The purpose of this section is to perceive the innovation of our existence.Therefore, let’s take a step back some hundred years.
The Bank in Antiquity
The origin of the bank goes back to Babylon where, as early as the second millennium B.C., lending on goods (especially grain) was already practiced within the temples.
With the appearance of money, around the seventh century B.C. .Money lending and deposit operations (giving money to someone to keep) developed: after being practiced in a religious setting, they were practiced by civilians.
During the Roman Empire, private bankers continued this lending and deposit business and took advantage of it to advance money on behalf of their clients in return for interest. Until the Middle Ages (i.e. around the 5th century AD), banking activities were limited to cash transactions (depositing or withdrawing money), and credit was still rarely practiced by banks.
From the Middle Ages to the Renaissance
With the Crusades (Christian countries trying to free Jerusalem from the Muslims), the banks experienced significant development. Commercial exchanges accelerated and the banks participated by facilitating the purchase and sale of goods (precious objects, animal skins…) and raw materials (cereals, spices, metals…). From the 11th century onwards, bankers were mainly Italians: the first bank was created in Venice in 1151, while the city of Florence became a leading banking center.
From the 12th century, the development of trade allowed banks to establish themselves all over Europe. The exchanges between Europe and the East, the existence of major trade routes in Northern Europe.The importance of the fairs of Champagne and Lyon, facilitate the use of the bill of payment, then the bill of exchange.
From the Renaissance to the 18th century
From the end of the 18th century, but especially in the 19th century in the midst of the industrial revolution.(creation of the steam engine, mass production of steel, coal, and textiles…), the rise of banks was favored by three factors :
the development of fiat money (i.e. banknotes) ; then scriptural money (checks for example); as well as the use of securities (shares) to finance commercial enterprises.
This period also corresponds to the creation of large banks. Such as Société Générale and Crédit Lyonnais in France, Deutsche Bank in Germany, or Barclays Bank in Great Britain. Little by little, the State supervised the activity of the banks and wanted to bring them under its control.
The 19th century: the arrival of modern banking
From the end of the 18th century, but especially in the 19th century in the midst of the industrial revolution.(creation of the steam engine, mass production of steel, coal, and textiles, etc.).The rise of banks was favored by three factors: the development of fiat money (i.e. bills), then scriptural money (e.g. cheques), and the use of securities (shares) to finance commercial enterprises. This period also corresponds to the creation of large banks such as Société Générale and Crédit Lyonnais in France, Deutsche Bank in Germany, and Barclays Bank in Great Britain. Little by little, the State supervised the activity of the banks and wanted to bring them under its control.
The 20th century: towards a new boom
In the twentieth century, the State strengthened its authority over banks and imposed regular controls. This was all the more necessary when the stock market crisis of 1929 (sudden and lasting fall in stock market prices) occurred. Thus, in the United States, President Roosevelt strictly separated investment banks (for large companies) from deposit banks (for individuals and small businesses). In 1945, France nationalized (the owner then became the State) a number of banks, including the Banque de France.
In the second half of the 20th century (from the 1960s onwards), banks experienced a new boom. More and more people had bank accounts. New customers appeared: women, young people, and children through their parents.
New means of payment are born: the bank card, for example. At the same time, banking groups are growing. These establishments work all over the world: Europe, America, Asia, Africa. Their activities are diversifying: investment in industry and real estate, presence on the financial markets.
Means of payment, what’s new?
After a long period of stability, the world of payments must adapt to keep pace with current consumer trends in the context of effervescent innovation and increased competition. To respond to these challenges, how can we identify the conditions for successful innovation in payments in a logic of value creation and differentiation? The increasing porosity between physical and digital means that new payment routes are needed to meet the needs of consumers and creditors. So banks are responding with a number of initiatives to make this change a success and to adapt their systems and infrastructures to remain the central players in this business and avoid disintermediation that would destroy value for their ecosystem.
Means of payment today refer to several major product families: checks, cash, bank cards, transfers, and direct debits. These families cover different realities in terms of management both economically and industrially.
Although this family of products has apparently been very stable for thirty years, in reality, it is constantly evolving, following long cycles influenced in particular by innovation and consumer use. Innovation is one of the main factors that make payment methods a lively and dynamic industry.
Conditions for the success of innovations in payment methods
In recent years, the market for means of payment has been in turmoil. A veritable profusion of innovations and projects has resulted in the launch of numerous services for both individuals and companies. This movement is intensifying today with an ever-increasing number of players and investors positioning themselves in this field of activity.
While these initiatives create real wealth and emulation in the market, however, it is often difficult to distinguish between those that bring real added value – and are set to develop – and those that will not meet the conditions for real market acceptance. This brings us back to a fundamental question: what are the conditions for successful innovation in payment methods?
