Mike McQuade

This article was taken from the September 2013 issue of Wired magazine. Be the first to read Wired's articles in print before they're posted online, and get your hands on loads of additional content by subscribing online.

Banking may be on the cusp of an industrial revolution. This is being propelled by technology on the supply side and the financial crisis on the demand side. The upshot could be the most radical reconfiguration of banking in centuries.


To understand why, let's go back to banking basics. Banking is a market in information. Banks exist as an information bridge between those with funds (savers) and those without (borrowers). They have played that middle-man role, more or less uninterrupted, for the better part of 700 years.

The durability of the model owes much to the fact that information markets are notoriously treacherous. Sellers will often know more than buyers about the quality of a product. That runs the risk of them becoming flooded with poorer-quality goods -- we get a "market for lemons". Second-hand cars are the classic example of such a lemons market.

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Banking is a conjuring act and all conjurors rely on the trust of the public. Banks and technology companies are no exception

The market for loans is also a lemons market. Loans require information on the borrower that an individual saver is unlikely to know. Banks grew up in the 13th century as centralised intermediaries to solve this financial-lemons problem. Despite mixed success, with recurrent panics and crises, banks have largely remained the financial lemon-squeezer of choice.


In 1995 Pierre Omidyar launched eBay. This was a first -- a decentralised, or peer-to-peer, market for second-hand goods. If ever there were a market for lemons, this was it. Yet eBay, and the decentralised model of exchange it pioneered, has not just survived but thrived.

Facilitated by the web's technology and sustained by its information, eBay has squeezed the largest of lemons.

This business model has spread. It has led to mini-revolutions in markets from music to publishing. The next frontier may be banking. Banking is rooted in two core services -- payments and lending. Both could be remoulded around a decentralised, peer-to-peer model. Indeed, in some respects this process of disruptive innovation has already begun.

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Take the market for payments. Thanks to technology, payments are increasingly going mobile. Smartphones and contactless cards make instant payment a practical reality. Retail companies are partnering with technology companies to create digital wallets: for example, technology company Square has partnered with Starbucks, McDonald's and KFC.

Existing players such as Google, Visa, Mastercard and PayPal are competing for market share. Forecasters predict exponential growth over the next few years.

The market for loans is also changing shape. One manifestation is the emergence of peer-to-peer lenders -- a sort of eBay for credit. These now exist in the markets for small-firm financing, consumer financing, foreign exchange and invoice financing, among others. From a low base, they too are rising fast. Crowdfunding is another incarnation of this decentralised lending model. Just as it did to music and publishing, the web is squeezing the middlemen -- the banks.

What are the risks to this embryonic financial revolution?


Banking is a conjuring act and all conjurors rely on the trust of the public. Banks and technology companies are no exception. Yet even this may work to the advantage of new entrants over tried-and-failed incumbents. Recent surveys of the public by Edelman suggest that the financial sector is rooted to the bottom of the trust league table. Technology companies, by contrast, are at the top. In Google we trust, it seems.

If this mini-revolution runs its course, its implications could be profound. Disruptive financial innovation could make for a cheaper, faster deal for bank customers. A more diverse, decentralised financial system could improve financial resilience for bank regulators. And higher banking productivity coupled with greater stability would be a prize we could all enjoy.

Andy Haldane is executive director for financial stability at the Bank of England.