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How Digital Technology Will Bring the End of Traditional Banks

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Digital technology has introduced a new era of innovation that will change consumers’ relationships with banks. What many people both inside and outside the banking industry do not realize is that these changes could, in fact, bring the end of banks as they have existed for centuries.

MIT

Alex Lipton, David Shrier and Alex Pentland of the Massachusetts Institute of Technology’s Connection Science & Engineering recently authored a paper titled, “Digital Banking Manifesto: The End of Banks?”

The paper begins with an overview of what purpose banks serve, followed by a summary of digital technology’s impact on banking to date, and an overview of what future changes are to be expected, including the possible disappearance of banks.

What Is Banking?

Banking is the skillful record keeping in a double-entry general ledger. Banks can be seen as dividend producing machines that seek deposits and issue loans at the micro level. At the macro level, they create credit money.

Successful bankers are able to attract a large pool of reliable borrowers. They also have to attract long-term depositors who they must serve well retain the deposits. Otherwise, the bank exhausts its liquid reserves and defaults.

Digitization Suits Banking

Because banking activity is mathematical and technological, it is suited to digitization. Nonetheless, legacy systems inhibit banks from embracing innovation to survive in the digital economy.

Mobile banking

While other industries such as communications, mass media, retail and travel have changed their business models in the last 30 years, banks are static. As a result, customers are generally dissatisfied with banks’ customer service.

Negative or zero deposit rates have made keeping money in the bank risky and unprofitable.

There is also a large group of people in undeveloped countries who are unbanked or underbanked since traditional banking systems are not flexible enough to address know your customer (KYC) needs or assess credit worthiness.

‘Digital Bank Of The Future’

Developments in mobile telecommunication adoption and data technology portend a third wave of banking innovation, the “Digital Bank of the Future (DBF).”

The first wave of digital innovation in banking were the “incrementalists.” The mid-1970s brought the ATM. The concept was to deploy machines to process transactions. Banks had historically had limited business hours. The ATM addressed the needs of two-income households.

Online banking came in the 1980s and gathered momentum in the 1990s with the Internet. Browser-based tools gave consumers access to banking transactions, including bank statements, money transfers and electronic bill payments.

Internet banking gave rise to the dedicated Internet bank such as NetBank.

Digital hybrids like NetBank brought the second wave of digital innovation. These hybrids took advantage of front-end systems to connect with consumers, but they were hindered by legacy back-end infrastructure, labor models and risk modeling systems.

Other hybrid banks used purpose-built IT that was less costly than legacy banks. But these “digital hybrids” still used centralized databases, primitive user data protocols and cloud-based storage. They marked a bridge between the legacy bank and the fully-digital bank.

New Technology Arrives

A new set of technologies has emerged allowing banks closer integration with consumers’ lives, access to the 2.5 million underbanked or overbanked, and more financial flexibility for the 45 million small and medium-sized enterprises (SMEs).

DBF will use the new technology to address the 50-year -old and under generation that grew up with computers. A mobile-first strategy will deliver ease of access and fast adoption. DBF will dispense with a central data depository that can be easily attacked. Instead, it will use an encrypted distributed system.

What Role For Banks?

The question arises: what role do banks have in the new economy? Is fractional banking facing its end with the introduction of government-issued digital cash that can be stored in digital wallets outside of the banking system?

On the retail side, DBF must provide the following:

• A holistic, intuitive, interactive overview of the customers’ money, encompassing their financial life, including information on their current account and deposit balances, recurring payments, pension contributions, transactions, outstanding loans and securities accounts.
• A holistic digital experience for customers, including paperless application and passing the KYC process. This includes an intuitive, interactive financial planner to organize financial life and optimize resources. It will provide immediate cash flow needs, tools for automatic savings, education, retirement, medical expenses, robo-advisory services, and tools for trading securities. This digital experience will empower customers to electronically apply for a mortgage and access competitive insurance contracts.
• Mobile e-payment solutions, such as domestic and international payments and remittances, peer-to-peer payments and automatic bill payments.
• Seamless and inexpensive foreign exchange services, such as protection against exchange rate fluctuations by offering multi-currency accounts. A full range of instruments will allow for hedging against foreign exchange risks, such as spot contracts, forward contracts, swaps, and exchange-traded options.
• Biometric technology like face and voice biometrics.
• A bank e-credit card based on customer preferences with pre-set limits and permitted transactions. This will include an electronic ID for secure online purchases, and tools to view, pay, analyze, organize and archive e-bills, and generate tax documents.
• Access to “crowd-everything” including P2P lending and payment opportunities.

Digital Banks’ Advantages

Digital banks have no real estate overhead or the need to spend on legacy IT systems. They expect to grow multibillion-dollar balance sheets with a fraction of staff compared to traditional banks.

