This podcast is all about why we think that the major banks will fade away in the next 15 years. It will not be a nice time. But a better system will replace it. Jordan and I are struggling to understand this ourselves and want to offer you our conversation so that we can all get a better sense of what is to come and so what can we each do to get ready.
The Banks seem essential and inviolate. But then, 30 years ago, so did "Big Steel". But a new small company came in to the bottom of the steel market and began to take away business that Big Steel did not want. Big Steel gave up the Rebar market without a fight because they could not make money there. So Nucor grew, as did other mini mills, and took on Big Steel step by step until there was nothing left.
This is the classic story of how disruption works as told by Clay Christensen in his classic books - The Innovator's Dilemma and the Innovator's solution.
In this post today, I interview Jordan MacLeod, author of Natural Money . Jordan is one of the leading thinks about the future of money today. We see signs that this process of disruption is well under way. We think that the big banks will be challenged as Big Steel was and that this will take place in the next 5 years.
In this segment, the first of 3, we identify the pressures that the banks have put themselves under that are exposing them to new disruptive entrants. Mainly driven by the fact that the banks treat the small person and the small business very badly.
The Federal Deposit Insurance Corporation estimates that roughly 10 million households in the United States do not use a bank, up from nine million three years ago. And the agency says 24 million more households have a bank account but still use nonbank financial services, like prepaid cards.(link)
Now that Visa is a for profit organization, it is aggressively raising fees for small business - maybe thinking that they cannot do anything about it.
Millions of people now wire money internationally. This has been a gold mine for banks who charge a fortune for this.
The large banks have proved that they cannot be trusted.
All this combines to empower new small competitors that are eating in to the bottom of the market that the banks don't like anyway - their Rebar market.
Walmart is banking the bottom end. Dwolla will do a money transfer for 25 cents. Square is targetting the small business . Dwolla and others are eating into the bank clearing system itself.
All this is happening very quickly and is being aided by banks that are small and who also resent being used by the majors.
What this implies is, that at some point, Money itself will be questioned. For today money is created by bank lending. With a Fractional reserve system, each dollar that a bank lends to you only requires a reserve of 10 cents. The other 90 cents is magic.
In parts 2 and 3 of this series we will talk about what may happen as the major banks are eaten up from the base and a confidence in them continues to fall. Where will we put our money then? What will money be then? These are huge issues. We take money for granted now. But history reminds us to be cautious when a large system is under threat.
Not an easy topic.
In the meantime, I have a lot more about the new system that is to come in my second book You Don't Need a Banker
