Fintech’s third wave is building, and it could wash away the systems we’ve used for money management since — well, forever. In May, the U.S. Federal Reserve closes the comment window for Money and Payments: The U.S. Dollar in the Age of Digital Transformation. The whitepaper marks the first step in a public discussion between the Federal Reserve and stakeholders about central bank digital currencies (CBDCs). It’s only the initial stage of what will be a long process, but in the end, this process could revolutionize money management and create lucrative opportunities for technology companies.
Fintech’s first wave started half a century ago with the introduction of automatic teller machines (ATMs). Many predicted ATMs would make bank tellers obsolete. In reality ATMs made the banking industry more efficient, enabling it to grow. While it’s true ATMs reduced the number of tellers needed at each branch office, the banks invested the resulting savings in building new branches to better serve their customers. These new branches needed tellers, so while the number of tellers per branch decreased, the overall number of tellers increased with the proliferation of new branches that accompanied ATMs. Check out Learning by Doing: The Real Connection between Innovation, Wages, and Wealth by James Bessen if you don’t believe it.
The Second Swell
Fintech’s second wave crested from the late 1970s to the mid-90s with the expansion of the credit card business. According to a U.S. Federal Reserve bulletin, Credit Cards: Use and Consumer Attitudes, 1970–2000, only 16% of American families had credit cards in 1970. This grew to 68% by 1998. Those of us who lived through that period remember the places you couldn’t pay with credit, but by 2000, nearly all locations accepted credit cards.
The past decade has seen the growth of payment apps that enable us to pay with our smartphones. These add a layer of convenience and security to our transactions. We no longer need our wallets, and if our phones fall into the wrong hands the security measures make unauthorized use difficult. These apps are innovative, but in the end, they amount to new interfaces for accessing credit and debit card networks, continuing fintech’s second wave.
The Third Surge
Fintech’s third wave is blockchain-based. Blockchain enables each of us to own our data versus having our data collectively lumped in with everyone else’s and centrally stored on server farms. This means it is technically possible for the U.S. government to create money in the form of a cryptocurrency, and for users of the currency to electronically transact with one another directly, without using the banking system.
While it’s technically possible to do this, there are critical issues to consider. For example, an important function of banks is to provide credit to the economy. The banks take in deposits, keep a portion of those deposits on hand to satisfy withdrawal requests, and lend the rest out to customers looking to build a business, buy a home or other needs.
If people were to stop using banks because their digital money was on a blockchain created by the Federal Reserve, banks would not have money to lend. If banks couldn’t lend how would businesses grow? How would people purchase houses and cars? This is just one of the important issues raised in the Federal Reserve’s whitepaper.
In May CTA’s Technology Council will convene to discuss the whitepaper and fintech to see if there is more CTA should be doing to address this important topic. Join us on May 10-12 in Arlington, VA