Where Finance Finds Its Future

This year marks the twentieth anniversary of the PayPal IPO. At the time, the failure of the conventional payments industry to respond to the epic potential of e-commerce on the Internet surprised even the more thoughtful bankers. Two decades later, that institutional inertia looks negligent rather than surprising. The loss of payments revenues by banks to technology companies represents a loss of shareholder value that far exceeds what the owners of banks lost in the financial crisis of 2007-08. With e-commerce continuing to grow, especially across borders, the frenzy created by the indifference of the banks continues. It is estimated that there are around 10,000 payment service providers (PSPs) of various sorts – acquirers, processors, facilitators, aggregators, gateways and digital wallet providers – now contending for pieces of the payments industry around the world. Yet the so-called revolution in payments amounts to no more than twin measures of the negligence of the banks: an increase in customer convenience that the banks should have provided plus a massive transfer of value from the owners of banks to the owners of technology companies. Every one of those 10,000 PSPs relies either on existing payments infrastructures or existing payments banks to provide a service. They are parasitic rather than transformational. A truly transformational innovation would dispense with the need for bank accounts altogether. It would also jettison the continuing reliance on the existing payments market infrastructures such as card networks, automated clearing houses and central bank-operated Real Time Gross Settlement systems (RTGSs) – what payments aficionados call “rails.” Lastly, a true innovation would undermine the current monopolies enjoyed by central banks over the issue of central bank money and banks over the issue of commercial bank money. Just such an innovation is now becoming visible in the crypto-currency and Decentralised Finance (DeFi) markets, which rely on software plus the Internet plus cryptography to enable anyone to issue digital money and anyone to use it to pay and get paid directly using digital wallets. These innovations have the potential to bypass the PSPs. They also have the potential to break the central bank and bank duopoly in the creation of money, allowing multiple forms of money to be issued and used to settle claims. New forms of money could fuse payments and monies into a single process in which money is indistinguishable from payment. Indeed, both payments and monies could be reduced to mere components of a single transactional process in which goods and services are bought and sold through exchanges of data that include the exchange of value. The value created by innovations of this kind will stem not from price or service but from the fact that the transactions they facilitate create data. If that data is owned not by the innovators but by their customers, it will have the power to overthrow more than the banks and the PSPs. It is certainly powerful enough to dislodge banks from their current roles in money creation through manufacturing credit, and in the selection of creditworthy borrowers. It may even be forceful enough to shift the balance of power in capitalism altogether, by making buyers more powerful than sellers.