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Alternative Finance: Power to the people?

Posted By E. Alex Floate, Friday, August 30, 2019

Alex Floate, a member of our Emerging Fellows program devotes his eighth blog post to the possibility of establishing an alternative finance. The views expressed are those of the author and not necessarily those of the APF or its other members.

 

Access to information creates an informed populace, makes people’s lives better and democratizes society. That was the idea behind the public library, and the mantra of idealists in the early days of the internet. Twenty plus years into that era we are still waiting on the full promise of a connected world. In the area of personal finance, we have seen small successes as banking, credit scoring, money and investment management have moved online. Increased access and information have been realized in these areas, and in some cases has brought investing and money management opportunities to people who never considered anything but savings account. However, these improvements have not brought life-changing experiences to most, and the economic paradigm we operate under appears to be more of the same, but with apps!

 

Where the most success has been achieved is with those who previously did not have access to mainstream banking or financial systems. Some of the early players, such as PayPal and Alipay created the means for moving money from one entity to another. Doing so allowed many who did not have conventional accounts to participate in the broader economy by having a cost effective alternative. Personal investing companies like Acorns are bringing saving and investing to the masses by stealthily increasing every transaction you make with your debit or credit card to the nearest dollar, then investing those extra pennies into exchange-traded index funds. The appification of finance is the first and most obvious sign that personal finance is changing, but there are bigger movements ahead.

 

Open banking is a new concept that relies on networks and the sharing of both personal and financial institution data across these networks. The goal is providing consumers with better information as institutions provide data about their services that conform to an unbiased and transparent standard. This allows for better competition between participating banks and institutions resulting in lower fees and borrowing costs for consumers. Conversely, institutions have access to the history of potential customers and allow them to more accurately configure and offer products based on the risk profile as seen through transactions, and not through 3rd party credit agencies.  

 

As the world becomes a global marketplace for finance, blockchain will be the technology that will facilitate it. Blockchain will be the means by which transactions are secured, trust is established, and value is traded. Currently we use intermediaries to reduce the risk of transacting with third parties, especially when crossing jurisdictions or borders. This raises the cost and complexity of those transactions which blockchain promises to reduce. This may even result in a complete remake of retail import/export chains as people are able to transact directly across borders. Additionally, blockchain coupled with open banking will elevate peer-to-peer lending to a level where nearly anyone with assets can participate in the capital income economy.

 

Empowering individuals is the promise and goal of personal fintech and alternative finance. However, as with any economic system there are issues and areas that the promise may not cover. How will the average person create value that can be leveraged across fintech and the web? Those with assets, products or services that are in demand will be poised to take the most advantage; those whose only asset is non-skilled labor will be left out. Although technology is just a tool, those tools enable humans to create and build better lives for the creator, owner and user of those tools. There is never any promise that a tool will bring universal prosperity, but we should be aware of the potential effects of any new technology. For these new financial tools and systems, we need to understand will they truly help the greater good, or just create another seemingly insurmountable divide in our society?

 

© 2019 E Alex Floate

Tags:  banking  Blockchain  finance 

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As much as we might deny it, we always trust the bank

Posted By Administration, Sunday, April 8, 2018
Updated: Sunday, February 24, 2019

Nichola Cooper‘s third post in our Emerging Fellows program explores trust, blockchain technology, and banks. The views expressed are those of the author and not necessarily those of the APF or its other members.

The future of trust is topical. A sustained spate of political and financial calamities has accelerated the decline of global trust levels and enhanced interest and development in decentralised technologies and peer-to-peer networks. This blog post marks the first in a series regarding how that trust is expressed in discernible changes in social organising patterns, engagement with technology and financial markets.

We begin with Bitcoin. You might have heard of it? It is commonly thought that its creation was a reaction to the global financial calamity; from a desire to obviate unscrupulous bankers and prevent bad lending practices. This is not quite true.

In fact, the Bitcoin protocol was designed to resolve the double-spend problem of digital currencies. Unlike physical money which is reasonably difficult to counterfeit, digital currencies can be replicated quite easily – they are basically like a file on your computer that you can email to a friend. There is nothing stopping you and your friend both copying (counterfeiting) the file and sending it multiple times across the network. The Bitcoin blockchain prevents double-spending by verifying each transaction with a proof-of-work algorithm which made digital currencies as a medium of exchange all the more viable. The proof-of-work is why a common refrain has become that the blockchain negates or even creates trust.

This also is not wholly true. There is an increasingly prevalent inverse relationship between trust in institutions and peers. For, unlike Bitcoin, decreased trust in centralised institutions can be attributed to corporate malfeasance and bankers’ chicanery. Whilst transactions on decentralised networks skirt institutions, they are not inherently trustworthy for this reason alone.

Despite excited claims that we evidently trust technology more than institutions, I suggest that blockchains are simply an artefact of greater trust in peers. In the cloud of blockchain and cryptocurrency confusion, we have forgotten Bitcoin’s famous integrity is designed and maintained by a community of users – people just like us. In other words, social trust is not shifting to technology, but ourselves.

In financial transactions, we deal with three particular kinds of trust: institution-based, character-based and process-based. Institution-based trust is self-explanatory: we trust the authority in the transaction, usually a bank or government. Characteristic-based trust is awarded to someone that reminds us of ourselves. Process-based trust occurs when precedent indicates reciprocity in an exchange. For example, if I go to shake your hand, I trust you will reach out to take my hand and return my handshake.

It naturally follows that trust in our peers would increase when we lose trust in central institutions and we don’t understand technology. Part of our fascination with cryptocurrencies is a yearning to be able to stick it to the man while making a quick buck. The dominant, practical part of ourselves, however, simultaneously wants to be protected from risk.

It’s all fun and games as long as the price of Bitcoin keeps going up. But it isn’t. Bitcoin’s price has lost 27% during the time it took to write this post, commentators blaming volatility in the markets on banks’ demands for regulatory intervention. Academics have observed banks’ demands are motivated by challenges to their power and legitimacy; technology that disintermediates them suggests lack of relevance.

Yet, the evolution of money has consistently shown approval by a central authority to always have been necessary. Gold has been valued by a jeweller, money dispensed by a bank, tax paid and refunded by a government agency. As much as we might wish the success of digital currency its use as a medium of exchange is probably dependent on support by governments or central banks; as seen in movements towards cashless societies in Denmark, Sweden, Norway, India, and Venezuela.

As much as we might yearn otherwise, we always trust the bank.




© Nichola Cooper 2018

Tags:  blockchain  economics  technology 

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