Why Do Banks Exist?

There is reason to believe that a bank-like concept has existed for 10,000 years. The idea of a bank is an old one. But why do we need them and is it finally time to move on?
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Today, banks are an important part of any adult’s life. Why do we need them? And why do banks still exist? These are two hot topics of modern economics.
To understand the present and predict the future of the banking system, let’s start with some history.

History Of Banks: Milestones

The first ATM installed in 1967 by Barclays in one of its branches in London.Image source: Shorthand Social

Why Do Banks Exist?

The shortest answer to this question “Why do banks exist?” would be “Banks exist to make money”. So, they are similar to any other business. But why our attitude towards banks is so controversial? Surveys show, that many people don’t trust these institutions and doubt they have their clients’ best interests in mind. Especially, if you ask about ‘banks in general.

The infographics showing the attitude of respondents to banks.Image source: Deloitte.

To understand this attitude better, it would be useful to know how the banking system makes money and what its pros and cons are.

Why Do Banks Exist And How Do They Make Money?

The number and variety of financial services a bank offers you may vary, but the core is always the same. Most banks provide:

Pros Of Banks

So far, it looks like the relationship between traditional banks and their customers is mutually beneficial. After all, they make our life easier in more than one way:

Banks make money digital and more convenient to use
Few people today carry cash in their wallets — almost all of us use credit cards, issued by our banks. It’s more convenient, fast and safe.

Cons Of Banks

The benefits we listed make banks look like a perfect solution for everyone’s financial needs. But these institutions balance their pros with some serious cons. These cons are the main reason why people today don’t trust banks or dislike them.

Why do banks even exist if millions of adults lack access to banking?
The graph showing the number of unbanked people in different countries in 2017.Image source Forbes Statista

Do We Still Need Banks?

Hopefully, we have answered the question “Why do banks exist?”

Now, let’s think if we still need them.

Ok, we all agree that most people need the services banks to provide them. It’s hard to imagine our daily life without a credit card of a payment app. We want to be able to send money with a click. We need a safe place to store our savings in.

Living without a bank account seems too stressful and challenging. So, why should we break our relationships with banks, even if these institutions cheat on us, occasionally?

Probably, the best answer to this question was given by Bill Gates back in 1994. He stated:

“We need banking, but we don’t need banks anymore”. 

Why blockchain can improve the existing concept of banks
Decentralized and centralized databases compared.Image source: eLearning Industry

Cryptocurrency vs banks 

In 2009 Satoshi Nakamoto developed the Bitcoin (BTC), the first decentralized digital currency, based on blockchain technology. The primary purpose of this cryptocurrency was to disrupt the centralized financial system that had proved to be dysfunctional. It’s interesting, that Satoshi himself had a negative personal experience with banks. In 2005, they repeatedly denied him an account just because he had no permanent address in the United Kingdom. 

“ I felt like a failure and was humiliated by the banks so I made it my mission to invent something that would enable a common layperson to access money without involving the big banks.” 

As a result, he decided to develop a system that everyone would be able to access. Something like a self-regulating bank without borders and without any trusted central authority to manage customers’ money and data. 

The creation of BTC was just a start. In the 2010s hundreds of cryptocurrency projects appeared, seeking to disrupt the banking system or transform it beyond recognition. The great majority of their developers just made easy money and vanished. Fortunately, there were a few fintech startups that were more about value than hype.

Among the most famous of them are Ripple (XRP) and Stellar (XLM). To know more about them, read this article.

Why with blockchain banks don't have to exist anymore
Blockchain use-cases for banks: from interbank transactions to serving the unbanked.Image source: Disruptor

Banks and blockchain 

The blockchain technology that makes cryptocurrencies possible is one of the most important topics in today’s financial industry. Many major banks are testing it to move with the times. Among them are JPMorgan, Santander, Bank of England, Bank of America, Citibank and Credit Suisse. The full list is available here.

Using blockchain is able to reduce the cost and increase the speed of transaction processing. It also allows to avoid many errors and eliminate a lot of reconciling work. The most obvious use-cases of blockchain are inter- and intra-bank cross-border transfers, that have always been absurdly expensive, complicated and slow.

Blockchain may look like the future of banking, but adopting the new technology means transforming the current infrastructure and retraining employees. So far, banks have been cautious to accept innovation. Rather, they are forming their blockchain strategy and starting to explore the opportunities it promises. 

Why Do Banks Exist: Conclusion

Will banks create their own cryptocurrencies that will displace Bitcoin and the likes of the market? Or will they disappear as ‘proper’ cryptocurrencies go mainstream? There are different opinions on that. 

Anyway, it would be interesting to watch them try ‘to centralize the decentralized’.

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