Fintech’s Final Frontier: Central Banks and Disintermediation

Alex Rampell

The internet has many legacies, but its greatest one is disintermediation. And the greatest disintermediation—of the banking system—is coming soon to an app near you.

Before the internet, consumers who wanted to buy an airplane ticket would talk to a travel agent, who would type into a “green screen” terminal, which would “talk” to a mainframe computer, which would procure said airplane ticket. Now the consumer has a computer which can talk to the mainframe—a web browser that accesses Expedia that accesses (amazingly) the same SABRE system. The same is true for mail order catalogs in the 1980s, which were like Amazon but with one key difference—you would call a person, who would type into a computer, which would tell another computer to ship you the item and charge your card. Now you just access “the seller’s computer” directly, disintermediating the human in the middle and making the whole process so much faster and convenient. “Do you have a table at 7pm?” or “When is the last flight to Hawaii?” or “Do you have paper clips in stock?” or “How long will that take to ship?” become API-able queries once the consumer’s computer can access the back-end system of record (database).

It is said that governments—as the sovereign—have a monopoly on money and law enforcement. But the “money” functions of governments almost never reach consumers directly. Very few people directly own US government bonds, instead earning interest from banks, who own tons of government bonds. No consumers borrow money from the Fed or loan money to the Fed; their banks do when making them loans or earning interest on overnight deposits. If you have a “conforming mortgage,” you effectively got your mortgage through the government, except you got it through many intermediaries first. The reason why things like the Paycheck Protection Program (PPP) have been such a disaster, or that stimulus checks still have to be mailed in 2021, is that there is no “direct connection” between consumers and government for money. The government is the mainframe for money, but there’s not really an Expedia yet.

The most basic bank in a fractional reserve banking system is the “savings and loan.” A bank takes deposits (savings), loans them out to borrowers (businesses and consumers, with and without collateral, for a variety of terms and purposes), and then pays some portion of the resulting profit to those depositors. But in many parts of the world, why take such risks when you can simply take deposits and loan to the government? This is precisely the state of consumer banking in much of the world.

In many emerging markets where capital flight (and currency depreciation) is a problem, governments use interest rates as a key lever to keep capital in the country. Since countries outside of monetary unions (e.g. Eurozone) control their own money supply and can simply print more currency to make interest payments, the yield on government debt is called the “risk free rate.” In Nigeria, the risk free rate in the last few years has been as high as 14 percent. Yet the biggest banks in Nigeria pay consumers less than half that—below the rate of inflation (about 11 percent). The result is that Nigerians horde dollars and Euros, shunning the banks. 

Fintech—“apps for money”—represents the most powerful tool that governments have to make their monetary services available directly to their own citizens, helping accomplish monetary and policy goals and benefiting consumers equally. Private banks can and do perform a valuable function in every economy, but when they merely serve as a “front end” to the central bank, they take a fee, insert more bureaucracy, and fail to pass on monetary goals. And in many emerging markets, the “easy” money of serving as a toll-keeper between consumers and their government’s central bank or Treasury lowers risk-taking propensity that can fuel the economy. 

Today almost 5 billion humans have mobile phones, 80 percent of them smartphones with internet access. The bank branch is an anachronism—Amazon has rendered much of retail obsolete—and this process is quickly happening to banks as well. Every consumer will access his or her savings, loans, and investments via a mobile app. This reshuffling of the deck is being quickly adopted by consumers, but it should be appreciated even more by governments, who can finally offer monetary goals more directly to their constituents.

What might this look like? Let’s look at the United States. The first Social Security Number (SSN) was issued in 1936, and today is the universal, unique identifier for Americans. Not every American has a driver’s license, a passport, or even a copy of their birth certificate, but every American citizen knows their SSN. There may be lots of people named “John Smith” but each John Smith has his own unique SSN. That SSN is the gateway into financial services, medical services, pretty much everything that requires a unique representation of you. An email address or a mobile phone number has the same level of importance, but without any official certification, proof of identity, or uniqueness. 

Why not turn the SSN into a bank account, placing some measure of security (password + second factor authentication) while we’re at it? With an SSN as a permanent financial account with the government, the government could deposit money directly to consumers, or allow person-to-person transfers (Fedwire being the SABRE of sending money, only accessible through banks), or pay overnight interest on deposits directly. Need to pay your taxes? Just deposit it directly to your Federal account. Waiting for a tax refund? Nothing to wait for. The same could be done with the “SSN for businesses,” called the Federal Employer Identification Number (FEIN). Start a business, get an instant “account” with the federal government for any transactions with the government. 

Imagine that Congress passes another stimulus package guaranteeing 80 percent of wages for small businesses. How on earth will that money *reach* small businesses quickly? How will the government identify, adjudicate, and disburse the funds? As PPP showed, it won’t, because it can’t. But with a record of every small business (FEIN provides this for every employer) and a unique account for each one, linked to tax returns, identifying, adjudicating, and disbursing funds would just be a “database update.” The same goes for stimulus checks. And in normal times, this would cause the compression of “intermediated” bank fees to the benefit of consumers and businesses alike (bye bye $35 wire fees! Or any annual percentage yield for savings under the Fed’s Interest Rate on Excess Reserves (IOER), which is much higher than you’ll get at Bank of America!).

This doesn’t mean the nationalization of banking, or postal banking, which would be a terrible idea. Risk-seeking should be exclusively within the realm of private capitalism, but if the borrower is the government, or if the recipient of money is the government, it makes no sense for that to be filtered through legacy financial institutions. The government already owns identity and is exclusively in charge of the money supply. It’s time to unite them. The time to build is now.

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