Could the ‘cashless society’ mean the end of the classic bank run? 

Published On : 01/07/2020

By Mathieu Saint-Cyr, Managing Director, Head of Asset Management, GMG

For most of modern history, national and global economic crises have been accompanied by a run on the banks. Dating back to the 16th Century, banking runs have accompanied the British South Sea Bubble, the Great Depression, and even the 2007 financial crisis included market-liquidity failures that were comparable to a bank run.

Mathieu Saint-Cyr

While people’s impulse to get their money out before the banking system or economy collapses is understandable, this kind of panic usually exacerbates the situation. It should hardly be surprising then that banks and governments alike have tried to prevent or mitigate the impact of panic-induced runs on banks.

But, as society becomes increasingly cashless, could the classic bank run become a thing of the past?

There’s evidence to suggest that this may be the case. Advances in technology mean that banks and consumers alike are safer from the impact of bank runs than ever.

The ever-increasing number of customers who have direct access to their bank accounts through digital portals and mobile interfaces, might accelerate the possibility of early redemptions in a stressed environment.

Nevertheless, banks can always implement maximum transfer limits per account, which has the same effect as limiting cash withdrawal at ATMs.

It is worth noting that alternatives to that issue exist. Indeed securities like bonds or equities can be segregated on the bank balance sheet and could be a good way of protecting assets.

In fact, some of the big changes driven by fintech dovetail neatly with the evolution of existing financial systems.

For decades, our financial system has relied on banks to lend more than they hold as collateral. This is known as the money multiplier effect. A purely cashless environment wouldn’t drastically worsen the current imbalance.

The entire financial system is based on trust. Recent paradigm shifts such as the evolution of Blockchain technology make value transfers among counterparties who ordinarily wouldn’t trust each other much easier.

At the individual level, meanwhile, technology is making people less dependent on banks, further reducing the risk of a banking panic.

Bitcoin, for example, is a decentralized network where each coin holder controls an asset that no state can have access to.

On the other hand, Bitcoin will probably never be as widespread as well supplied state-owned currencies which would benefit from the multiplier effect and maximize the use of money.

That said, the finance industry will have to be more adaptable if it hopes to thrive in this shifting environment.

New technologies are bringing hyper-transparency and instantaneous transactions. As a result, the traditional banking system is under pressure to cope with the fully digitalized processes and let go of paperwork safekeeping.

Fortunately, that does appear to be happening.

Most financial institutions are currently working on increasing the speed of value transfer and reducing the number of required intermediaries.

Ultimately, he believes, this will lead to a brand new way of doing things, integrating profiles in the Blockchain and digital ledgers, rather than obsolete forms of support, such as paperwork, fax confirmation, mails, and validation checks.

So, rather than accelerating financial crises as some pessimists might think, technology could well make the global financial system more stable while empowering people like you and me, who depend on its infrastructure in our daily lives.

Wanda Rich

Wanda Rich has been the Editor-in-Chief of Global Banking & Finance Review since 2011, playing a pivotal role in shaping the publication’s content and direction. Under her leadership, the magazine has expanded its global reach and established itself as a trusted source of information and analysis across various financial sectors. She is known for conducting exclusive interviews with industry leaders and oversees the Global Banking & Finance Awards, which recognize innovation and leadership in finance. In addition to Global Banking & Finance Review, Wanda also serves as editor for numerous other platforms, including Asset Digest, Biz Dispatch, Blockchain Tribune, Business Express, Brands Journal, Companies Digest, Economy Standard, Entrepreneur Tribune, Finance Digest, Fintech Herald, Global Islamic Finance Magazine, International Releases, Online World News, Luxury Adviser, Palmbay Herald, Startup Observer, Technology Dispatch, Trading Herald, and Wealth Tribune.