We all have become deeply accustomed to the fact that banks are among the most profitable companies. Many perceive the success of banking as something magic. In fact, it is based on a surprisingly simple trick.

Profitable banks as symbols for capitalism? Bank CEO’s as advocates for less government interventions? Oh, please… (Photo: jorgophotography)

Why is Apple among the most profitable companies on this planet? The answer is simple: Apple sells popular products. Some people might have difficulties to understand the religious zeal of Apple customers, but even Apple skeptics can easily understand why Apple is one of the most successful companies on this planet.

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Recent developments in finance challenge regulators around the world. Fintech companies are on the rise, and it is not clear what kind of new rules are needed. To shed light on these issues, one of the authors behind Jonathan McMillan gave a speech at the GovKnow conference on “The Future of Financial Services – Governance, Regulation and Accountability” in London.

Mind the regulatory gap between banks and fast moving Fintech companies. (Photo: i am jae)

First of all, I’d like to thank you for this opportunity to discuss some perspectives on financial regulation in the digital age. In my view, this is a topic that has not yet received the attention it deserves. So let’s get right into it.

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The End of Banking discusses abstract concepts such as information asymmetries, systemic stability, or money creation. Sure, these concepts are critical for our argument to end banking. But there are also very tangible reasons for a world without banks that are just as important.

The world after banking will indeed be a better place (Photo by FreeImages.com/mokra)

In The End of Banking, we describe how a financial system without banking can work. We show how life for both borrowers and lenders will improve, and how it will be better in supporting the real economy with credit. In this short blog post, we want to discuss a key feature of a financial system without banking: the absolute transparency and accountability you have as a saver.

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Is there a better way to explain the Eurozone crisis than with Greek Mythology? Probably not, as Odysseus’ choice between Scylla and Charybdis offers a particularly neat analogy for the current situation in Europe.

Austerity or Debt Relief? This picture symbolizes both options quite well. (Photo by Crinn Wolk)

“To choose between Scylla and Charybdis” means to choose between two very bad options. The two main options crystalizing from the never-ending Eurozone crisis has been debt-relief or austerity measures. Mainstream economists from the Anglo-Saxon countries predominantly advocate another generous bailout program for Greece paired with debt relief.

Let’s call this option Scylla.

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If Larry Summers speaks about marketplace lending, it is advisable to listen. Not because he used to be the president of Harvard, the head of Treasury, and an economic advisor to Barack Obama, but because of his outstanding ability to predict the opposite of what is going to happen.

«The only useful banking innovation was the ATM» – Marketplace lending seems to confirm Paul Volcker once again (Photo: striatic)

Most people working in finance know one colleague with an outstanding sense for being wrong. It is the person who always buys at the peak and sells at the trough; he is the one you ask for investment advice and then do exactly the opposite of what he advised you to do. In the political sphere of Washington, this person is Larry Summers.

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A common narrative to explain the last financial crisis goes like this: Banks used securitization to unload crappy loans on unwitting investors and thus did no longer uphold proper lending standards. This is a dangerously misleading story, particularly in light of recent developments in marketplace lending.

If banks on Wall Street offloaded all the crappy loans to unwitting investors, why would they have suffered mind-staggering losses?

The “unload-crappy-loans-to-unwitting-investors-caused-the-crisis” narrative interprets securitization as a financial technique to distribute risks. Its proponents argue that banks did no longer care about risks which they distributed with securitization, so lending standards fell. Sounds intuitive, right? The only problem is that securitization is not a technique to distribute credit risk. The purpose of securitization is the exact opposite.

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The perception that financial professionals earn more than people in the non-financial world is not wrong. Interestingly, however, there was a long period in the 20th century where this was not the case.

Since the 1990s, it is more likely that a banker lives in this villa than someone working outside the finance industry.

Every child knows: Bankers earn a lot. They actually bring back home much more than someone else with a comparable job outside the financial sector. But what drives this difference? Is it because bankers create so much economic value? Or are bankers just reckless people, better in getting the best deal possible for them?

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Banking is the Achilles heel when dealing with the Greek sovereign debt crisis. (Photo: Boris Kyurkchiev)

Will Greece default or will it service its debt as agreed with creditors? This seems to be the critical question for our politicians, economists and bureaucrats. But the Greek sovereign debt crisis raises a much more important question than this one.

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Still better to bump into a banker than to bump into this guy when visiting Wall Street (Photo: Timalan)

During a demonstration, an Occupy Wall Street Activist dressed as a polar bear to demonstrate against climate change. Why would an Occupy Wall Street activist do that? I would rather expect him to wear a Dick Fuld mask while he tries to land a remote-controlled model helicopter on one of the skyscrapers. Why polar bears? Shouldn’t Occupy Wall Street deal with banks and the financial system and not with polar bears and climate change?

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As strong advocates of peer-to-peer lending, we were excited to hear about LendIt. But the conference on alternative finance turned out to be a sobering experience.

Where is the marketplace lending industry going? Some answers from the LendIt conference. (Photo: Safrane01)

Having written about the potential of information technology to make banking obsolete, it was a no-brainer for me (the Investment Banker co-author) to visit the LendIt conference. I wanted to see first-hand how far the marketplace lending industry has progressed to replace banking and to pave the path towards a brighter financial future. At this conference, the industry demonstrated that it has developed almost all the tools that are required to make banking obsolete. This is the good news. The bad news is that this potential is not used to end banking: It is used to reinvent (shadow) banking.

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