Money is weird stuff.
It's a very intangible thing.
You might like to think that the values of the currency in your wallet or bank account have an intrinsic value, but the truth is that after most nations took their currency off of the gold standard – it’s more volatile than you’d care to think. What this has meant is that there is a sense of volatility to the banking system as a whole, as illustrated by the financial crisis of 2008.
However, the nature of banking has become a lot more fluid as the internet begins to trade in digital commodities and people begin to realise that there is a lot more flexibility – indicating a desire for change.
So what are the revolutions in finance currently taking place? And what, if anything, is the reason for this revolution?
Why? - Philosophy, Politics & Economics - A Motivator For Change
What is really interesting is that the philosophy of the banking system has motivated a desire for change amongst the population.
The attitude of cavalier bankers gambling with public money only to have themselves bailed out when they lose is a negative view held by many.
Brian DeChesare wrote a piece for Mergers & Inquisitions which illustrated the following common problems with the banking system’s philosophy that were highlighted by the crisis;
- Predation – the nature of the financial crisis was largely predatory. Selling people mortgages they could not afford, selling toxic debts to other institutions and then ignoring the consequences put many people off of the system which was then seen as parasitic and amoral.
- Lavish Spending – huge bonuses for bankers made many people consider their approach dishonest, with undeserved remuneration beyond the vast majority of the average citizen’s pay – even after the crisis.
- Elitism – the banking system was considered relatively noble before the crisis. Afterwards it was considered a boys’ club controlled by few for the benefit of a few – and with connections to a reliant political system that would bend certain rules for them that they would not bend for others.
The political nature of the world’s major banks was highlighted after the crisis. In the time preceding the crash, bankers would rarely be seen to interact with politicians in a very meaningful away – aside from the occasional photo opportunity and the odd debate on regulation. Once the crash happened, bankers went to the politicians hat in hand and begged for bailouts – something that left the entire world economy reeling.
George Friedman wrote an insightful piece in 2008 for Stratfor Global Intelligence in which he stated that political interactions post-crisis had created a resentment for bankers and the banking system as a whole in the following ways;
- Favouritism – the banks were favoured by the government as they were considered ‘essential’ to society operating correctly despite most of the population having only fleeting contact with them in their day-to-day lives. Despite this, household names such as Sharper Image and Woolworths were left to flounder.
- Corruption – there are many different forms of corruption, from direct payment to subtle influencing and glad handing. It is now popular opinion that there is frequent ‘grooming’ of senior politicians by those in the banking industry for special treatment.
- Electoral Considerations – many people feel that bankers have situated themselves as crucial to electoral success. For example, one can make an impact on an election by saying that one candidate’s economic policy is sound, whilst another’s is not. This ‘gun to the head’ approach is considered an unfair influence by banks upon politics.
Economically speaking, it is plain to most people that the current model does not work effectively. It apparently favours the rich and punishes the poor, thus worsening the class divide. There is also a punitive aspect to modern banking that seems to punish the account holders. Popular indicators that banking in an economic sense is unfair to the end user includes;
- Charges – banks include many charges for accidental overspends and other things that aren’t particularly necessary. Liz Phillips wrote in The Guardian that banks make £2bn from overdraft fees, all of which could be avoided by automatically declining payments over the amount of a customer’s bank balance.
- False Charges – there are many banks that automatically include charges for products or services in error, and the pointing out of these errors is left to the account holder – which means that people are charged and told ‘they should have noticed’ and banks will only provide remuneration up to an arbitrary date in their records.
- General Disdain – there is an incensement at the way banks tend to ‘hold us hostage’, being the only avenue for a mortgage or a loan and providing a distinct lack of options. The inability to pay things like bills with cash also means that people must use a bank – this hostage taking has created general disdain for the banking system as a whole.
The combined nature of the three elements of philosophy, politics and economics paints a largely negative picture of the banking system currently on offer – therefore they are a primary motivator for alternatives.
But what are these alternatives, and where do they come from?