The U.K.’s Atom Bank plans to grow into a £5 billion balance sheet business in five years with 340 full-time staff, compared to legacy bank Metro, which has the same size balance sheet with 2,200 people.

Digital banks can generate value in the following ways:

• Digital payments include mobile, online and P2P interactions. They allow banks to raise fees and interest income and connect with a broader set of customers with more diverse services.
• A digital wallet is essential for digital ecosystems built on value-added services. It optimizes funding costs for banking operations and transaction costs for customers.
• Artificial intelligence (AI) assisted sales of banking products include loans, mortgages and deposits that are conducted through direct channels, such social media.
• A seamless multi-channel approach to sales improves the bank’s share of customers’ wallet, strengthening customer loyalty.
• An AI-based digital financial planner manages monthly income, savings and investments, and recurring payments, increasing interaction between the bank and its customers. The bank serves as a trusted source defining financial needs.

• Robo-advisory services optimize investment portfolios based on individual goals and preferences.
• Advanced analytics enables the bank to transform its data into more personalized client services aimed at data monetization.
• AI- and Big-Data based credit models allow risk-managed provisioning of credit access to SMEs, banking the underbanked SMEs. By 2018, banks in Western Europe are forecast to have half or more of new inflow revenue from digital-related activities in most products.

What The Future Holds

projecting the future

A digital bank will be a cross between a fintech company and a bank. A digital bank can be organized into five divisions: retail banking, private and business banking, analytics and IT, finance management and operations, and risk management. The relationship between the divisions is different in legacy and digital banking, with IT and analytics being the cornerstone of digital banking. Success is measured by technologies and analytical methods rather than the product line.

Digital banks will include the following:

• Novel IT infrastructure. Building a digital bank from scratch allows the creation of a flexible IT infrastructure, providing state-of-the-art risk management. This can optimize the balance sheet to achieve a return on capital higher than the return of the incumbents, guaranteeing compliance with changing banking regulations in real time.
• Database design. Database technology based on a distributed ledger framework can cope with the growth in data, new Internet technologies and analysis methods.
• Advanced data analytics. The bank can consolidate data across deposits, consumer finance and other accounts for a unified view of customer activities. Customers’ in-store payments are more accurate than conventional profile data in predicting their future financial activities and credit worthiness.
• Artificial intelligence. Autonomous selection of best methodology when presented with arbitrary data lets banks build financial profiles of its customers, including debt capacity, credit worthiness, and risk appetite for financial planning. AI can present the best offers at the right time, changing as the customer evolves.
• Security and discretion. Security and protection is a competitive advantage for digital banks compared to other financial service providers.

Digital Bank Constituencies

Digital banks have natural constituencies. These include consumers with at least an undergraduate college education and digitally educated consumers who will form the foundation of the customer base for the digital bank.

Central and private banks are actively pursuing the creation of digital currencies. Considerations for this dimension are:

• Non-bank digital currencies. Bitcoin is not suited for high volume transactions due to its low transactions per second capacity. Other digital currencies based on consensus achievable by means other than proof-of-work will be used in digital banking.
• Central bank digital currencies. Several central banks are exploring whether a state-backed digital currency can reduce capital outflow, tax evasion and money laundering, making economic activity more transparent and efficient. The free or inexpensive deposits commercial banks have benefited from will disappear.
• Private bank digital currencies. Advances in digitization have made private bank currencies a viable idea. Bank of Tokyo Mitsubishi UFJ (MUFJ) is developing its own digital currency and a smartphone application to authenticate digital tokens on a P2P platform.
• Distributed ledger. Distributed ledger reduces transaction costs, improves the resilience of the system and mitigates operational risks. Distributed ledger will be part of operational procedures of a digital bank and its interactions with other digital banks.

Also read: Successful banking blockchain test shows core banking possibilities

Future Financial Ecosystem

A well-designed digital bank will be the cornerstone of a much larger financial ecosystem. Insurers, wealth managers, brokers, credit card issuers, robo-advisors, cross-border payment providers, P2P lenders and currency exchanges will all be part of the ecosystem.

The ability to satisfy the financial needs will be enhanced by access to a wider financial system through the digital bank. At the same, the bank will benefit by gaining additional information about customers’ habits and needs, thus closing the information feedback loop.

Digital cash issued by a bank can provide a lubricant allowing the wheels of commerce to spin faster and more efficiently. In addition to financial businesses, a digital bank can incorporate into its ecosystem various non-financial actors.

All such developments will enhance the social utility of the bank and its appreciation by the public while improving its profitability.

Banks Have Competition

Banks have to realize competition for their customers’ digital wallet is coming from current digital champions, such as Google, Amazon, Facebook and Alibaba.

The key is to have customer-centric data across all areas of life, held in a standard format with standard APIs working across all the digital ecosystem and not just its financial services. Given the rather uncertain and limited capacity of P2P networks to provide credit, digital banks have to come to the rescue.

