A world without banks?
Central bank digital currencies and accelerating digitization fast removing need for private banks
4 May 2021 | Keith Mullin
Keith Mullin
Keith Mullin

How about this for a sign of the times in banking? On May 1, the Bank of England (BoE) had 26 jobs  on its careers website. Of those, seven are in the area of cyber-risk and seven are in the area of central bank digital currencies (CBDCs). That, in so many ways, tells you all you need to know about the direction of travel in banking towards a digital future, and sums up some of the key issues and critical threats confronting banks today.

By comparison, solvency, profitability, revenues, provisions, costs, business strategies, one quarter up/one quarter down, what the new CEO or chairman might do, who might buy or merge with whom are so much banking white noise.

Payments account for around a third of revenues at some banks. This is up for grabs as banking digitizes. Nimble new digital banks, fintechs and Big Tech are vying for a share of the pie, and competition is picking up on the back of regulatory initiatives in Europe to give consumers control of their own data and make it easy for them to shop it around. Taking to their ultimate conclusions, the emergence of digitisation and CBDCs, and the wholesale disintermediation of payments could deprive banks not just of their bread-and-butter core business revenues but of their very existence.

That’s not as outlandish a statement as you might think. Can I envisage conducting my banking business on a BoE blockchain using digital pounds held in my digital wallet? You bet. My bigger issue is how I protect my digital security. And let’s face it: banks demonstrate zero loyalty to customers. Why should customers bat an eyelid if their digital interface is that of the central bank rather than a private bank, which has always used bait-and-switch tactics and done everything it can to attract new customers by offering them the benefits we’ve been deprived of?

One of the challenges in all of this from a regulatory standpoint will be figuring out and understanding the exact function a central bank in a CBDC environment. It alters the nature of the interaction between central banks and entities under their supervision from regulatory overlord to potential substitute. But will that concern consumers? Hardly.

And be in no doubt: the digital story is moving fast, accelerated by economic lockdowns as a result of Covid-19. The days when retail, consumer and business banking business was conducted in bank branches is quickly disappearing into the annals of history. As is physical money. Some countries are more advanced than others in the area of digital payments, but the number of retail outlets in Europe refusing to accept cash is growing fast.

Cyber-attacks and cyber-theft pose a more serious threat today than bank robberies. Try recounting stories of gangs putting stockings over their heads to disguise their faces and bursting into bank branches with sawn-off shotguns demanding bags of cash, getaway car at the ready, to anyone under 20. Watch their brows knit with puzzlement.

With the People’s Bank of China (PBoC) leading from the front, the BoE, the European Central Bank, Federal Reserve and others are all actively working on digital currency projects. From the perspective of Western governments, the PBoC’s position has lent the grand project the air of a classic Cold War saga, as the West frets about China’s ability to use the first-mover advantages of currency digitisation as a fulcrum to force more trade flows into Renminbi from US dollars.

A week or so back, the BoE and the Treasury (the UK finance ministry) jointly unveiled a Central Bank Digital Currency Taskforce to co-ordinate exploration of a potential UK CBDC. The announcement was quick to say that the digital currency would exist alongside cash and bank deposits rather than replacing them, but that of course would remain to be seen. “No decision has yet been taken on whether or not a CBDC is needed in the UK, but it is an important topic for the Bank to understand,” the BoE’s CBDC job descriptions read.

The taskforce will convene an engagement forum to gather strategic input on non-technology aspects, and a technology forum to gather input on technology aspects. Hence those job postings I mentioned at the top. In the past few days, the BoE posted jobs for a CBDC senior manager, a senior policy analyst, a technology analyst, a project analyst, a stakeholder analyst, a solution architect and a senior enterprise architect.

The BoE is assessing monetary policy and financial stability aspects, CBDC use cases, engagement domestically with the government and internationally with other central banks – inter-operability between CBDCs will be vital – as well as features for consumers and merchants. Make no mistake: this is no talk shop.

On the basis that CBDCs and accelerating digitization are fast removing the need for private banks, how long will it be before banks start to disappear?