The New Age Of Financial Services: Open Sourced

Chris Skinner

Money originated as a control mechanism for governments of Ancient Sumer to control farmers, based upon shared beliefs. It was then structured during the Industrial Revolution into government-backed institutions, banks, that could issue paper notes and checks that would be as acceptable as gold or coinage, based upon these shared beliefs. We share a belief in banks, because governments say they can be trusted and governments use the banks as a control mechanism that manages the economy. So now we come to bitcoin and the Internet age, and some of these fundamentals are being challenged. Before we get into that though, let’s just take a step back and talk about how the Internet age came around.

The Internet age

Some might claim it dates back Alan Turing, the Enigma machine and the Turing Test, or even further back to the 1930s when the Polish Cipher Bureau was the first to decode German military texts on the Enigma machine. Enigma certainly was the machine that led to the invention of modern computing, as British cryptographers created a programmable, electronic, digital computer called Colossus to crack the codes held in the German messages.

Colossus was designed by the engineer Tommy Flowers, not Alan Turing – he designed a different machine – and was operational at Bletchley Park from February 1944, two years before the American computer ENIAC appeared. ENIAC, short for Electronic Numerical Integrator and Computer, was the first electronic general purpose computer. It had been designed by the U.S. military for meteorological purposes – weather forecasting – and delivered in 1946.

When ENIAC launched, the media called it The Giant Brain, with a speed a thousand times faster than any electro-mechanical machines of its time. ENIAC weighted over 30 tons and took up 1,800 square feet of space. It could process about 385 instructions per second. Compared with an iPhone 6, which can process around 3.5 billion instructions per second, this was rudimentary technology, but we are talking about 70 years ago, and Moore’s Law hadn’t even kicked in yet.

The key is that Colossus and the ENIAC laid the groundwork for all modern computing and became a boom industry in the 1950s. You may think it surprising that, back in 1943, the then-president of IBM, Thomas Watson, predicted that there would be a worldwide market for maybe five computers. Bearing in mind the size and weight of those darned machines, you can see why he thought that way. But, my, how things have changed today.

However, we are still in the early days of the network revolution, and I’m not going to linger over the history of computers here. The reason I mention ENIAC and Colossus is to put our current state of change in perspective. We are 70 years into the transformation that computing is giving to our world.

ValueWeb in financial services

Considering it was 330 years from the emergence of steam power to the last steam power patent, that implies there’s a long way to go in our transformation. However, we can already see that a new age of money is being created in the Internet age. I call this the ValueWeb, connecting everyone on the planet to talk, socialize, communicate, and trade globally, in real-time for almost free. I can make a Skype call for almost no cost to anyone on the planet, thanks to the rapidly diminishing costs of technology. (For example, the cheapest smartphone in the world costs just $34.) In other words, what is happening in our revolution is that we can provide a computer far more powerful than anything before, and put it in the hands of everyone on the planet, so that everyone on the planet is on the network. Once on the network, you get the network effect, which creates exponential possibilities, as everyone can now trade, transact, talk, and target one-to-one, peer-to-peer.

As we connect one-to-one in real-time, it will create massive new flows of trade for markets that were underserved or overlooked. Just look at Africa. African mobile subscribers take to mobile wallets like ducks to water. A quarter of all Africans who have a mobile phone have a mobile wallet, rising to pretty much every citizen in more economically vibrant communities like Kenya, Uganda, and Nigeria. This is because these citizens never had access to a network before; they had no value exchange mechanism, except a physical one that was open to fraud and crime. Africa is leap-frogging other markets by delivering mobile financial inclusion almost overnight.

The same is true in China, India, Indonesia, the Philippines, Brazil, and many other underserved markets. So the first massive change in the network effect of financial inclusion is that the 5 billion people who previously had zero access to digital services are now on the network.

A second big change is the nature of digital currencies, cryptocurrencies, bitcoin, and shared ledgers. This part is building the new rails and pipes for the fourth generation of finance, and we are yet to see how this rebuilding works out. Will all the banks be based on an R3 blockchain? Will all clearing and settlement be via Hyperledger? What role will bitcoin play in the new financial ecosystem?

We don’t know the answers to those questions yet, but what we will see is a new ecosystem that diminishes the role of historical banks. The challenge for historical banks is whether they can rise to the challenge of the new system.

Digital inclusion

This new age of finance, the ValueWeb, is a digital, networked value structure that is real-time, global, connected, digital, and nearly free. It is based upon everything – from the 7 billion humans communicating and trading in real-time globally to their billions of machines and devices, which all have intelligence inside – being connected. This new structure obviously cannot work on a system built for paper and buildings and humans, and it is most likely to be a new layer on top of that old structure.

A new layer of digital inclusion that overcomes the deficiencies of the old structure. A new layer that will see billions of transactions and value transferred at light speed in tiny amounts. In other words, the new age is one where everything can transfer value, immediately and for an amount that starts at a billionth of a dollar if necessary.

This new layer of value exchange is therefore nothing like what we have seen before and, for what was there before, it will supplement the old system and diminish it. Give it half a century and we will probably look back at banking today as we currently look back at cash and barter. They are old methods of transacting for the old historical structures of physical trade. These have been replaced by a new method of transacting in the digital age.

The path forward

In conclusion, I don’t expect banks to disappear, but I do expect a new system to evolve that may include some banks, but will also include new operators that are truly digital. Maybe it is the Googles, Baidus, Alibabas, and Facebooks; or maybe it is the Prospers, Lending Clubs, Zopas, and SoFis. We don’t know the answer yet and, if I were a betting man, I would say it’s a hybrid mix of all, as all evolve to a new age of financial structures. The hybrid is one where banks are part of a new value system that incorporates digital currencies, financial inclusion, micropayments, and peer-to-peer exchange, because that is what the networked age needs. It needs the ability for everything with a chip inside to transact in real-time for near-free. We’re not there yet, but this revolution is in early days. It’s just 70 years since the first computer was built. The Industrial Revolution took three centuries to play out. Give this revolution another few decades and then we will know exactly what we built.

The fourth industrial revoloution is here, and there’s no going back. Learn more about Live Business: The Digitization of Everything.

About Chris Skinner

Mr. Skinner is chairman of the Financial Services Club, CEO of Balatro Ltd. and comments on the financial markets through his blog the Finanser. He can be reached at