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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.

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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?”

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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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4.8 stars on average, based on 4 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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Altcoins

DragonChain (DRGN): Release the Dragons

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DragonChain (DRGN) was originally developed at Disney in 2015-16 and was later released as open source. DragonChain ICO recently ended and the value has climbed considerably, even though it is still only listed on Etherdelta. The cryptocurrency allows companies to build on a server-less platform with built-in protection of data using popular languages such as Java, Python, Node, and C#.

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DragonChain is building relationships with companies to help them bring their product onto the blockchain. DragonChain is a sleeping giant in that it already worked through 20 or so use cases while in development to tweak the initial implementation of the platform. While some companies struggle to find use cases after they are done with their product, DragonChain has figured out a way to simplify the integration of real business applications onto the blockchain in a secure way.

Underserved industries are the initial target of the DragonChain platform, which includes Wine, Arts, Automotive, Legal and Digital Marketing. Some of these industries are lagging behind for lack of innovation and Dragonchain is bridging the gap. DragonChain is creating a turnkey platform for startups and mature companies to rapidly deploy applications on the blockchain. As one might appreciate, blockchain development can be incredibly complex, is hard to understand and sometimes uses archaic development languages for implementation. DragonChain allows companies to use programming languages they are already familiar with to take advantage of blockchain features.

The Benefits of DRGN:

  • Smart contract integration, which has recently only been available on the Ethereum network.
  • High scalability and faster speed to market, which reduces development costs.
  • Built-in security that is inherent to blockchains.

From an investor standpoint, DragonChain is already light years ahead of a lot of ICOs that are creating platforms. It has an incubator program that will fund startups that will help real-world companies get up and running on the DragonChain platform. Unlike Ethereum, which has mainly become an ICO launch pad, DragonChain is building a platform for existing businesses to be able to build on top of the blockchain. While Ethereum is mainly a platform that is there to build on, Dragonchain is a platform with support.

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The DRGN platform is focused on reaching companies just as much as they are building out the platform itself. This will accelerate platform adoption and business growth while increasing the value of DragonChain. Larger companies are approaching the blockchain with skepticism and reluctance. DragonChain can be the bridge that connects the two. It is very expensive to try and leverage blockchain technology in already existing companies. The DRGN platform attempts to solve this by putting businesses first based on past experience and offering restful interfaces, interoperability with other blockchains, ease of integration, a simplified architecture and more.

Dragons or DRGNs will be utilized by developers and organizations to interact with the DragonChain commercial platform’s products and services. Dragon tokens will also be used to support startups in the DragonFund Incubator providing early access to data and technology as well as first access to purchase tokens for use on the developed platforms.

The DragonChain ICO raised $21,358,506 USD. It has since grown to around three times that level and appears to be expanding more rapidly as time goes on. Once the DRGN token is listed on larger exchanges there will a lot great liquidity. DragonChain has a current value of approximately $60,000,000. This is low for a platform that is already so mature, was originally backed by Disney and has an incredibly capable development team.

Disclaimer: Analyst current invests in Dragonchain.

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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4.9 stars on average, based on 9 rated postsKent Hamilton is a cryptocurrency day trading ninja, specializing in altcoins. Founder of CryptoDayTrader.io




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Bitcoin

Bitcoin’s Offensive Continues as Prices Breach $3,400

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Bitcoin’s value jumped to a new record on Tuesday, a clear indication that the bull market was back in vogue following a month of turmoil.

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$3,000 & Beyond

The virtual currency (BTC/USD) rose 2.4% to $3,468.00 in overnight trading, according to Bitstamp. Before the weekend, the BTC/USD had crossed the $3,000 mark only once.

At current prices, the market value for all bitcoins is more than $57 billion – the highest on record.

While post-fork exuberance shows no signs of fading, traders are reminded that bitcoin’s recent leg up has been accompanied by decreasing volume. In fact, a similar trend has been observed during every leg up from $1,800.

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Zooming out to the 1-day Bollinger Band, the market appears to be overbought. A historical analysis reveals that, more often than not, a puncturing of the Bollinger Band in either direction leads to a broad pullback in the market.

The daily RSI also adds credence to the view that the market is approaching overbought territory.

Bitcoin Cash Trading Well Below Its Peak

Bitcoin’s surge followed the creation of a spin-off digital currency – Bitcoin Cash (BCH) – last week. The newly minted coin spiked above $700.00 on Aug. 2 before a series of volatile moves dragged prices back toward $200.00.

