Innovation comes to banking

Bitcoin is a simple idea, but its implications are enormous, particularly for the world’s poorest.

Dr. Saifedean Ammous is Professor of Economics at the Lebanese American University.

Dr. Saifedean Ammous is Professor of Economics at the Lebanese American University.

Paul Volcker, the former chair of the US Federal Reserve Board, famously remarked that the ATM is the only significant financial innovation of the last few decades. While his comments were meant as a disparagement of the sophisticated financial instruments which wrought the last global financial crisis, they also highlight the real dearth of transformative innovation in the financial system in an era where almost all other aspects of economic life have been revolutionised by technology.

The consumer experience with banking and financial services has essentially remained unchanged for most of the lives of those today living: We’ve been carrying the same quaint plastic cards for decades, incurring hefty charges and substantial risk of identity theft every time we use them. The majority of the world’s poor remain unbanked and unable to benefit from financial services, as the transaction costs they would pay are not worth the bother for large financial institutions. Most astonishingly, international money transfers still take several days to complete, and involve large commissions and exchange rate charges. All of this at a time when email has completely transformed personal communication from the days of paper mail and search engines have made knowledge accessible worldwide in a way unimaginable in the days of library cards.

Enter bitcoin, which at its core is to currency what email is to paper mail. With nothing but an internet connection, you can costlessly, instantaneously, and safely send any quantity of money anywhere in the world. Through a genius open-source transparent algorithmic design, bitcoin eliminates the need for third-party financial intermediation and verification, making online transactions as real, simple and final as in-person cash transactions. While bitcoin is a simple idea, its implications are enormous, particularly for the world’s poorest. In the same way that many of the world’s poor have never used landline phones and gone straight to the cheaper and faster mobile phones, they could now avoid dealing with the legacy financial system and jump straight to the simpler, safer, and cheaper option of bitcoin.

The most obvious transformative role bitcoin could play is in facilitating international remittances. The World Bank estimates that more than $400bn in remittances are sent annually around the world, with high commissions that are particularly burdensome on the poorest migrants. Bitcoin can make these remittances instantaneous and almost costless.

What is an insignificant sum of money for individuals in developed countries can be a life-changing amount for those in the poorest countries, and without high transaction costs, bitcoin allows individual-to-individual international aid and financing, based on a more transparent personalised relationship between sender and recipient. It opens the door for immediate aid to be sent from all over the world to those affected by disasters in situations where brick-and-mortar financial institutions are unavailable. It can make it possible for small micro-donations to be pooled from large numbers of donors to fund large projects. Further, individuals in rich countries can make direct low-interest, or interest-free loans to entrepreneurs in developing countries.

Digital currency also makes it much easier for citizens of developing countries to buy and sell goods and services online. The biggest impediment to globalisation of trade in goods and services is no longer communication or shipment, which are getting ever-cheaper and more widespread, but payment. By reducing transaction costs, services such as computer programming, proof-reading, and secretarial work can be done much more affordably by the vast talents of the developing world, even at very small scales. Bitcoin can also allow skilled artisans in developing countries to easily sell individualised and handmade products all over the world, at prices far more favourable than what they could sell them in their home countries.

More broadly, firms in the developing world suffer from an inherent payment processing disadvantage when conducting business internationally. Their transaction costs are much higher and financial institutions are reluctant to engage with them, given the high risks and low rewards. Bitcoin can be the great leveler of the global market place, allowing firms the world over to compete purely on the basis of quality and price, rather than their ability to access financial intermediation and financing. Consumers and producers the world over will gain from this.

These are but a small fraction of the possibilities which an international digitised currency can unlock. While most media attention has so far focused on bitcoin as an investment, or as an alternative currency, that is almost tangential to the more important consideration of bitcoin as a technology. Whatever happens to bitcoin the currency is not as important as the possibilities unleashed by the technology of global immediate payments without intermediation. This is an extremely valuable, practical, and transformative technology which cannot be uninvented, and will continue to evolve as more people adopt it and find new uses for it. It is worth remembering that the technology of internet search engines has revolutionised the world of information and knowledge, regardless of the fate of Altavista and the earliest search engines.

Dr. Saifedean Ammous is Professor of Economics at the Lebanese American University, and Foreign Member of Columbia University’s Center for Capitalism and Society.

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Posted by: Amman

These 'possibilities unleashed by the technology of global immediate payments' that you mention have a name. They are called "Google Wallet", and Facebook and Apple.

Apparently, Banking as we have known it will kaput in 10 years.

Posted by: Jean Amiouny

Crisp article Dr. Ammous.

It's a shame that in most conversations today people tend to be frightened at the word bitcoin, thinking of it solely as an investment opportunity that they don't understand. Emphasis should be put on the opportunities it opens. You say it best:

"Whatever happens to bitcoin the currency is not as important as the possibilities unleashed by the technology of global immediate payments without intermediation."

Your next article could dig deeper on this and open the discussion (or paint a picture) of what bitcoin, or other altcurrencies, could bring to the region.

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