The World Keeps Growing Smaller: The Reinvention Of Finance – Seeking Alpha

In the prominent headlines, we keep reading about the attempts to keep the world fragmented by imposing tariffs and constraining the exchange of ideas in many ways, but information keeps spreading, and with the continued spread of information, the world progresses. John Thornhill writes in the Financial Times about how China is completely redesigning finance...

Yes, the United States is working through the FinTech era, where efforts are being made to use evolving finance and technology to deliver familiar services more efficiently, but the Chinese effort, writes Mr. Thornhill, is trying to do something entirely different.

China wants to change the platform.

In the past, I have written about how the United States banking industry has lagged behind the rest of the world is moving toward a more electronic and integrated finance platform. Even in some less-developed countries, payment systems have been evolving at a faster pace than in the United States because of the need to reduce the impact of geographical distances.

Only in the past year or two have some of the larger US banks moved forward, trying to develop a more advanced system.

Commercial banks in the United States have been the biggest and most important banks in the world and have concentrated upon the more sophisticated areas of finance, rather than the basic payments systems that are the foundation of the whole financial system. And, although there have been efforts to advance the financial platforms of the American banks, it is somewhat ironic that several of the largest banks have moved toward quantum computers to revolutionize activities like risk management and trading.

Richard Waters writes about how JPMorgan Chase & Co., Goldman Sachs and Citigroup have entered this space in the last couple of years.

For example, Mr. Waters quotes Paul Burchard, a senior researcher at Goldman Sachs: We think theres a possibility this becomes a critical technology.

And Despite the challenges, advances in quantum hardware have persuaded the banks the time has come to leap.

One can smile at this leap, but what about the basics of banking?

Here Mr. Thornhill writes that, The speed at which China has moved from a cash to a digital-payments economy is staggering: some $17 trillion of transactions were conducted online in 2017. Chinas mobile payment volumes are more than 50 times those in the US.

The growth has come from two corporate sources, Alibaba (BABA) and Tencent (OTCPK:TCEHY). The number of users is staggering.

However, the biggest potential lies ahead. As Mr. Thornhill states, the most enticing opportunities lie abroad. About 1.7 billion people in the world remain unbanked. When they come online they will be looking for cheap, convenient, integrated digital financial services, such as China has pioneered.

China has the chance to rewire 21st-century finance.

The implication here is that United States banks will have to adjust to this payment system that China is spreading to the rest of the world.

In other words, information spreads, and even though the spread of information may be constrained in certain parts of the world, it will expand in the areas where there are fewer constraints. This is the way it has always worked throughout history. Quantum computing is currently not the answer for the US banking system.

Oh, yes, it will be fun to design new types of algorithms for quantum computers, as Mr. Waters writes, and the first of these involves a class of optimization problems that take advantage of the probabilistic nature of quantum computing to analyze a large number of possible outcomes and pick the most desirable...

But who is going to own the payments platform?

Mr. Thornhill believes that the trend in finance over the next decade will be led by the Chinese and the payments system that is being developed within China.

This has all sorts of implications for the US banking system, the US economy and the US political system. A question coming from this conclusion concerns whether or not the US dollar can maintain its position within the world financial system.

When we start trying to insulate ourselves from the world and try and control little pieces of it for ourselves, we tend to lose our place in the bigger picture. This is just another one of the unintended consequences we find in the field of economics.

But it has huge implications for American banks and the United States banking system. Consequently, this has huge implications for investors in the commercial banking industry. And it should be put within the context of what is just happening in the United States.

I guess that banking in 2030 will not look at all like what is going on right now.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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