From information and communication to music and television, the Internet has helped transform every aspect of our lives. Well, every aspect except banking.
In the last three decades while our smartphones transported us to the future our banks got left behind. A three-year study by Viacom's brand consulting division Scratch revealed that Millennials view banks as irrelevant, out of touch, and in desperate need of a shakeup.
The survey found that people born between 1981 and 2000 overwhelmingly believed banks had the highest risk of disruption of the 15 industry categories included. Over half aren't sure what makes their bank different from any other, and as such, one in three are open to switching institutions in the next 90 days.
In truth, our banks aren't to blame. One of the main problems is the antiquated payment network that our banks rely on.
These systems still operate like the Internet of the 1980s and early 1990s, a mishmash of disparate, closed networks that couldn't effectively communicate with one another. If you used AOL, you could forget about messaging your friend on CompuServe.
The inability for regional payment networks such as the automated clearing house in the U.S., Faster Payments Service in the U.K., and the Single Euro Payments Area to interoperate with one another seamlessly and cheaply has cascading consequences. Money tied up or unsent is productivity lost, while creating unnecessary barriers for banks, small businesses, and individuals trying to tap into the international market.
Worst of all, our current system stifles innovation, acting as a constant bottleneck for what financial institutions can offer their customers. Square became one of the hottest fintech startups out of Silicon Valley since PayPal with its novel marriage of credit cards and smartphones. Its product and service is clearly a winner, but the company can barely scrape by due to the costs of existing payment networks.
What we need is for our payment systems to look more like the Internet of the 1990s and 2000s. The standardization of protocols like HTTP for the World Wide Web and SMTP for email meant that people could communicate with whoever they'd like and everyone had access to the same websites no matter what provider they had. This global, open platform would spawn a dizzying array of awesome products and services like the web browser, YouTube, and Wikipedia.
So why have we seen this evolution everywhere else except banking? The bar is simply higher to transfer value than for information, and it hasn't been technically feasible at least until very recently.
Instead, payment processing companies have built layers on old technologies to smooth out some of the friction points. As it stands, cross-border messaging primarily takes place over SWIFT, while the movement of funds follows a separate path through a process known as correspondent banking. This Band-Aid solution creates a slew of problems because data and money don't flow together, leading to delays, costs, and suboptimal customer experiences.
Distributed ledger technologies like Bitcoin and Ripple finally solve this problem, enabling value to move like information does today. (My company, Ripple Labs, is focused on contributing to the Ripple protocol and expanding its ecosystem. But Ripple is open-source, meaning anyone can contribute code or use the technology for free. The same is true of Bitcoin.) A true Internet protocol for funds transfers enables straight through processing, with funds settling at the same time as payment messages, minimizing costs associated with risk, time delays and fees for banks. And, just as HTTP made localized news accessible around the world, a payments protocol unlocks previously illiquid assets for trading.
Such protocols promise to help reimagine payments and value exchange in the spirit of the Internet. What kind of innovation can we expect if value can move as freely as information? Imagine a value web through which people can remit money from the U.K. to Nigeria instantly and at a fraction of today's fees, and pay for coffee with airline miles using a prepaid card.
Of course, what we've learned from the web is that technological innovation can be a source of disruption. For some, it might even be perceived as a threat. After all, one third of the Millennials surveyed by Scratch don't think we need banks at all.
Then again, that also means that two-thirds have taken a more pragmatic approach. This is a once-in-a-generation opportunity. Could this be the chance banks have been waiting for to truly differentiate themselves?
Maybe we don't need the banks of today. Maybe what we really need are the banks of tomorrow.
Chris Larsen, a co-founder and the CEO of Ripple Labs in San Francisco, will speak at American Banker's Digital Currencies conference in New York Tuesday.