First of all, any new means of payment must be simple and easy to use, practical and secure. It must have the trust of its user. Secondly, demanding consumers put pressure on pricing (when the payment method is not free), which creates constraints from the point of view of the business model and the service’s revenues and operating costs.
In its use, the new payment method must also offer added value compared to existing payment methods. The attractiveness of the proposed offer is decisive.
Finally, and probably the most important condition, the success of its adoption by consumers requires a specific organization of its deployment in the market. In a very particular two-sided market where there is always a payer and a payee, it is necessary to synchronize the use by the two parties so that they meet and work together, regardless of the bank that provided the means of payment. This is what is commonly referred to as the universality of the means of payment. All of these conditions make the adoption of these innovations by customers relatively slow.
In fact, there are almost too many innovative offers, which also limits the ability of some of them to emerge and develop. Moreover, they affect the entire payment chain: the physical support of the offer, the payment process, and the solution itself. A problem of legibility and comprehension for individual customers and businesses is clearly posed.
This area of innovation is attracting a lot of interest from many players – from start-ups and FinTech to GAFA (Google, Apple, Facebook, Amazon) – who are looking to position themselves at the customer relationship level to diversify, and sometimes with very different interests: data monetization, related value-added services, etc.
The balance of payment channels
The change in payment methods requires technological innovation combined with a new regulatory and competitive environment, in search of new solution models. While traditional payment methods still account for the bulk of the media used, new payment methods have emerged and are beginning to find their place in the market. The digitalization of exchanges and transactions will catalyze their development and encourage the growth of new physical media and new payment processes, such as blockchain technologies and their bitcoin versions.
Beyond the cell phone, which could become a new payment medium, the integration of the Internet into ecosystems and connected objects could lead to new payment solutions.
A Consumer Choice Panel study estimates that sales of new connected products such as connected watches amounted to €64 million in 2013, should be equal to €400 million in 2015, and continue to grow at a very strong pace beyond that.
Banks will have to count on renewed competition, with cooperation as well as competition with new players, both in terms of issuing new solutions and processing transactions.
Finally, the transformation of payment systems and infrastructures, with the ability to execute transactions more rapidly throughout the entire value chain, is likely to create the conditions for real-time payment, with immediate debits and credits to accounts. The world of instant payment could resolutely change the way things are done on a daily basis and further upset the balance between payment channels.
Bitcoin to replace currency?
Can digital currencies replace currency? A detailed examination of the Bitcoin protocol shows that this conceptual and technical feat is still far from being able to play the role of currency, but it has spurred innovations in financial technology that could have far-reaching implications for payment systems.
Recent years have seen the emergence of what can be called digital or virtual currencies. This innovation has come from the private sector and no one yet knows where it will lead. Should central banks be worried about it? What are the monetary and financial consequences?
A payment system, but not yet a currency
As a means of payment, Bitcoin has potential advantages, largely due to its decentralized structure. Payments are relatively fast: a transaction is confirmed on average after ten minutes, although it is recommended to wait until several blocks have been added to the chain before admitting a payment as final. The network, being decentralized, is inherently robust. Payments are person-to-person and do not require financial or other intermediaries – users have the choice of going through a “bank” or a custodian to manage their electronic wallets. The chain on which everything rests provides an unalterable record of past transactions and can be used as evidence. Transactions are irreversible, which is both an advantage and a disadvantage, depending on the application. Since Bitcoin is divisible up to 10-8, it makes micropayments possible and thus transactions that are not made or are made badly.
The use of Bitcoin by criminals has often been discussed. This is undeniable, just as it is with cash. But Bitcoin has serious drawbacks for criminals since all transactions are recorded. It is true that only wallet addresses appear in the chain, and additional information is needed to link them to individuals. But if the justice system has this information (for example, because it has seized the criminals’ computers), it can establish proof of the transfers; the Silk Road case in the United States demonstrated this well.
That said, Bitcoin has many hurdles to overcome before it can be transformed from a means of payment into real currency. Its use as a means of payment remains marginal and the demand for Bitcoin is essentially speculative, with investors betting on its eventual success and a large capital gain as a result. As a result, its exchange value against the official currencies (dollar, euro) fluctuates considerably and sellers who accept Bitcoin hardly ever set their prices in Bitcoin. Little used as a limited means of payment, risky as a store of value, unused as a unit of account, Bitcoin is far from being a currency. It could become more common if it became less risky, but its value will only stabilize if it becomes more commonly used.
Bitcoin and Other Digital Currencies
Bitcoin remains a very complex protocol. It is true that one does not need to understand fluid dynamics to fly, but Bitcoin’s technology is not yet mature. It has been in operation for several years, but it has already undergone changes and will be able to undergo much more important ones.
