist