Will peer-to-peer lending and associated aspects of the fintech web ebb away at the central US banks’ collective ability to impact the economy in the coming years?
That’s the question being asked by Randall Kroszner, a professor at the University of Chicago Booth School of Business and formerly a board governor of the Federal Reserve. Mr. Kroszner delivered a presentation exploring the impact of the sweeping technological shifts that are taking place in the financial services sector at the Atlanta Fed’s 20th annual conference. His paper’s remit extended beyond the borders of alternative finance, also assessing the widespread ramifications of various aspects of the fintech space.
The thrust of the piece is that the multitude of new and impactful funding sources could serve to reduce the Fed’s control over the supply of money, rates and inflation. Mr. Kroszner explained:
“Digital currencies, mobile-phone banking, crowdfunding, peer-to-peer lending could diminish the role that traditional commercial banks play in the standard ‘money multiplier’ process through which changes in bank reserve affect the money supply and the price level.”
“With the potential for disruptive innovation in banking and payments, regulators and central banks will need to understand how these changes affect the cost-benefit tradeoffs of their micro- and macro-prudential regimes–possibly driving activity out of the traditional banking sector–and disrupting the traditional channels of impact of monetary policy on the economy.”
The degradation process being described by Mr. Kroszner is in its infancy, relatively speaking. The disruptive technologies that he references are each growing extraordinarily quickly, but remain a blip on the radar in relation to the gargantuan transactional flows of the traditional players. The operative word in the Professor’s warning is “could”. Mr. Kroszner aptly summarised the situation:
“Threats to the role, purpose, and economic viability of commercial banking are rife. Commercial banks and central banks are certainly not dead but technological innovators have them in their sights.”