Paul Volcker, former chairman of the Federal Reserve acclaimed, famous questioned the value of financial innovation. He said he saw the point of the ATM ("more than a mechanism that financial innovation"), but that was it. Financial innovation was unproductive competition for excess gain and a cause of instability.
If Volcker is right, we will soon have another problem on our hands, as a new wave of financial innovation is forming. This could sweep over traditional banking, traditional payment systems, including the traditional idea of money.
Do you think that exotic asset-backed securities were a big deal? That was nothing.
As reported by Bloomberg Markets, the revolution in information and computer technology financial innovation is pointing in a new direction - in the financial infrastructure and basic services rather than new exotic products. That's what makes the "internet money" far-reaching.
Finance has been digital for years. Instruments ranging from bank deposits to currency swaps to structured debt obligations have long been recorded and transmitted electronically. But money and payment systems, the basis of all financial activity, remain traditional in one respect: They are based on third party central - the banks - to register and attest to the transactions.
Digital currencies do without this. Create a decentralized registry - a "book distributed accounting" - that allows buyers and sellers interact directly.
Bitcoin, the best known of these coins has attracted attention for the wrong reasons - as a speculative asset. It is measured by small users or transactions, and no guarantee of its use is spreading. He's suffered serious technical problems and aroused the concerns of regulators. All this obscures the crucial point. Digital currencies have shown that it is feasible distributed book, and that's a spear pointed at the heart of traditional banking.
The other basic functions of a bank - borrowing and lending - are also subject to technological pressure. New ventures are matching borrowers and lenders in the online markets. It is the focus of eBay credit: loans may be originated more quickly and at lower cost. Big Data is being exploited for scoring cheaper and more accurate credit. Banks have been slow to take advantage of this opportunity; new technology is giving nonbank lenders agile competitive advantage.
Meanwhile, innovation in mobile payments is growing. In some cases, banks are still in the picture - and services like Google Wallet 'mobile users of Apple users Payment link bank accounts - but the potential threat to incumbents is flat. In developing countries, mobile money systems (first by Kenya M-Pesa) offer banking services through mobile networks. The technology can bypass the traditional full banking branches.
It is disturbing, especially for traditional banks, but the good news is that Volcker was wrong. Financial innovation has been a net plus. Any type of innovation can have unintended consequences. In finance, in particular, the risks should be handled with care - and if they are not, the costs can be enormous, as the 2008 crisis showed. But the benefits of financial innovation have been huge, too. Credit cards, debit cards, index mutual funds, venture capital, most financial derivatives and securitization simplest types have expanded access to capital, improve its allocation across the economy and became the most prosperous world.
As the next wave of innovation in rolls, which is likely to remain true. It would be wrong to stifle new ideas, even if that were possible. Attend risks prudently regulate and see what the future holds.
