Just as computer firms took over the business of typewriter manufacturers, banking services today are offered by other companies than banks. With far reaching consequences, says Judith Vogt, a financial expert.

By Judith Vogt, CEO Vogt Consult, Switzerland

Just as in previous times computer manufacturers took over the business of typewriter manufacturers, today other providers take over more and more business from the banks.

Payment transactions are managed increasingly by service providers including Alibaba, Apple, Amazon and Google. Even loans and mortgages are handled by service providers other than banks. For investment advice and asset management, automated trading systems and ‘Robo Advisors’ are used. Without adapting to new technologies, changes in customer needs and new laws, banks will be threatened with bankruptcy.

Impending Bankruptcies in the Absence of Adaptation

In October the Swiss private bank Hottinger, which looked back on 200 years of tradition, went bankrupt. This was caused by over-indebtedness from the bank having to retain funds due to losing a tax dispute with the US government. The Bank failed to resolve legacy issues resulting from managing untaxed money from American customers.

What does that mean for the bank's customers? Cash balances of up to 100,000 Swiss francs are insured and the customers will be refunded up to this amount. Securities owned by the customers may be transferred to other banks. Cash holdings from customers of over 100,000 francs will become available to the bank’s creditors and will be lost to the customers.

Negligent Advice

Trouble also threatens banks directly from the customer side. If an international operating bank is not perfectly familiar with and complies with the national rules in force in each country, customer complaints, for example for negligent advice, can make life difficult for the bank.

Once a bank is offering services and products outside its home jurisdiction, it must be fully compliant with applicable national laws. Take the case of bank Safra Sarasin, which is being sued by a customer in Dubai for incorrect advice in the Dubai International Financial Centre (DIFC) Courts. If the customer ultimately wins, the bank’s losses could easily reach double-digit millions.

The Apple Watch is also a Wallet

The new blockchain technology not only replaces banks as providers of financial services, but also as external gatekeepers. By means of the new technology, transactions are handled directly from person to person without the need for a bank. The new providers make available only the technology. Consumers use the system.

The Apple Watch is the wallet. The money is on the iTunes account. With the secret code «Open Sesame» credit is transferred from the customer’s smartphone or Apple Watch to the account of the seller and the customer then receives the goods. This reduces both cost and risk.

Blockchain allows the settlement of trade transactions which are documented on a secure, digital statement. In this way, everything is stored simultaneously on different computers of a decentralized network.

Blockchain Application

Decentralization is important: it avoids any need to have recourse to a central database needed by, for example, banks and PayPal, an online payment system. The first application of blockchain was Bitcoin, a digital international currency that allows payments directly from person to person without transaction fees and meets military standard requirements of data encryption.

KPMG, one of the big four international accounting firms, compares blockchain with pioneering innovations such as the computer or the Internet. The potential of the blockchain technology goes far beyond transactions of crypto currencies like Bitcoin.

Peer-to-Peer Transactions

NASDAQ, the second largest US stock exchange is currently testing the technology. Transactions such as settlements among banks and the processing of payments will be revolutionized. As payments will be made directly, the risk of failure will be removed since the transactions take place simultaneously.

Today, trade transactions are carried out through brokers, custodian banks, clearing houses and central depositories in order to minimize counterparty risk. Often multiple transaction systems are necessary as is the involvement of lawyers and accountants.

Use of the blockchain technology, however, will allow for direct peer-to-peer transactions without transaction fees and counterparty risks. Ownership and asset transfer will proceed in a secure and fast system. Possession and trading of securities will be radically simplified.

Keep an Eye out

It is risky to store more than 100,000 francs in cash at any one bank. The money is much safer in real estate or securities. Major assets should be spread over several banks. Even larger amounts should be distributed advantageously among several countries.

Keep an eye out for the blockchain technology and its new applications. Currently, the technology is still in private hands. Should an IPO emerge, high profits are to be expected.

Judith Vogt has over 20 years’ experience in financial research and investment management. She began her career in Frankfurt with Bank of America in 1990. After working for Credit Suisse in Zurich and New York for over 5 years, she joined VP Bank Vaduz in Liechtenstein in 1996. From 1999 to 2005 she held several responsibilities within UBS and was promoted to head of institutional & wholesale sales Central Europe. In 2005, she became a partner for Aquila Investment, in charge of business development. Since 2009 Judith is the CEO of Vogt Consult which she founded in the same year.