Banks are one of the engines of the modern economy
But the way they work is under threat
Tech-payment giants and digital currencies…
…are revolutionising how people use money
And this could have dramatic consequences…
…far beyond banking
It could affect consumer privacy…
…government power…
…and the stability of the entire financial system
It is difficult to overstate…
…sort of how radically different that world could be…
…from the one that we live in now
So what would a world without banks look like…
…and would you even miss them?
The fundamental principles of banking…
…have been the same for centuries
...and revolve around the greatest magic trick of all…
…how to create money
It’s called fractional reserve banking
Here is how it started
Hundreds of years ago banks stored gold for investors
But they realised it was unlikely…
…everyone would claim their gold back at the same time
So they began to loan some of these gold deposits…
…out to other people
This made money for the bank through interest
And helped power the economy…
…by allowing idle deposits to fuel new business and trade
As time went on, the banks started issuing bank notes…
…or IOUs—rather than physically giving out gold
And these IOUs started being traded in the economy
This meant the amount of money in circulation…
…was much larger than the value of the gold held by the banks
So the banks’ lending had in effect created new money
Nowadays, most money is digital
When the bank makes a loan…
…it creates a new asset on its balance sheet
And credits the borrower’s account with new funds…
…which creates a new deposit
The fundamental principle is the same
Every time the bank makes a new loan it creates new money
In fact, 90% of money in the world is digital deposits…
…that have been created by banks in this way
This is hugely important for the economy
What it means is that banks are able to respond…
…to demands for money in an economy
And that means that the supply of money in the economy…
…is very elastic
There is no set amount of money in circulation
So if the economy is booming and more goods are being created...
…then thanks to fractional reserve banking…
…the supply of money should also increase…
…as people take out loans and make new investments
The ease with which commercial banks can create money…
…is largely controlled by central banks
…like the Federal Reserve, which set interest rates
If interest rates are high…
…banks pass those costs onto borrowers
This makes it more expensive…
…for them to borrow money to buy things…
…and so banks create less new money
Central banks also supply money for use in the economy
They print the physical paper cash people carry around
And so banks and central banks balance the need…
…to create money between them
That sort of balance…
…means that, you know, money can grow easily with demand…
…but also that the central bank has sort of a direct presence…
…in payments and transactions
But this delicate balance is under threat…
…thanks to a revolution in the way people use money
For a start…
…an increasing number of businesses…
…no longer rely on banks for loans
This is because businesses, historically…
…used to create concrete assets—like machinery…
…against which banks were happy to lend
They could always claim the assets…
…if the borrower stopped repaying
We know you are reliable
I’m glad you think so
But intangible assets like software…
…can’t easily be posted as security for a bank loan
The world has shifted in a way…
…that does makes it hard for banks…
…to fund the, sort of, most innovative parts of the economy
If you want to get funding as a Silicon Valley startup…
In general, you’ll need to go to people who are equity investors…
…so they take a slice of your business…
…in return for some money
And it is not just innovative startups…
…that are turning elsewhere for funding
Since the 1950s the share of bank loans…
…as a percentage of GDP…
…has been relatively stable
At the same time, non-bank loans and securities have risen sharply
This means the role banks play…
…in financing important businesses is receding
And that’s not all
The way people move and spend their money…
…is changing too—thanks in part to a new class…
…of mega-apps from China
One of the most popular is Alipay…
…from Chinese tech giant Ant Group
It has over a billion users and handled $16trn in payments in 2019
I am Alipay
I have a dream…
…to create a world where mobile payment replaces cash payment
Rather than using bank cards to make payments…
…Alipay customers carry out transactions…
…by loading money into digital wallets
They can then do anything from buying lunch…
…to investing in stocks and shares—all without leaving the app
And rather than paying expensive international transaction fees…
…to their bank…
…Alipay users can also use the app overseas
You’re already seeing this even in America
You know, Walgreens in the States accept Alipay
This, sort of, new digital payments ecosystem…
…sort of completely disregards nation states and national borders
It’s not just Alipay
Facebook is developing its own digital currency…
…and Amazon is also working on financial services
Some worry this could concentrate too much power…
…in the hands of a few tech companies
But, for central bankers, the problem is even more acute…
…they fear these developments could cut the cord…
…between the central bank and the economy altogether
The super apps in China, they started off just doing payments…
…and now they do provision of loans…
…they do provision of investment services, they provide insurance
You know, they do all the things that banks do
Central bankers feel as though their, sort of, ability to oversee…
…and conduct monetary policy…
…and oversight is, you know, fundamentally slipping away
So some central banks have taken radical action…
…by creating their own digital currencies…
…to rival the tech giants’ payment systems…
…in the hope this will secure their grasp on the economy
Central bankers’ level of discomfort…
…is potentially prompting them…
…to, sort of, act to change this, you know, economic system…
…the monetary system that has underpinned modern economies…
…for, you know, 250 years
China is one of the largest economies leading the way…
…by trialling a digital yuan
You might have heard of Bitcoin…
…or other digital money…
…that is supposed to disrupt finance
But digital currency issued by governments…
…in this way might be even more radical
Here’s how it works
Most central-bank money is held by commercial banks…
…as reserves against customer deposits
You can only access…
…a small amount of this government-made money…
…via physical notes and coins
As this physical cash is issued by the central bank
In the UK…
…bank notes are even signed…
…by the chief cashier of the Bank of England
A central bank digital currency—or CBDC—is a bit like digital cash
…as it gives the consumer…
…a direct relationship with the central bank
So in theory, instead of keeping your money…
…in a commercial bank…
…you could hold all your money…
…in the Federal Reserve or the Bank of England…
CBDCs are only being used or trialled…
…in a handful of countries worldwide
But they’re growing fast
80% of central banks are considering issuing them in the future
The Bank for International Settlements…
…which is a club of central bankers…
…says that within three years…
…a fifth of the world will live in countries…
…that have this central-bank digital money
This could change everything
If everyone put their money into a CBDC…
…then fractional reserve banks could potentially be out of a job
This could affect economic growth…
…as they could not rely on consumer deposits…
…to finance their loans
And this would be particularly pronounced…
…in the developing world…
…where most lending still comes from banks
But that’s just the beginning
There are also concerns about potentially, you know, cyber-warfare
Because if you can take down the servers…
…that support the central bank digital-wallet system…
…then you could shut down an entire economy
Digital currencies could also increase the potential…
…for state intervention in everyday transactions
It becomes much easier for governments…
…to completely block your ability to pay for something
It’s very easy to imagine…
…that, you know, perhaps you could program, you know…
…money in China…
…so that it can’t be used to pay for books or newspapers…
…from foreign sellers
Supporters of CBDCs…
…claim they could lead to a world…
…where more people have access to financial services
…and it’s cheaper and easier to move money…
…across borders
But innovations like this…
…could also disrupt the financial equilibrium...
…and give governments far greater control…
…over their citizens’ money and lives
So, although it’s possible for the first time in modern history…
…to imagine a world without banks…
…you might just find you’d miss them…
…if they were gone
I’m Alice Fulwood…
…the Wall Street correspondent for The Economist
If you would like to read more about the future of banking…
…I’ve written a special report on the subject…
…that you can find by clicking the link
And thank you for watching