No better show of force could have been shown by the banking establishment than removing Russia from the SWIFT system. In the absence of this global system, Russian banks will be unable to process global payments.
SWIFT is a messaging system (like email) used by 11 000 banks in 200 plus countries.
To be removed from this system can be considered the ultimate punishment by the global banking authority, yet even this action will not stop Russia from accessing the financial system.
According to some media reports, Russian entities are preparing to blunt some of the worst effects by making deals with anyone around the world willing to work with them.
And, they say, those entities can then use digital currencies to bypass the control points that governments rely on — mainly transfers of money by banks — to block deal execution. In Russia, cryptocurrencies are becoming an important tool in lessening the impact of sanctions.
This illustrates the extent to which the power of banks is waning due to technological advancements. This point was made by one financial giant leader during her talk with the Bank of England four years ago.
In a speech delivered at the Bank of England conference, the managing director of the International Monetary Fund, Christine Lagarde, highlighted the impact of technology on the banking sector.
She highlighted three areas where financial innovations could impact banks: (1) virtual currencies; (2) new models of financial intermediation; and (3) artificial intelligence.
On virtual currencies, she made the point that they allow for peer-to-peer transactions without central clearing houses, without central banks. This is a very critical role that is played by central banks.
The challenge with cryptocurrencies, however, has always been the adoption by wider society.
In this regard, she pointed out that “citizens may one day prefer virtual currencies since they potentially offer the same cost and convenience as cash – no settlement risks, no clearing delays, no central registration, no intermediary to check accounts and identities.
If privately issued virtual currencies remain risky and unstable, citizens may even call on central banks to provide digital forms of legal tender.
On the issue of financial intermediation, she highlighted the role of new models of financial intermediation.
According to Lagarde, there’s a possibility of a break-up or unbundling of banking services. In the future, she indicated that banks might keep minimal balances for payment services on electronic wallets. She pointed out that remaining balances may be kept in mutual funds or invested in peer-to-peer lending platforms with an edge in big data and artificial intelligence for automatic credit scoring.
The leader of the global financial giant wrapped up this point by saying, “some would argue that this puts a question mark on the fractional banking model we know today”.
Her last key point was about the role that will be played by artificial intelligence. She pointed out that over the next generation, machines will almost certainly play a larger role in assisting policymakers, offering real-time forecasts, spotting bubbles, and uncovering complex macro-financial links.
Looking back, this talk by Lagarde is an important reminder to the banking establishment that the world of banking is heavily impacted by technology to an extent that it’s decimating some functions that were key for the banking sector in the past. Of course, at the time she was addressing the central banking community.
Fast forward to 2022, the banking sector has felt some of the predictions by Lagarde and will soon witness some of them.
The retail banking sector has tried to remain relevant by innovating, however, for many this has not yielded desired results. Some banks have tried to innovate from within, but few have succeeded.
Banks have tried to add the technology layer on top of the old banking foundation, which has only resulted in opaque banking solutions.
Some banks in the quest to be relevant have tried to acquire fintech companies, only to frustrate them once they are within the banking system.
What seems to have worked are pure tech companies that tried to develop solutions with new models. These companies have not merged with old banks, but stayed vanilla and truly innovative.
All these factors highlight one thing for the banking establishment: the writing is on the wall. The future of banking will not remain the same.
To remain relevant banks need a complete overhaul. They are no longer as powerful as they once were.
Wesley Diphoko is editor-in-chief of the Fast Company (SA) magazine.
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