It was originally made in the early 1990s by consultant Ed Furash in a report for the Bankers’ Roundtable but was picked up by Bill Gates, among others. And it’s true.
"When the banks closed in Wuhan, nobody cared.” – The Financial Times
Modern economies need payments, they need marketplaces to bring borrowers and lenders together, they need the means to create money and manage the risk of funding long term investment with short term lending horizons.
Banks have traditionally done all this. But there’s no universal law giving them that privilege.
As in so much, the COVID-19 crisis has provided an intense crucible for financial transformation and it has tested this maxim. And indeed, modern economies do not need banks.
Digital banking maven Chris Skinner, who has tackled this theme at length, pointed out a great headline in The Financial Times (FT) recently: “When the banks closed in Wuhan, nobody cared.”
He noted during the initial lockdown in Hubei province, where the pandemic originated, the functioning of this modern economy barely felt the closure of banks.
According to the FT: “ATMs remained functional and most banks in the area offered some form of online banking. But many people in Wuhan said the payment applications they use — Alipay or WeChat Pay — were enough to get them through the crisis.
“We don’t need the banks anymore. If they close down, we don’t pay attention,” said one Wuhan resident who works as a driver. Another resident, a woman in her late 20s, said in early April: “I can’t remember the last time I went to the bank.”
This would not be the case in almost every advanced western economy where the traditional banks remain more deeply entrenched in daily financial life. Indeed, in Melbourne where I reside and a new, more intense phase of lockdown has just been brought in, banks are considered an essential service and their role explicitly recognised by state Premier Daniel Andrews.
But just because every function of a bank can theoretically be done by another entity, that won’t mean banks will disappear.
Even in China, banks still have a role. As the FT said: “online payments accounts require users to link to a bank account, and many companies still pay their employees through banks”.
But the FT added the rider this role is not best one. This is the risk that threatens any bank. Not that they will be eliminated but that they will be relegated to subordinate roles, reduced to low margin utility functions, and will lose the crucial direct relationship with customers.
This was actually the threat Furash’s original report addressed. At the time the big fear was payment schemes like American Express or software giants like Microsoft would play the role of Alibaba or Tencent and take over bank functions and, even worse, relationships.
Yet they didn’t. They did take over small banks, to give themselves the required banking licences, but never took on the full roles of banks. Today the most likely giant engulfer in the west is Amazon.
Tech industry analysis site CB Insights has kept close tabs on Amazon with several reports.
The firm analysed how the tech giant has expanded its finance-related reach in 2020 alone:
- In January, it announced customers will be allowed to pay for gas at Exxon and Mobil gas stations through Amazon Pay
- It partnered with OTG in March to deploy cashierless tech at select airport stores and is reportedly looking to do the same with Regal Cinemas
Most recently, it inked major deals with Goldman Sachs and ING to issue small to medium-sized business loans up to $US1 million.