The Banking Challenge – Cashless Society
As a young programmer I worked for the Italian International Bank in London, who were owned by the Banca Monte dei Paschi di Siena reputedly, the oldest surviving bank in the world having been operational since 1472. As an employee, I was steeped in the traditions and values of such a venerated institution and I was often subjected to a rhetorical narration of the banks genealogy and associated history of banking culminating in how our new systems and technology will take us into the future!
Please make allowances for my extended years with the understandable abstraction that has occurred over time, and permit me to recall a few key points with you.
Roman grain store loans
The story starts way back in pre-Roman times with grain store loans and we know of archaeological evidence of loans and money exchange with coins being transacted during Roman times, but banking did not really become truly recognisable until the twelfth century Crusades when the need to transfer large sums of money was met by the Templars and Hospitallers, who’s practice it was to take in local currency, for which a demand note would be given that would be good at any of their castles across Europe, allowing movement of money and reducing the usual risk of robbery whilst traveling.
A significant issue at these times was Usury (defined as lending at unreasonably higher rates of interest) which was forbidden by the predominant Christian and Muslim faiths and which allowed Jewish traders, who had no religious restrictions around usury and who had settled in Italy, to make advanced payments against crops and against future delivery of grain shipped to foreign ports. These merchant’s “benches” (the word bank is derived from the Italian for bench, BANCA, as in a counter) developed into centres for holding money against a bill (billette, a type of negotiable instrument which can be considered a forerunner of the promissory notes we know today).
Not to be outdone, the Christians and Muslims quickly devised negotiable instruments that avoided or disguised usury. One such method was to lend money without interest, but also require that the loan is insured against possible loss or injury, and/or delays in repayment. The laws of the time were also “adjusted” to make a distinction between things that were consumable (such as food and fuel) and those that were not, with usury permitted on loans that involved the latter.
The Modern banking practice and the issue of banknotes emerged in the 17th century with the Bank of England being the first in 1695. At this time, wealthy merchants began to store their gold with the goldsmiths of London, who possessed private vaults and charged a fee for their service. In exchange for each deposit of precious metal, the goldsmiths issued receipts certifying the quantity and purity of the metal they held as a bailee; these receipts could not be assigned and only the original depositor could collect the goods stored.
The next step was for the goldsmith-bankers to issue the receipts as payable to the bearer of the document rather than the original depositor. This meant that the bill could be used as a form of currency based on the security deposited with the goldsmith. The bankers also began issuing a greater value of notes than the total value of their physical reserves in the form of loans, on the assumption that they wouldn’t have to redeem all of their issued banknotes at the same time.
This simple shift in the use of promissory notes (a promise to pay the bearer in coins, usually copper, silver or gold), enabled banks to make out fixed denomination notes for use as money and the modern banknote was born, as was Fractional Reserve Banking and the associated Central banks.
In the UK, commercial banks were generally able to issue their own banknotes until the mid-nineteenth century, when the Bank Charter Act of 1844 restricted authorisation to issue new banknotes to the Bank of England and served to restrict the supply of new notes reaching circulation giving the Bank of England an effective monopoly on the printing of new notes.
In 1959, many banks agreed on the standard for Machine Readable characters which allowed cheques to be machine read. This was followed by the first Automated Teller Machines and the early 1970’s saw the establishment of the international payments system known as SWIFT. I was involved with the team that developed the BACS direct debit module in the IBIS systems in the early 1990’s, and also with the Certificates of Deposit module.
The entry of other non-banking financial institutions into the market at the turn of the century gave rise to a proliferation of technical negotiable instruments that could be traded worldwide and this along with various other factors contributed to the Global financial crisis of 2008 and the realisation that banking was an essential part of the fabric of our society and could not be allowed to fail.
These days we are starting to see innovative ideas such as paypal, the use of mobile phones in Africa for financial transactions, micro loans and of course, Bitcoin continue to gain acceptance. My particular thoughts centre on the fact that the acceptance of phone and Internet technology has in many ways negated the need to carry notes and coins. These days, we recognise that our machines are more intelligent and much more reliable than human systems and more and more of our transactions are routinely handled by computer systems.
So my question is; Why not do away with bank notes and coins?
Bahrain is a small island with a population around 1.3 Million souls and given that many Telecoms use Bahrain to field trial many of their new mobile phone technologies here, there is already an abundance of tech savvy people and a good infrastructure. Let’s consider Bahrain as a potentially excellent opportunity for developing a cashless banking system and field trialling it here?
Such innovation could be a great way to put Bahrain back in the driving seat of banking in the Middle East and of course, Bahraini computer technicians would be widely sought after having been exposed to such an innovative venture. The Central Bank are used to innovation and are not so caught up in their own self-importance to not seek help from outside and given Bahrain’s excellent relationship with the UK and America, I am sure several deals could be developed with Banking institutions, Universities and training institutes to develop and support such an idea.
As an executive coach, many of my customers seek to be involved in creating meaningful change and in leaving a legacy to future generations.
Do you want the “Icebox challenge” and take a cold shower or do you want to innovate and change history? – What do you say?