“Bank to the FinTech” Why Banks of the Future Won’t Use Cash
When you think of today’s banks and financial institutions, you typically think of concepts like cash and credit scores. However, the banks of the future won’t exchange cash, or even digital money. And, for many Millennials, credit scores will replaced by a system of social credit via the Blockchain.
It’s becoming increasingly apparent that in order for banks to move forward in the new FinTech era, they will have to make sense of all the data that social networks such as Facebook are creating. Unlike the financial data typically created, stored and analyzed by banks, however, this data will include qualitative data that’s created by everyday social interactions. The field of “Big Data” is, in many ways, the struggle to convert all this new qualitative data created by social networks into quantitative data that computers can analyze.
At a time when many people are suffering from a lack of credit history or bad credit, and as a result, cannot get loans, there is the need for an alternative. Whereas typical bank lending relies on financial indicators such as net worth or monthly salary, the new form of “personal value lending” relies on new social indicators. You can think of this as “character lending,” in which your reputation online is just as important as how much money you make at your job.
From a banking perspective, the key is converting all of your accumulated social activity online – your Facebook status updates, your tweets, your Instagram photos and your Yelp reviews – into “social credits.” The more social credits you have, the higher your “social credit score” would be.
Unlike a traditional credit score, this social credit score would be more of a social conduct score. Do people trust you? Do you have a lot of friends online? Do you contribute value to the social networks where you are active? You can think of this as a Social Profiling Index, or SPI for short. It’s a way of using your social values and social worth to create a score for you.
You can immediately see why this is potentially so disruptive for financial institutions. It would fundamentally change the lending decision-making process. In today’s banking world, the only people who can get loans are the people who don’t need loans. In tomorrow’s banking world, the people who need loans are the people who will get loans.
A loan or credit transaction in the future would be based on personal and social value. In the good old days, people would visit their local shop and a tally or tab would be put against their name on a board, to be paid off each week when they got paid. This social form of lending looked at people’s character. If you were a trusted member of the community, it was considered safe to extend a loan to you.
However, when the industrial revolution took place, people could travel far and wide by trains and other forms of transport; thus, it became harder to judge one’s personal merit or character when making a loan. As a result, banks devised complex and sophisticated lending models that told them when they could extend credit to someone – and for how much.
Unfortunately, while those lending models are often mathematically rigorous and statistically accurate, they also ignore all the qualitative factors that should go into the lending decision. For example, consider the single mother who is trying to take care of her kids while juggling several jobs at one time. Or, take the example of young Millennials who are now part of the Gig Economy and do not have official, full-time jobs. Instead, they are driving Uber cars in their spare time.
An early breakthrough in how social values and “social credit scores” could be used as part of the lending decision was devised by Nobel Prize laureate Muhammad Yunus and Grameen Bank nearly a decade ago. What he had in mind was a global system of “micro-credit,” in which well-intentioned shopkeepers and entrepreneurs could receive small amounts of funding for their ventures despite their lack of a credit history.
Suddenly, people who were not “bankable” could become bankable. The key was their social profile – as part of the vetting process on sites such as Kiva, each entrepreneur or shopkeeper would upload a photo of themselves and their business, and describe how they would use the funds. The story mattered more than their income or wealth.
Flash forward 10 years later, and new FinTech innovations are beginning to further blur the line between social networking and financial activity. Concepts like social capital, talent and reputation are emerging as important factors.
Take peer-to-peer (P2P) lending institutions, for example. They are disrupting the lending process by changing the role of the financial intermediary entirely. In the case of P2P lending, it’s not banks that are making loans – it’s thousands of individuals chipping in to make one large loan to someone else.
While these P2P lending platforms mix financial and social factors, the really exciting developments are being made in the area of crowdfunding. Here, there are no financial intermediaries. People give money to other people based on a photo, a fun video and a cool story. Whereas banks might take months to make a lending decision, crowdfunding platforms such as Kickstarter, Indiegogo and GoFundMe can yield tens of thousands of dollars in just a week. All you need is a good story and a social media presence.
And that’s where tools that measure social worth like Klout play an important role. They are taking information and data about your social status and converting it into a single score. The better your reputation, the higher your score.
And those “social credit scores” are about more than just bragging rights. They can also help you snag bargains and cheaper rates. Brands will often extend discounts, bargains and special rates to people they consider to be “influencers.” And guess what? That influence is a direct measure of your activity online.
Take Facebook, for example. The number of friends that you have online is just the beginning. How often do you post? What do you usually talk about? How diverse is your social network? How many people “like” your updates? All of those are now interesting questions to consider for companies as they search out the “influentials.”
Just as some hiring managers now won’t even consider a candidate unless he or she has a social media presence online, we’re now rapidly approaching a point where institutions won’t extend you credit or financing unless you have a social media presence. Who wants to crowdfund an entrepreneur unless you can check out his or her tweets online? Who wants to give a discount to a customer unless he or she can influence friends and followers to shop at that store?
In the future, social networks such as Facebook will become a new type of bank – a bank of your social credit. If you have poor social credit scores, people will be less likely to do business with you. Those with positive social values or high Klout scores will get better deals or superior rates of lending. Those narcissistic people who take selfies don’t stand a chance!
This will lead to a transformation of society. Reputation will become a real social currency. If you knew you were unlikely to get paid as much or as big a loan as possible, you would change your social behavior. If your SPI was in the red and the Blockchain held this for all to see, you’d take a second thought before posting “drunken photos” online or trolling others on social networks. It’s not only how you conduct yourself but also the respect and treatment of others.
By getting rid of traditional currency and replacing it with social currency, we would totally eradicate financial crime – a person’s “social value” could never be stolen and if it were, it would be apparent via the Blockchain who stole it! And just think of the new types of role models that we would have – we would celebrate the people who contribute value to our online lives (the people who update Wikipedia!), rather than the people who just use social media to brag about their achievements.
A generation from now, we may think how amazingly quaint it was that massively secure institutions made of concrete housed huge vaults of cash underground. Instead, all of that wealth will be floating around in the cloud, accessible to anyone with an Internet connection and the desire to make the world a better place.