As we are about the enter the next recession after 2008 it is safe to say that the faith and trust in banks is at all time low. I think that many of you would agree with me here on this assessment and it has cleat reason why this happened. In this article I want to name my reasons for why I think the banking system will soon fail and what the successor to this system is.
Reasons For Mistrust
In order to understand the mistrust we need to investigate the ways that banks are making their money. One of the ways is as financial middle man. People are depositing their money into the bank for around 1% return. On the other side somebody who wants to borrow money needs to go through an application process and heavy background checking in order to get his loan which he has to pay 6% interest on. Now, I agree that banks need to make money somehow but because they are the most profitable companies around the world it just looks very out of proportion. Not only that but we already saw cases where the bank actually charges people to deposit their own money into the bank! For me this is straight up robbery as we are dependent on this kind of system right now.
Another but very similar way for the banks to make money is to lend their access money to other banks or companies in order to stimulate the supply of the economy. This is another very shady thing, as banks are only required to have a fractional reserve on hand. To be honest, it used to be worse as banks were not required to do that, so we could say that we are moving into the right direction. It is still a very bitter aftertaste to know that your hard earned money is actually not protected but being lend out.
This brings me to the actual loans that the banks are giving out. Let’s assume you are taking out a loan for a house that you want to buy. In order to buy this house you are basically selling a “I owe you” note to the bank for the asked price. It was shown that this money does not come from people’s deposits nor from the bank’s reserve which actually makes the bank a real money creator.
With the latest financial crisis in 2008 where banks crossed the line severely in order to become richer and causing the housing market and the whole financial system to the verge of collapse the mistrust achieved a new level. What’s more is that responsible people got bailed out and were able to continue their operations almost without any consequences. Another reason for the growing mistrust are the constant and very transparent credit card rules as well as the requirements to be able to get a credit card in the first place. It just looks like the banks are always getting their cut and it is always the biggest one.
Reaper: Fintech and DeFi
But it seem like there is Reaper waiting for these endlessly greedy banks in sight: Fintech and DeFi. With the pandemic hitting in 2020, people were required change their lifestyles and rely more on the Internet. This is where companies like RobinHood were able to step in and satisfy the growing demand for innovation. The traditional banking system is getting caught up by all of these companies because they have some advantages over the old banks.
The first one being the business model. It just seems so much easier to get exposure to the stock market in general. No need to pay high fees with your bank broker, just sign up with the next neo-Broker that is not asking for any fees at all while trading or buying stocks. It is very easy to sign up and there are almost no restrictions. Furthermore, these new companies are making it easy to invest unlike a few years ago where the banking system made it hard with all of its special words for a newbie to enter the markets.
This brings us to the next point: Technology in general is supposed to make the life of people easier. This is why FinTech is such a great asset right now. Like mentioned before, the handling of stocks and other valuable assets is becoming easier. Furthermore, there is still a lot of growing potential and it looks like the growth is accelerating very fast.
Last but not least we have to talk about the speed advantage of these young companies. Because they are young, they can move faster than regulations can get them. The best example for this is Decentralized Finance. What if I told you there is a way to borrow money without any banks, cash, stupid forms or even a credit card rating? Then DeFi is for you!
War or Partnership?
The main problem I see right now is that banks are being very stubborn and do not want to give away any of their power and money. This is a big problem as banks are very well interconnected in the current politics as well as economy. This means that there would be a very cruel and nasty war between the traditional system and the upcoming FinTech branch. With regulators probably influenced by the history and current power of the banks it would be very difficult to just get rid of the big banks completely.
But why is such a war even on the table? In my opinion both sides have their up and downsides which why I think that a partnership between the uprising system and the traditional one would make the most sense. Of course this would mean that people would still be dependent on the current system but it would be a step into the right direction in my opinion. With more and more integration of FinTech, the traditional system will be replaced anyways so why risk a full on war if you can have a smooth transition between these two systems.
Published by ga38jem on
LeoFinance
On 7th May 2022