Reading "Bank 4.0"

Author:ThejaswiniCompiled by: Block unicorn

Could you abandon existing banks and build a bank from scratch? Using today's technology, start everything afresh.

In this process, would you still have physical branches? Would you still use paper money? Would you still need to personally sign forms (i.e., "wet ink signatures") and have them witnessed and archived to prove identity?

Do we still need passbooks, plastic cards, checkbooks, and a mortgage loan agreement that requires a dozen or twenty pages of paper? This is the question Brett King posed in his book *Bank 4.0*. Today, I'll revisit his core ideas and see which of his predictions for the future have already come true. "No, sorry," Jin wrote, "that's utter nonsense." He's right, and that's why, after reading the first 50 pages (which is my rule of thumb for deciding whether to continue reading a book), I chose to keep going. The bank you're using now is essentially a collection of medieval relics, only with modern software technology superimposed on top of them. The basic form of banking was established by the Medici family of Florence. Today's payment networks are simply a modern version of the 12th-century model of the Knights Templar transporting gold for royalty. For those unfamiliar with this history, the Knights Templar established the earliest international banking system to protect their wealth. Rulers didn't need to carry physical gold across dangerous terrain; instead, they stored their assets in the Knights' fortresses and could travel using only encrypted letters of credit. The passbook of the 1850s evolved into today's debit card. Apple Pay simply copies that plastic card to your phone. As for bank branches? Since the Monte dei Paschi in Siena opened 750 years ago and has stood ever since, the form of a branch has never truly changed. King borrowed an engineering term to describe this phenomenon: design by analogy. This refers to solving problems by observing how something completely unrelated works and borrowing its ideas. You build new things by copying old things and tweaking them. Von Braun's V-2 rocket evolved into NASA's Apollo rocket, and then into all kinds of rockets that followed. In 1885, Carl Benz didn't try to build a faster horse-drawn carriage, but instead used existing engines to build the first automobile. Musk took the same approach with SpaceX, reducing the cost of getting into orbit by more than 90%. Steve Jobs used to carry a piece of wood with him in his office to remind his team that a mobile phone could be conceived from scratch. King points out that when the World Wide Web emerged, people simply copied the "branch" model onto a screen. Online banking is essentially a branch model, only running in a browser; mobile banking is the same model, just with a smaller interface. But have we ever asked ourselves: is this form really necessary? A quarter of a century has passed since the commercialization of the internet, yet in some places, you still can't open an account without being physically present and signing by hand. The proof of identity is an ancient artifact dating back to the first century AD, which is neither unique nor easily forged. If you were to build a bank from scratch today, you wouldn't build a bank in the traditional sense. Your goal would simply be to transfer funds from point A to point B. Therefore, the entire process is merely a practical tool. Once you remove bank cards and signatures, you'll find that they actually become obstacles, hindering your smooth progress; the traditional concept of a "bank" would cease to exist, only its core functions would remain. Much of this book explores the companies that Kim believes can achieve this "separation"—namely, Neobanks and fintech companies, including Chinese giants like Alibaba and Tencent. The pioneers championed in *Bank 4.0* largely rely on analogical thinking. Revolut, Monzo, N26, and Moven, Kim's own company, while developing sophisticated applications and streamlined registration processes, still depend on the same outdated and slow underlying systems used by all other banks when processing fund transfers. This means that, in a deeper sense, Neobanks are merely applications, not true banks. When you swipe your Revolut card or make a transfer, the app delegates the task to the common legacy systems: Visa and Mastercard handle the card payments; in the US, interbank transfers are handled by the ACH network and processed in batches. The standards set by Jinse require abandoning existing assumptions and building infrastructure from scratch, but the companies he admires have failed to meet this requirement. They have merely tweaked old systems without establishing a completely new foundation. If you don't touch the underlying payment network (rail), what you're doing is merely patching and iterating on the "branch" model. 76% of neobanks are still losing money—I just wrote about this last week. These banks contribute an average of about $45 in revenue per customer per year, compared to $350 for traditional banks. Those neobanks that survived relied on the oldest method in banking: lending. Nubank's profits primarily come from credit cards and loans; Revolut only achieved its first real profit after its lending business expanded. Ultimately, those neobanks that survived eventually became traditional banks. King writes that this new form will inevitably emerge when we need to transform currencies, stores of value, and payment systems to adapt to a real-time world built on top of an IP layer and accessed directly by users (rather than through "gatekeeper" intermediaries). Consider this passage again with the concept of "stablecoins" in mind. What I mean is, if you remove Bitcoin's volatility, you'll find that it's exactly what its own logic points to. He couldn't say this directly in 2018, hence the distance he took from this chapter—perhaps that's why he called it a "futurist's perspective" and turned to other topics. Emerging markets are the main battleground for action because they lack established, outdated systems. He then recounted the story of M-Pesa. In 2005, seven out of ten Kenyans did not have bank accounts. Today, almost every adult uses mobile payments, and about 40% of the country's GDP flows through the M-Pesa network (this was the figure when King wrote the book; the percentage is even higher now). The banking sector foresaw this trend and lobbied the Ministry of Finance to investigate, but it was too late. In areas untouched by the old system, "first principles" often prevail. Stablecoins have seen the most rapid adoption in places where local currencies are unstable, banks are inefficient, and mobile phones are the only "bank branch"—a development model strikingly similar to M-Pesa, only built on a more fundamental technological architecture. In this book, the chapters on cryptocurrencies unfold like a time capsule. Back then, ICOs (Initial Coin Offerings) were considered the "killer app." John McAfee once predicted that Bitcoin would reach a million dollars. I still believe him. Rereading that now might be a little embarrassing, but it remains essential reading because it leads us back to the "first principles." Eight years later, this is exactly what that idea means today. Despite the cryptocurrency space being filled with zero-value tokens and various noises, it remains one of the few areas that truly experiments, prompting us to think: what exactly is money if we start from scratch? While some answers are pure nonsense, we can still see the essence. King once challenged the banking industry to imagine what it would be like if banking were restructured starting today. Faced with this question, probably almost nothing around us would survive. Even so, we would still retain them. "First principles" is a brilliant concept. However, truly applying it means examining your life's work and acknowledging that if you were given the chance, you might not structure it in the same way. This is why, despite its high regard, this concept is often shelved and rarely put into practice.