“The digital chasm will claim 80% of the world’s bank within 20 years.” This statement may be far-fetched but the thinking behind it is worth considering, writes Brian Caplen.

If you want to get the audience’s attention at a banking conference, telling them that out of roughly 30,000 banks today only 6000 will be left by 2038 is an effective way to start. The founder and CEO of digital payments start-up Koine Finance, Phil Mochan, kicked off in this way at the Brand Finance banking forum in London.

The first reaction of bankers to this kind of claim is bound to be defensive, but given the challenges facing the industry surely every future insight – no matter how unpalatable – deserves serious consideration. Mr Mochan’s numbers and timeframe may be awry, but what about his reasoning?

The argument is that of the three main banking functions – taking deposits, arranging payments and allocating credit – only the first requires a banking licence. Technology allows new players to do all three things faster, cheaper and better than banks and by splitting them up these new entrants can mostly avoid the expensive task of obtaining a licence.

In this scenario, new ‘reserve’ banks take on the role of collecting deposits, especially those of high-net-worth individuals that are not covered by deposit guarantee schemes and so need a safer home. Reserve banks would not create money by lending deposits out but would invest them in liquid and secure treasuries, in other words similar to how a money market fund performs.

Continuing the hypothesis, the payments slice would operate across a blockchain with a single source of information free from clearing, settlement and fraud risks. Non-banks can do this cheaper than banks as a result of the centralised technology and since they are free from the costs of anti-money laundering compliance. (There are doubts about the viability of this, see my blockchain blog.)

Finally, a variety of alternative lending models (peer to peer, crowdfunding, marketplace and direct lending) serving a fragmented consumer and business market replaces the old banking model of retail, commercial and SME lending.

The result would be a massive consolidation in the banking sector as banks lose their deposits and transform into payments agents.

Now it is unlikely to happen exactly like this. But all the time we hear that bankers are keeping their organisations on the ball by cannibalising their own business model. They now need to up their game and do some scenario planning for a cannibalisation of the entire sector.  The results can only be helpful in planning for the future.

Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen

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