Blockchain will brutally disrupt old-fashion banks

Clack. Clack. Clack.

“I can’t believe I did it…”

Clack. Clack. Clack

“But I had no choice…”

Clack. Clack. Clack.

“Everything would be alright…”

And with that the clacks ceased. From now on his world would be replaced by the continuous sound of soft clicks – He had finally bought a PC.

The ubiquitous typewriter had been around for more than a hundred years before the PC showed up. We accepted their jammed keys, their snarled ribbons and their smudgy carbon paper for making copies. It was part of life and our productivity depended on it.

So when the PC arrived we ditched them forever and now in the digital age we write, cut and paste freely. No longer do we need to carefully craft our thoughts before we bash away. We can delete bucket loads of ill-thought-out dribble in a keystroke. Litres of Tipp-ex are saved.

Sometimes you need to look afresh at the status quo so you can innovate. There is always a better way of doing things. That’s why the PC replaced the typewriter. The establishment of the Internet, the rise of the smartphone and the creation of the Internet would otherwise not have happened.

Something similar could happen to our banking system, which definitely needs to improve. Humanity can’t afford another financial crisis like the one we saw ten years ago. It’s just not acceptable that billions of dollars were used to prop up banks too big to fail, while ordinary people suffered financially during this period.

Something needs to change.

This change might actually be happening already. Think about how you transact with the world around you today.

When you use your credit card to make an online purchase, the retailers and banks behind this exchange in money are using something called FinTech – Technology that’s linked to finance. It’s the same for when you buy and sell stocks online, or transfer money abroad from one country to another: FinTech is behind the scenes making it happen. You wouldn’t have been able to transact this way 25 years ago, which is why it is so impressive.

Now days newly formed FinTech companies are using tech to create new and better financial services that the banks haven’t been able to provide. Although it’s early days yet, they are slowly chipping away at the market share that traditional banks hold, thanks to digitisation in the new information age.

The focus is now on easy access, convenience, efficiency and speed. Finance and technology is becoming increasingly intertwined, leading to more scalable tools and online solutions than ever before. Comparison sites are reducing the cost of financial services for ordinary people, lowering the margins earned by banks and insurance companies. Robo-advisers are helping reduce advisory fees for investors, doing away with the need to pay for expensive financial advice. Change is underway and banks are desperately trying to catch up in order to survive.

However, there is something potentially more disruptive on the way – the Bitcoin. This is a very controversial topic because a lot of people don’t actually know what Bitcoins are, or at least understand their purpose.

However, the rise of Bitcoins bizarrely enough, could do to banks what email has done to our postal service. Perhaps it’s a little before its time, like the Internet before the web browser. And it may not actually survive in its current volatile form. The cost of a single Bitcoin as of writing has breached $10,000, which could signify a bubble waiting to pop.

Nevertheless, even if Bitcoin falls apart, it’s the underlying technology – blockchain – that is important because it could change our banking system as we know it.

Blockchain is a digital ledger that is validated simultaneously across a network of computers. It’s a bit like a shared excel file, with the difference being that no one person can make a change without the agreement of the other.

It’s an audacious idea that would remove the need for an intermediary, such as a bank, from financial transactions. If you would like to know more about how blockchain works, there is a great blog here written by Mohit Mamoria. However, for the purpose of this article I want to explain how blockchain technology could radically alter our relationship with banks.

Modern day banking has been built upon financial intermediation. Our whole global economy is built upon this system. When your salary is paid into your bank account, you spend your money and it’s deposited somewhere else, which is then spent again. If you don’t spend it, then it’s lent out; whoever borrows it, will then spend it so it’s re-deposited again and lent out once more. This virtuous cycle has a huge multiplier effect on the amount of money circulating through our banking system.

Although banks only earn a fraction in each transaction, the sheer volume that goes through the system can generate enormous profits. That’s why banks are constantly trying to find more creative ways to funnel money through their infrastructure. Sometimes they can get too creative, which is part of the reason behind the last financial crisis.

What blockchain will do is remove this reliance on the banks. You wouldn’t need a bank or any other financial institution to carry out a transaction with blockchain.

It’s a radical departure, but has many interesting applications. Here’s one example seeing that it’s Christmas – a season for giving and caring for others. Say you wanted to send in good spirit a $100 to a farmer in a third world country, like Zimbabwe. The expenses incurred for such a small sum would mean the farmer only receives 80 cents of every dollar.

However, with Bitcoin you just need to send an SMS to the farmer with a web address for the Bitcoin wallet and a password. They can pay suppliers for goods such as grain, without ever needing to convert to a local currency. Here, the transaction costs are virtually nil and the money has been transferred in an instance.

This is not a new concept. In sub-Saharan Africa transferring money between people using mobile phones is extremely popular thanks to FinTech. Here, mobile money accounts are used to make the transfer, which is facilitated by the mobile phone operators. Bitcoin – or its blockchain replacement – would remove the need for even these mobile operators.

I’m not sure if Bitcoin will survive. But I think the concept and application of blockchain technology certainly will. I believe it is only a matter of time before blockchain seriously disrupts our financial services industry for the better.