The legacy banking model will need to disappear over time. But in the transition, digital banks will have a role in daily life as transaction lubricants and enablers.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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3.9 stars on average, based on 8 rated postsLester Coleman is a veteran business journalist based in the United States. He has covered the payments industry for several years and is available for writing assignments.




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Analysis

Has Ethereum Lost Its Cache?

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For all of us believers that asset prices are set by fundamentals rather than fantasy, these are perplexing times.  Crypto prices are not only way off their January highs, they are at the lowest level this year. Progress in addressing issues like scaling and security may be slow, but they are taking place.  The cooperation between crypto and government regulators is improving in big chunks.

Yet, while all this is going on crypto technicals look terrible. Everyday technical analysts use words like downtrend and overhead resistance.  When prices have rallied, the joy is short lived, lasting only for a day or two. Even on good days, the moves are weak on low volume.  This is never a good sign. Long gone are the kind of investor fears about missing out (FOMO) that we saw last year.

There are fundamental reasons for skepticism for long term believers, as the data has not been going in the right direction.  True, projects are progressing a slow pace. This maybe good for avoiding problems with security etc., but for investors who want immediate gratification, right now crypto isn’t ringing any bells.

But truth is, crypto markets appear to be unresponsive even to seemingly good news. Take for example this recent Cryptovest headline: Cardano (ADA) Releases New Version, Price Remains Stagnant.   Today, crypto exchange Coinbase announced it was increasing daily trading limits sevenfold, changing settlement times from days to instantaneous and finishing its beta before accepting Ethereum Classic.

At the time of this writing, Bitcoin had fallen over 8% in the previous 24 hours while ETH was off almost 10.5%.  This marks on of the worst days for crypto in quite a long time.

Drilling down a bit into ETH reveals some core softness.  Since virtually the entire crypto pricing stinks there is more than a single cause to Ethereum’s weakness, but here is a start.

Using DappRadar To Measure Ether Demand

According to Business Insider, there were over 930 ICOs last year that raised anywhere from $3-$5.7 billion depending on which resource you listen to.  In the first quarter of 2018, there were roundly another 200 raising over $6 billion. These numbers make for great headlines but there is one problem.  They have not translated into higher prices for Ether, or any other crypto either.

The Ethereum platform can claim that somewhere between 70%-80% of ICOs that have Dapps built on the ETH platform.  If logic were applied, this should result in greater demand for Ether. But as the truism goes, if everything were logical, men would ride sidesaddle!

One of the clues to unlock this contradiction may rest in the use cases for the most active Dapps.  What I an getting at is this: when the top five Dapps function as exchanges to buy and sell Ether or any other ERC-20 token, that is not a sign of mass adoption. Nor is it good when almost 75% of the activity in the top five is accounted by three Dapps and those are exchanges. And finally when volume on nine out of the top ten are trending down, it is not what investors want so see.

To keep some balance to these observations, there are some positive use cases.  Three of the ten most active Dapps are for gamers, and that is a use case worth it weight in any currency. Also, usage levels tend to be quite volatile from hour to hour so we may have checked on an atypical moment.  But what we want to see are use cases like marketplaces or even gambling where user demand trumps speculators and where activity is growing.

What Is Happening With Augur

And speaking of gambling, Ethereum big gun Augur, which allows users to create prediction markets for just about anything by buying shares and staking ETH in the outcome of an event.  When launched in early July nearly 1,200 were traded in a 24 hour period. At the time Augur appeared to be one of Ethereum’s most promising Dapps.

To be clear, 1,200 is just a benchmark and not proof of success or failure. However, when Augur, one of your most promising Dapps, is being used less than 100 a day with a huge valuation of over $300 million, that is a disappointing moment.

What Ethereum Needs

So what is missing here?  From the insights offered by DappRadar, the answer is that ETH, and for that matter crypto in general, is hungry for valid signs of a breakthrough in mass adoption. In other words, developments in the payments side of crypto could well provide the needed solution. There is no shortage of projects like Bitcoin Superstore and TenX.  And there is always the possibility that the critics of Augur are premature in claiming this potentially game changing Dapp is a disappointment. But so far all of the flashy new whitepapers and highly valued ICOs aren’t connecting with investors. It is time for proof that actual crypto users are getting into game.  And obviously, what is good for ETH is also needed by other players as well.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.4 stars on average, based on 96 rated postsJames Waggoner is a veteran Wall Street analyst and hedge fund manager who has spent the past few years researching the fintech possibilities of cryptocurrencies. He has a special passion for writing about the future of crypto.




