Geneva Report 22 | Banking Disrupted? Financial Intermediation in an Era of Transformational Technology

Tuesday, September 24, 2019

BANKING DISRUPTED? Latest Geneva report from CEPR examines the prospects for financial intermediation in an era of transformational technology

The provision of financial services is profoundly changing worldwide – so much so that many commentators are predicting the death of banking as we know it. The 22nd Geneva Report, which is published today, provides an overview of the rapid changes facing the industry and considers what banks must do to maintain their position of influence.

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The Report – written by Kathryn Petralia, Thomas Philippon, Tara Rice and Nicolas Véron – argues that while the financial landscape will continue its radical transformation for the consumer, banking at large will remain a business conducted primarily by government chartered and regulated entities, including many incumbent banks. Banks and governments have co-existed through history, the authors note, and often relied on each other symbiotically to fulfil their missions.

Banks have developed extensive institutional knowledge, precedent and organisation around working with governments. They have successfully mobilised their lobby to maintain the status quo, drive regulation in their favour and discourage the emergence of non-bank firms as major players in the financial sector.

Conversely, technology firms, which are generally lacking comparable policy and regulatory muscle memory, have been slow to see the importance of public sector calls for high standards of governance, protections and ethics. 

Yet the authors also find scope for an alternative outcome, as the scale of the Big Tech firms and the speed of adoption across borders in the digital era suggest that developments in the provision of financial services could accelerate at a faster pace than seen before and rapidly change the competitive landscape.

In this fast-changing environment, banks may not live up to customers’ expectations and demand for quicker, cheaper and more personalised financial services. This would allow technology firms to make a wedge between banks and customers and disintermediate the provision of financial services, relegating the banks to simple utility providers.

The authors conclude:

For banks to succeed in the new era, they should embrace technology, partner with tech firms, meet customers’ expectations and maintain their trust.

If banks were to enable and offer the free (or very cheap) and easy transfer of money and assets between institutions and individuals globally, it could shift the bank–tech firm dynamic distinctly in their favour.

The motivation and means to enable "free and easy" banking will soon be here. Will banks be ready?’'

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