Banking 2025: The Bank Of The Future by SSRN
University of Applied Sciences, Bielefeld
June 1, 2015
Developments in information technology are fundamentally changing many traditional business models. Progress in the IT area is bringing about one change in particular: it is reducing search costs and allowing buyers and sellers of products and services to find each other directly on web-based platforms, without the need for a mediator, broker or intermediary. All business models of trade are affected by this development, and this means that financial trade is also affected.
However, bank customers will only turn to the new business model of web-based financial intermediation if the economic advantage of a behavioural change, in which the individual approaches the unfamiliar, is so compelling that the associated transaction costs of learning the new as well as the initial uncertainty of action are justified. Once the number of new users reaches a critical mass, the process of reorganisation is no longer linear and continuous, but advances in bursts and exponentially. This means that, at a certain point in time, the process of system change gains so much momentum that it can hardly be controlled. In view of the inefficiency of the existing banking system as well as the economic superiority of web-based alternatives, it seems that it is only a matter of time before a system change takes place in the banking business.
Banking 2025: The Bank Of The Future – Introduction
1 The ‘bank’ business model in 2015
1.1. Social privileges and their utilization
In economic textbooks, the bank is usually depicted in its role as an intermediary that collects deposits from individual savers on the liability side of its balance sheet and distributes them on the asset side as credit to the private sector. This intermediary function, i.e. as a simple mediator of capital, would mean that a commercial bank could only lend out the same volume of credit that savers had previously deposited. This, however, is a misconception. Every commercial bank receives two social privileges along with its banking license that enable it to expand its business, regardless of the volume of savings deposits: (1) The option of favourable refinancing via central bank credits, which means that commercial banks always have central bank money at their disposal.1 (2) The privilege of creating its own deposit money through lending and fractional holding of minimum reserves on deposits. Each time a commercial bank lends out money, it creates new deposit money because the borrower usually has an account with the corresponding commercial bank and the amount of the loan will be credited to this account. If one simply looks at the way balance sheets work, the bank grants a loan on the assets side and credits itself the same amount on the liabilities side as a customer deposit.2 Since fractional reserve banking only requires a bank to hold a small fraction of the amount as a deposit with the central bank, banks can grant almost unlimited loans from a given volume of savers’ deposits, thus creating money.3
The central bank has a limited amount of control and influence over the creation of money and hence the money supply because commercial banks can procure the necessary central bank money on favourable terms at any time by availing themselves of central bank loans. The central bank can only influence money market rates, which indirectly affect demand for credit in the real economy via capital market interest rates and thus guide the creation of money.4 However, this transmission mechanism of monetary policy is highly vague and uncertain because, as the current situation in Europe demonstrates, the demand for credit in the real economy is influenced by a variety of factors.5 The costs of financing are only one determinant of business investment decisions, and often they are not even the deciding determinant. The central bank is, of course, free to intervene directly in the market by purchasing or selling securities (so-called open market policy) to create or remove money, enabling it to control the money supply. Nevertheless, the central bank can only justify such measures of quantitative control of the money supply in extreme market situations. Aside from this, the monetary policy of the central bank regarding deposit money creation can best be described as accommodative rather than controlling and supervisory.
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