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Altcoins

MB Technology and GoChain Partner to Accelerate Innovation on the Blockchain

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MB Technology has recently announced that it is committed to bringing $500 million USD worth of ICOs to the GoChain platform. MB Technology is an expert ICO advisory firm that has advised blockchain projects with a combined valuation of over $2 billion in several industries. Some of the companies that they advised include Fantom, Origo, GoChain, QuarkChain, CoinSuper, Icon and other top ICOs.

The company is committing $500 million to GoChain because it has already launched it’s mainnet functioning at 100 times the speed of Ethereum while being 1,000 times more energy efficient. GoChain is fully compatible with existing Ethereum wallets, smart contracts, dApps, etc. Two companies have already chosen GoChain to launch their ICOs: Solaster Health and Etherprise with a combined value of $63 million.

GoChain has hit the ground running. While many blockchains are still trying to finish up their technical whitepaper or have yet to launch their mainnet, GoChain is way ahead of the curvey. Although blockchains are competing to deliver the fastest Transactions-Per-Second (TPS), they nothing without the dApps that build on them. While speed is important, most blockchains releasing now are more than capable of handling sufficient TPS for production dApps. The dApp ecosystem built on top of a blockchain is just as important, if not more, than the speed of the blockchain itself.

ICOs struggle to build on new blockchains as there are not many well-defined standards. GoChain’s codebase is 100% compatible with Ethereum so any dApp that can or has been built on top of it will easily port to GoChain. This makes it easy for existing Ethereum apps to move over to GoChain and immediately work 100 times faster. A few blockchains build amazingly fast transacting software yet have no use cases or a dApp ecosystem building strategy.

With MB Technology bringing half a billion dollars to GoChain, the coin is extremely undervalued. Compared to other projects on CoinMarketCap, GoChain should be at least in the $100 million market cap range. Competing blockchains talk about overtaking Ethereum, yet GoChain has a working mainnet with dApps being added at a blinding rate. GoChain is one of the most underestimated and undervalued blockchains at this time. Look for GoChain to grow to five to ten times in the next few months from its current market cap of $19.4 million. GoChain is currently only on Kucoin. Look for it to list on other exchanges as it gains daily trading volume.

MB Technology offers advisory services to bring specific solutions designed to boost a project’s outcomes. They also create global investor awareness through their network of partners, influencers, and media outlets.

Disclaimer: Writer does not own GoChain. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 49 rated postsKent Hamilton - ICO Analyst on Hacked and Co-Founder of SpryOne - Loyalty Platform on the Blockchain




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Blockchain

Crypto Proxy Stocks Rise With Broader Market

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The cryptocurrency market’s sudden revival has triggered a large rally in crypto proxy stocks, a broad cluster of companies with direct and indirect exposure to blockchain technology. After a bumpy few months, blockchain-branded firms are once again rising in lockstep with bitcoin and the broader digital asset class.

Crypto Stocks Jump

Stocks tied to cryptocurrencies have traded sharply higher in recent days, with the likes of Riot Blockchain Inc. (RIOT), HIVE Blockchain Technologies (HIVE) and Marathon Patent Group Inc. (MARA) among the best performers.

Riot surged more than 20% on Tuesday en route to fresh two-month highs. Share prices surged 11.7% on Monday.

HIVE, the first publicly-listed blockchain infrastructure firm, jumped more than 11% Tuesday and is up more than 23% this week. The penny stock is proposing a business model that aims to bridge the gap between distributed ledger technology and capital markets.

Marathon’s share price rose 19% on Tuesday after gaining 9.2% in the previous session. Marathon was one the first miners to secure a listing on the Nasdaq.

Nvidia Corp (NVDA), an S&P 500 component, rose by as much as 2.2% Tuesday after falling in each of the last two sessions. The California-based chipmaker generated $289 million in sales to cryptocurrency miners during the first quarter, far exceeding forecasts of $200 million. The company has warned that mining sales are likely to fall sharply in the July quarter.

Bitcoin’s Comeback

The price of bitcoin is once again showing signs of life after blowing past $8,000 earlier in the day. The gain not only sparked a wider relief rally among cryptocurrencies, it put crypto proxy stocks on the fast track to bigger gains.

With the exception of Nvidia, which is far more diversified than some of its blockchain peers, many of Wall Street’s crypto players are small- and medium-sized firms that have struggled to make headway during the market downturn. Although blockchain companies for the foreseeable future will continue to be steered by cryptocurrency prices, their long-term trajectory is more favorable as distributed ledger technology gains wider acceptance.

Current market leaders in blockchain technology include Ripple, Chain, Coinbase and Bitmain. Over the next five years, market researchers expect the industry to grow manifold with the likes of Microsoft, IBM, Amazon and Deloitte entering the picture.

As Hacked reported July 9, China’s Bitmain has become the largest blockchain-focused company in the world following a series of strategic acquisitions. The company says it is open to the idea of an initial public offering (IPO) after rivals Ebang and Canaan Creative announced plans to go public.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 547 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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