Do We Even Need Banks Anymore?

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Do We Even Need Banks Anymore?

At one time in American history, paying for things was pretty simple. People used cash or checks. But technological revolution spawned a whole new era of paying for things. People have been paying with debit and credit cards for some time now, but more and more you see people paying with other types of technology. Today we are going to talk about the new ways we pay for things, which will lead us to answering the question, “Are banks even necessary anymore?”

Let’s start first with the payment method everyone is familiar with – cards. Now this may seem obvious, but I’ll state it anyway – It’s not the cards we are using to pay with (not the plastic), it’s the number attached to the cards. The card just acts as a medium to transmit a number and that number functions as an account number for you. The combination of this account number, in tandem with other numbers like expiration dates and the three numbers on the back of your card are what validate transactions. Understanding this concept will help you understand a new way people are paying – Apple Pay.  

Apple Pay is just the electronic storage of these numbers. You are storing your debit or credit card on your device. But what makes Apple Pay even safer than paying with cards is that it generates a new card number for you that can only be used with your device. I’m sure we are all familiar with data breaches in which malicious actors steal card numbers. So if your credit card number and expiration date and CVV are stolen, you could see unauthorized transactions start popping up on your credit card or bank account. But with Apple Pay, if your new Apple generated credit card number were stolen from a merchant, it is useless because it has to have your device in order to complete the transaction. Your device acts as the token, or a key, to authorize the transaction. This is pretty cool. There are some additional practical benefits to using apple pay. If you use it to check out online, it makes it a breeze. You know how frustrating it is to enter your name, address, email, phone number etc. when you checkout online. Well, Apple Pay has all of this information stored. For those sites that support it, you can check out with Apple Pay with two clicks and a facial recognition. You might see people paying at terminals with Apple Pay on their phones or watches. This keeps you from having to hand a card to someone and can even keep you from having to get anything out of your wallet or purse. Digital wallets like Apple Pay are going to become more popular to pay for things. But remember, you are still using a debit or credit card number – it’s simply being stored and transmitted digitally.

Let’s talk about another incredibly popular service people use to pay for things: Venmo. Most of the time Venmo is used to pay friends. What is so great about using Venmo vs. writing a check to your friend to split the lunch bill? Because it’s super easy. When you pay someone in Venmo the money immediately appears in their Venmo account. But is the money in your Venmo account really your money? Not really. This is a little-known fact about Venmo. Your money is essentially in one of Venmo’s accounts at another bank somewhere in the world. It’s not in your legal name – it’s in Venmo’s name with your name in a ledger that tracks everyone’s balances. In other words, Venmo is the ultimate owner. Not you. My app may say there is $50 in Chad Wilson’s name, but the money is legally in Venmo’s name. They are just holding it for me. That’s how they are able to do instant transfers, it’s really just going from one name to another on the ledger, but it is all still under the Venmo umbrella. This is all fine and good, unless Venmo goes out of business. If that happens, you could lose all of your money in your Venmo account.

Now this is highly unlikely. Venmo is owned by Pay Pal, and they are a huge company not likely to go out of business. But we did see a large fintech company with some similarities to Venmo go out of business recently. The company’s name was Synapse, and they tracked ledger balances for several fintech companies like Venmo. Somehow (whether through fraud or some other kind of error) the individual fund balances became incorrect. This discrepancy forced the company to close its doors, and it caused great confusion as to who owned what in the comingled bank accounts. The banks that were holding these balances came under scrutiny, because they held accounts for these Fintech companies, but they had no idea whose money was whose. It was a big mess. The moral of this story – don’t trust technology companies blindly. Just because an app on your phone offers a great rate doesn’t mean there aren’t risks involved. In the words of Ronald Reagan, trust, but verify. Do your homework. Know where your money is. But regardless of failures like Synapse, more and more people will continue using Fintech apps to pay for things.

Pay Pal Stable Coins are the final payment mechanism we’re going to talk about. Pay Pal Stable Coins are a type of crypto currency, like Bitcoin. But they are backed by real dollars. Every pay pal stable coin has a dollar behind it. So it really just serves as a digital means to move dollars faster. People who are moving money internationally in particular want a faster means to do so without having to wait on the wire or ACH process with banks. So the antiquated infrastructure of banks, and the highly regulated nature of money movements in banks have created an environment for faster payment mechanisms like Apple Pay, Venmo, and Pay Pal Stable Coins.

With all of these new ways to pay, do we even need banks? For now, yes. Because behind all of these technology companies, behind your Starbucks app for example, there are banks. Banks are the custodians of these funds (which are all still held in dollars by the way). Even your Starbucks account held in Starbucks bank account somewhere is in dollars, not Starbucks bucks. The role of banks is to act as financial intermediaries. Banks serve as safe places to store your funds. They also put your funds to work elsewhere in the economy by loaning your dollars to others. Banks are critical to the success of the economy, at least for now. And banks are getting faster at moving money. Same day ACH is gaining in popularity and will become ubiquitous eventually. The number of banks, however, will continue shrinking. Eventually, you will have a handful of massive financial institutions, several small community banks, and nothing in between. There are currently less than 4,000 banks in the country. When I started in the business 24 years ago there were over 8,000. That consolidation will continue. Bitcoin and other cryptos will likely be utilized for payments more and more in the future, but as long as people utilize dollars, they will need banks to hold those dollars.

At Foundation Bank, we believe we are a great partner to help you utilize your dollars well. Whether you want to have a high interest checking account that includes several benefits like cell phone protection (just to name one), or whether you want to borrow money for your next home, or whether you want to figure out how to save money for the future, we can help. Start your financial conversation with us today. We also hope you’ll subscribe to this podcast to it in your favorite podcast app and share it on social media. These episodes are not recommendations specific to your own unique circumstances.  Please consult your own advisors. And until our next episode, God bless you.

-President Chad P. Wilson, CFP

Today’s episode of “Money Matters” was written and recorded by President Chad P. Wilson of Foundation Bank/McKenzie Banking Company on January 13, 2025. This episode does not constitute financial advice. Please consult a financial professional to discuss your specific needs. Any rates mentioned are subject to change and are accurate as of the recording date. Foundation Bank/MBC is an Equal Housing Lender, Member FDIC.