How banks will migrate to Finance 2.0

Finance is ancient.
A currency transaction does not take place instantaneously, but technology has been able to fulfil real time transactions for the past 20 years.
This anomaly in the finance system is all of a sudden under the scrupulous attention of all the fintech companies in the world.
For those that did not understand the magnitude of this paradigm shift, the fact that the UK has issued more new banking licenses in the past 2 years than in the history of the UK, should clearly spell it: if your bank does not innovate within 2 years, they will run out of business within 5 years.
As drastic as it may sound, there is no other possible way, but innovating.
The typical example is a person in Japan transferring $100 at 8 am to a friend in Los Angeles.
This is impossible with the current banking system.
First of all, due to the time zone, the customer in the USA would not receive the amount until the next day, because according to standard chronology, 8 am in Japan still corresponds to the day before in Los Angeles.
Secondly, if the transaction was initiated on a Saturday morning, it might not be performed until the next Monday or Tuesday in Los Angeles.
In a real time society with real time technology, this is just absurd.
Lastly, the friend in Los Angeles would not receive the entire sum of $100, but the balance after the expensive bank charges are applied.
The other possible scenario is that the person in Japan can absorb the bank charges, but the bottom line is that someone ought to pay.
This is the last absurdity.
A bank transaction is nothing but a record of data being inputted from one cell to another in a database.
It takes less than a second, and on a blockchain with an automatic API, even less than a second.
Why in Finance 1.0 is it charged as much as $10 or $20? In the meantime the new virtual banks are performing true 24/7 real time transactions free of charge.
And bank transfers is only one small scope of all of a bank’s operations.
Mortgages are another crucial issue.
For someone who wants to apply for a housing mortgage today, the number of questions to be answered and the procedure to go through are just too many and too slow.
If you — reader — have applied recently for a housing mortgage, you would find yourself submitting paper after paper and answering question after question.
“Can you name a contact in case of emergency? What is their name, their telephone number, their address and their relationship to you? When was the last salary drawn? How long have you been working with this company? Do you have an original payslip of July’s payslip with a rubber stamp of your company? Do you have your employment contract on original true certified letterhead?”
All of these annoying questions could be easily, safely and in an unequivocable way stored on a blockchain, and made accessible in real time.
But the (slow) reality of Finance 1.0 is that this process can take nowadays any amount of time between 2 weeks and a month.
On the other hand, in Finance 2.0, a mortgage will receive approval in 1 second.
When it comes to credit cards, the process is equally slow, still involving phone call to the applicant’s boss to check if the data provided are true.
This is another absurdity of Finance 1.0, while blockchain could grant uncontested access to the same data in real time.
Lastly, small loans.
Currently a bank would assess all the belongings of a person or a business, scrutinising the ability to repay against the assets deposited or locked in as collaterals for the loan.
In Finance 2.0 this process will be running on platforms similar to crowdfunding where a collective group of users able to withstand small risk, will be issuing small units of loan to a peer-reviewed community of lender, none of which has the intention of frauding, but some of them might be unable to repay, exactly the way it is happening in Finance 1.0, with a major difference: easier access to investment and loans.
All the examples in this column might sound crazy to those that are not really involved with the development of finance.
But for someone like me, it is all much more than science fiction.
When I was still in the training business, teaching photographers how to edit their pictures, up until 2007 I still came across photographers who told me that digital photography would never succeed.
They got it all wrong.
Innovation does not wait for anyone’s opinion.

Stefano Virgilli
stefano@virgilli.com