BCH was back above $300 on Tuesday, having gained more than 27%. Its total market is valued at more than $5 billion.

Coinbase Caves to Investor Demand

U.S. cryptocurrency exchange Coinbase has announced that it plans to support BCH as of January 2018. Initially, the exchange said it would not support the new coin, triggering outrage among users and a surge in withdrawals.

A contingency of Coinbase customers also threatened to sue the exchange for not supporting BCH, equating the decision to a brokerage withholding new shares from its investors.

“We are planning to have support for Bitcoin Cash by 1 January 2018, assuming no additional risks emerge during that time,” the leading exchange said on its blog.

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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4.5 stars on average, based on 155 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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Blockchain

Bulletproof

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Hi Everyone,

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One of the things that’s been bugging me about blockchain technology is another technology that is on the rise just as fast and could possibly make it irrelevant.

Quantum computing is currently under development by some of the biggest tech players in the world. IBM, the NSA, and Google are all working hard to make everything that we know about computers irrelevant within the next decade.

The idea is quite simple, in the world of quantum physics anything is possible. For example, throwing a basketball through a brick wall is not a very probable thing to occur but the odds of it happening are greater than zero.

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In computers, it means rather than making one calculation at a time in a sequential order, a quantum computer could theoretically just calculate all the possibilities at once.

So things like passwords or private keys, for example, could theoretically be reproduced in a matter of moments. This of course, threatens not just Bitcoin but all digital payments, online banking, and virtually all areas of encryption and cyber-security.

Now, we’re still several years away from this becoming a real concern. So now is the right time to start building the infrastructure to protect ourselves against it.

A company called Droplex, who’s pre-ICO is just entering its final hour aims to build a bullet proof blockchain that will be impervious to future Q-hackers. Now, I haven’t personally looked too deep at this project as of yet but I am extremely comforted by the fact that somebody is building a fix for this already.

Perhaps in 5 years or so we can have another debate about the best way to upgrade Bitcoin for Q-safety.

@MatiGreenspan
eToro, Senior Market Analyst

Today’s Highlights

Stocks are down

Bezos Briefly Best

August 1st BTC Deadline

Please note: All data, figures & graphs are valid as of July 28th. All trading carries risk. Only risk capital you can afford to lose.

Market Overview

Problems pursue in Washington for the precarious President.

The newly appointed communications director Anthony Scaramucci is now taking swipes at the chief of staff and Trump himself has been lashing out at his own attorney general Jeff Sessions.

Some speculate that Trump is getting ready to fire Sessions in order to get the special prosecutor Robert Muller off his back.

Meanwhile, the bill to repeal Obamacare was just shot down in the Senate as the notable Republican and previous presidential candidate (2008) John Mccain voted no.

Stock markets have not been performing well so far in Asia and the European markets just opened with a notable gap down.

At least the USD seems to be getting some support.

This chart showing USDollar support was posted by @4exPirate Dawid Kowalski in Poland who is arguably one of the most consistent traders on the eToro network.

Congratulations to Jeff Bezos

…for briefly becoming the world’s richest person. Jeff managed to snag the top spot off Bill and kept it for almost 3.5 hours.

Most of Bezos’ fortune is in Amazon shares, so when the market opened with a significant gap up his net worth reached $90 Billion. However, a sour earnings report from Amazon sent the stock back down.

Turbulence in Crypto

If he times it right, Bezos may just be able to buy all of the cryptocurrencies currently in circulation, which is now holding steady at about $90 Billion.

Or not, the sale of 17% of all AMZN shares along with word that the founder is selling would probably push the price significantly down before he could offload most of them. Of course, that much buying pressure would also move the cryptos up.

In any case, if anybody were considering to buy that many digital assets they might want to wait until next week. Given that August 1st is coming up this Tuesday and still nobody really knows what’s about to happen to Bitcoin.

For those of you looking to trade this event, make sure to get your orders in as early as possible as there may be some downtime on BTC depending on the way it plays out.

Wishing you and yours a very pleasant weekend.

This content is provided for information and educational purposes only and should not be considered to be investment advice or recommendation.

The outlook presented is a personal opinion of the analyst and does not represent an official position of eToro.

Past performance is not an indication of future results. All trading involves risk; only risk capital you are prepared to lose.

Featured image from 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 31 rated postsSenior Market Analyst at Etoro.com.




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