When you read the words “fractional reserve banking” you are often in for “the system is evil and Bitcoin is the revolution”.
I promise you that this is not one of those posts.
I do believe that the business model of fractional reserve banking will be replaced by something else, but it will not necessarily be anything to do with Bitcoin.
My question is more to do with business model than technology:
I see two types of service with fundamentally different models:
- Automated Asset Liability Management (ALM) via Marketplaces to Replace Term Deposits. This is what Lending Club etc do. It is the same monetization model as Banking – the intermediary charges a spread. The difference is simply that the marketplace model is lower cost (the market place takes no ALM risk) and so the spread is less. The math of lower costs = tighter spreads = better rates for both lender and borrower is what creates the network effects and massive valuation of ventures like Lending Club. It is hard to imagine the marketplace model not winning. The marketplace model has no systemic risk. A Lender may lose money, but this does not threaten the marketplace. This is like a stock exchange, where even meltdown like crashes (eg September 2008) are not a threat to the stability of NYSE and Nasdaq.
- Pre Paid Digital Wallets to Replace Demand Deposits. The model today is statistical modeling with public insurance as a backstop. The chance of every customer wanting their money out at the same time is statistically unlikely and to guard against that remote possibility (a run on the bank) we have taxpayer funded insurance. There is political and therefore regulatory pressure around this. Pre Paid Digital Wallets can be free, in the same way that SAAS vendors use Freemium. The cost is almost free and falls lower thanks to Moore’s Law. This dramatically increases demand by bringing the Underbanked into the market (as proven by M-Pesa). You then sell fee based services to some % of your free users. The models, metrics, techniques and tools of Freemium are now proven and mature.
“Don’t fight free” is a big lesson of the Internet.
Banks borrowing business models that are digital native is one of the reasons why Banks are reaching out to Fintech startups and being respectful of the culture of a bunch of youngsters with a fashion sense that most bankers don’t instinctively feel comfortable with.