The programs that apply the protocol are open source, which means that they belong to no one and can be freely examined and even copied. When a change is necessary or desirable, anyone is free to propose it, and all users will decide if it is accepted. In practice, changes to the protocol are in the hands of a small group of programmers, but even among them, it is not always easy to reach an agreement on how to proceed. Splits are possible in which one part of the users refuses to adopt the change that the other party has accepted, resulting in a bifurcation of the chain and a monetary split.
A recent debate in the Bitcoin community illustrates this problem.
It focused on another limitation of Bitcoin, namely its capacity. The size of the blocks is limited by the protocol and results in a limit of about seven transactions per second, clearly insufficient capacity for a network that would be global. The proposal to increase the size has been controversial and it has become apparent that the Bitcoin community does not yet have a mechanism to resolve it. It would be difficult to tolerate this kind of blockage for a widely used currency.
The nature of the Bitcoin network may also change.
The original vision had nodes equal to each other, validating transactions and undermining at the same time. The network has changed, both on the miner side and the node side. Bitcoin was initially worth only a few cents, but since its price soared in 2012, the gains for miners (fixed in Bitcoin) have also soared. Protocol, as we have seen, adjusts the difficulty in the face of the miners’ rush, but the arms race among miners was not foreseen.
Today, miners are designing integrated circuits that only serve to solve the hash problem and are searching the world over for the cheapest sources of electricity (the miner’s marginal cost coming entirely from the energy consumed). The mining industry is highly concentrated: to date, half a dozen operators mine more than two-thirds of the blocks. No “51% attack” has taken place to date, but the risks of this concentration for the Bitcoin model are significant. On the node side, the network has also changed because as the chain becomes longer and longer, it is impractical for each node to examine the entire chain for each transaction, resulting in the emergence of simplified nodes that simply ask other randomly selected nodes to do some of the verification work. This reduces the proportion of complete nodes, which poses a risk of fragility.
Only an attempt ?
Finally, Bitcoin is far from being the only attempt at digital currency, although it remains the main one. Competition is free and many experimenters have devised variants, usually inspired by Bitcoin, but with modifications. Will Bitcoin or any of these “alt-c corners” replace the official currencies?
Early enthusiasts may have thought so, but history shows that states have long included currency as a regalian prerogative and only gave up control of it when they could not or would not exercise it. There have been episodes, such as those of necessity currencies, where the state has tolerated the private sector supplanting this or that portion of the monetary system, and at most, one can assume that one or more digital currencies are tolerated in specialized jobs. But if paper money is to suffer the same fate as the book on paper, i.e., to be supplanted by a more modern medium, it is highly likely that the states will want to be at the forefront of progress.
But the question is not all or nothing, and beyond the specificities of Bitcoin, it is necessary to question the scope of this technological advance.
Bitcoin, at a minimum, is a life-size experiment that demonstrated how to ensure the authenticity of a public land registry of transactions without central control. Seen from a monetary perspective, it allows the transfer of units with a fixed total number, but the mechanism could be used to transfer something else.
This is already the case: the transaction, in its technical execution, includes a program whose purpose is to verify by means of a cryptographic key that it is indeed the owner who initiates the transaction, but which could also perform other tasks. The programming language is rather limited, but it allows additional conditions to be imposed, for example by requiring several signatures or by distributing the transferred bitcoins to different recipients if certain conditions are met. This leads us to the concept of “intelligent contracts”: the blockchain could become the medium for more complex transactions, involving objects other than the transfer of bitcoins.
It is a bit like using banknotes as a medium for writing and executing contracts on other assets. The Ethereum project is an attempt to reconstruct Bitcoin in this sense, by making it possible to obtain data from outside the system (for example, the temperature in a given place or the price of an asset) and to condition the transfers to this data.
There are other payment systems that are based on a decentralized structure, but leave out the proof of work. Such is the case with Ripple, where the validation of transactions is based on consensus. Each node in the network manages a list of nodes it trusts and the state of the chain is changed when consensus is reached (80% of the nodes) following an iterative process. Ripple uses the concept of “native” currency in the system for security purposes: each transaction consumes units of value, small enough not to impose a cost on legitimate transactions, but small enough to discourage a flood of fake transactions.
It is known that private banks are increasingly interested in the blockchain.
It is still too early to know where this research is heading.But it seems that the idea of decentralized management of balances, allowing peer-to-peer transactions.By means of a chain of unquestionable authenticity, has great attractions. The Bitcoin protocol solves a problem that is not that of the banks, which is to establish a reliable currency without a central authority. But the (relative) success of the protocol has brought to the forefront a set of cryptographic and computer techniques.Which, although not new, had not been considered in their entirety.
What is at stake for central banks is no longer their function as creators of money.But rather their role in payment systems.Both as regulators and as guarantors of financial stability and as holders of the ultimate means of payment, legal tender. If a currency is to play a key role in these decentralized systems, it would be natural for central banks to ensure that it is theirs.