Apple

Why do we need banks?

I’ve always taken banks for granted. Someone asked me a question about technological innovation in banking. This led me to question what banks are and thence how to disrupt money and the way we use it.

The classic argument for a bank is that if you keep your cash in your mattress it can be stolen or the value can be eroded by inflation.

Banks are also pretty good at helping you move money from place to place. They provide coins, notes, cards, BACS and SWIFT. Also letters of exchange and credit.

Finally they create money through fractional reserve banking. They take money in as deposits and lend more money out as loans. So they stimulate or contract the economy through the availability of money.

Let’s step back a bit and think about cash or money in the larger sense.

Why do we need Money?

It’s an efficient way of enabling us to satisfy our wants and needs. If we have cash some pretty outrageous desires can be satisfied. Equally without it we struggle to survive in an integrated economy that doesn’t have space for hunter gatherers.

We also need cash (and I am using it very broadly) as an insurance policy against an uncertain future. Instead of having a barn full of good food to see us (and the rats) through the winter we can have a fully loaded bank account.

The transaction costs of money

The traditional argument in favour of money is that solves the transaction problem of figuring out how many lemons my potatoes are worth. If I only grow lemons I have to manage hundreds or thousands of different exchange rates. lemons to potatoes, lemons to fertiliser, lemons to big macs…. Money makes this far easier. Trade velocity increases and everyone becomes far richer as a result.

Those are examples taken from centuries ago. Most people in developed countries or reading on Quora don’t create anything tangible. They create services through their use of time. They sell that time for a salary, for an hourly rate, for pieces of work.

You sell your time for money then you exchange the money for something that you want.

The transaction problem of money

During this transaction you have several problems

It’s not clear how well you price your time. Adjustments are infrequent. Salaries change only with a job or a pay rise. It averages out the value of your time or services over a period. So you are paid as much for the trip to the photocopier as for the insight in the meeting with the CEO that created a new $100 million business.

Put a different way: A bottle of water that I bought in a desert petrol station has the same price whether I have just staggered out of the desert or am in the air conditioned comfort of my Cadillac.

Pricing works on average and this averaging has a cost to everyone. Banks make a profit (including central banks as banks) on providing this service.

Is there a better way?

It seems to me that we are heading in the direction of being able to get rid of money.

Take a simple example. If I work for Tesla then I could be paid in cash. I could also be paid in Teslas. So 45,000 people work at Tesla. 83,000 Tesla’s produced in Q3 2018 That makes 0.61 Tesla’s per month per employee on an averaged basis. (But it wouldn’t be this much as the wages bill does not equal total revenue)

Obviously I don’t have much use for two thirds of a Tesla. It’s also pretty hard to sell two thirds of a car, especially when it is not obvious which car it is and which two thirds of a car I’m selling.

This is a problem that’s already been solved.

We already invest in fractional ownership of companies. Stocks and shares have been traded like this for centuries. Fractional ownership of products is increasingly possible as we have the ability to manage large datasets and establish value across different trades.

So imagine having an account into which your Tesla’s are deposited each day. Then when you go shopping the fractional Tesla’s are automatically converted into whole Apples in the form of phones. No money involved.

How can we make this happen?

The technology exists in part. There are markets, auction software, market making algorithms, databases and so on and so forth. It’s fairly easy to see that we could model a system like this on a micro level to see how it could work in reality. It needs some experiments to start paying people digitally in kind. Startups already do this with equity. Others make promises to investors to do so in the future with ICOs.

Is it Plausible or Practical to Disrupt Money

I don’t know enough economics to argue this well. Are the transaction costs of money high enough to support the tech infrastructure that would be needed to do this? Again no idea. It’s worth doing some experiments to see what happens.

What it is though is disruptive. Specifically it takes banking and money in a very different direction and that opens up lots of possibilities.

If you think about what we have done with money and the number of derivatives, products, options and futures that have been created think about the vaster possibilities that being paid in digitised products (like a Tesla) would create. Disrupting money will create vast opportunities for innovation.

Working for Andy Warhol or Damien Hirst? Saving some part of your fractional painting ownership as a potential pension fund with far bigger growth….If you don’t have the option to work for him then buy fractional ownership off the people who do (as they need to sell to buy other things to live)

The real value proposition and the death of money

A technological innovation like this could release vast amounts of value for both businesses and individuals. It would focus people on the value of what they were created and thus incentivise them to create the most value for the least effort.

Who’d want to be paid in fractions of an Edsel?

By disrupting the very concept of money at it’s roots we have the possibility to create entirely new industries that will grew out of the ruins of banking. We don’t need money. We need ways to transact. Money was an efficient solution to matching problems in Lydia in the 7th Century BC. Those matching problems are far less intractable now as we use technology to solve them.

So let’s leave money behind and get the benefits of better trades, transaction and exchange

I was originally asked this question on Quora What technological advance would you love to see in your lifetime in personal and business banking? I didn’t really expect the answer to go the way it did but I found it fascinating. Especially as so much is murky.

What I really like though is that the idea of disrupting money is testable and modelable.

I can pay my team in fractions of a business model. Or at least we can have the discussion and explore the idea and get a sense of how we would have to change the work in order for that to happen. There are interesting questions about fungibility. Is my business model as valuable as Andrew Chen’s? Would fungibility only be possible with products from larger brands or companies? Is fungibility dependent on the depth of the trading pool of each product or service? how much would it push the commodification of services?