The internet has undoubtedly provided an immense platform for change, in any number of aspects.
In addition to this it has paved the way for innovators to create alternate financial systems in the digital age. Companies like PayPal have utilised web technology to provide methods of payment including the ability to transfer money online using the web.
A slew of these companies have arisen delivering the ability to collect payments and make payments in a purely online setting. These include;
- Google Checkout
These payment systems are designed as alternatives to both personal and business banking. They have the ability to provide many banking services through an online platform by depositing from a standard bank account and utilising the facilities available with the online payment gateway.
There are numerous benefits that make the online payment account system more appealing to the traditional banking system including;
- No Fees – there are numerous fees involved with banking, partially to cover costs of being in a physical space such as on the high street; these are reduced as the digital nature of payments means that they are much more streamlined. In addition most gateways only offer the ability to charge up to their balance with no overdraft fees and SagePay offer merchant accounts with no set-up fees.
- Flexibility – there is a greater degree of flexibility in many online payment gateway systems. As a result the need to transfer money online abroad, for example, is less of a chore – as fees are less and it can be done online. There is also a lesser waiting time, for example NETELLER provides instant international payments where a traditional bank would not.
The appeal of online payment gateways allows e-businesses to function more effectively, it also helps personal finance with things like prepaid cards available for customers to be used in shops or bank ATM’s for an ease of access outside of the digital world.
It is considered a much more level playing field online. There are so many ways of doing things as a business or in one’s personal financial situation online that avoid the economic discrepancies of the traditional banking system.
But it’s gone beyond alternatives online; we have recently seen a glimmer of what might well one day become a fully-fledged digital economy.
Cryptocurrency Online, BitCoin & The Future
You may not have heard of this term; cryptocurrency.
What it essentially means is a transfer of currency from a digitally encrypted peer to peer network. BitCoin is the current leading cryptocurrency and for a while was the fastest growing currency in the world, able to be used to shops and bars in places like Berlin – as was evident in a piece from Guy Grandjean and Kate Connelly in the Guardian’s technology section.
It was first brought about in a whitepaper by Satoshi Nakamoto, a pseudonymous developer, in 2008 and works essentially as an electronic cash system.
The future of BitCoin and the possibility of a digital currency and complete digital economy is currently uncertain. But there are numerous benefits, particularly for merchants and businesses, as outlined by Ivan Raszl in an article on his popular blog, including;
- Low Inflation – inflation in modern currency systems has a negative effect on businesses and people in general, particularly when trading with another currency. The BitCoin model is based on a finite system, only 21 million BitCoins will ever be released (in a process known as mining) and therefore they will not lose their purchasing power like normal currencies.
- Safety – The risk of BitCoin collapsing is very low. This is partially due to the fact that it is not dependent on any form of government. Governments fail, and political machinations mean that hyperinflation can occur. BitCoins are not connected to politics in any way, unlike every other currency, and are therefore more resilient.
However, there are some downsides to BitCoin too - including;
- Untraceable – you might think that there are benefits to no one knowing where money is going or come from, but overall it means that black market commodities are harder to trace if they are purchased with BitCoin. Still, to the average honest BitCoin user it’s not a huge risk and affords greater privacy.
- Easy To Lose – banks have established insurance and government protection to avoid losses, in BitCoin these protections aren’t there so the possibility of being hacked and losing all of your BitCoins is quite real.
There are many benefits to a digital economy, but at the moment the cryptocurrency has just not been around for long enough to be established as a safe and worthy method of trading currency and capital.
BitCoins are useful for the consumer though. As one can buy BitCoins to be spent right away, there is little risk of losing them if they are spent within a short period of time.
Online Financial Revolution & Evolution
Overall it's plain to see that the power of the established traditional banking system is waning, at least to a small extent.
The development of alternative financial systems online has handed some of the power back to the merchants and the public.
It is an evolution, as opposed to a revolution – but there are many things to encourage people that there is hope for a fairer and more flexible financial system after the crisis of 2008.