End of Uber? (and perhaps banks?)

This is a short conceptual note w.r.t. my opinion on the impact of rapid advancements in technology on a traditional businesses.

While blockchain technology (BCT) is often overshadowed by its glamorous cousin, the Bitcoin, I believe BCT to be one of the most significant advancements of this era. It addresses the very root upon which rest the foundations of many traditional businesses. 

Many businesses today are, at their core, in the business of 'trust'. They serve as 'brokers' (for lack of a better word) between parties who do not know/ trust each other. The easiest example is that of a stock exchange/ clearing house. The buyer is unsure whether the person who claims to hold the securities he wants to buy, actually holds them. The seller, on the other hand, is unsure whether the buyer has the funds to satisfy the value of the sale. Therefore they both trade through a stock exchange which guarantees performance in most cases.

Another business that comes to mind is the business of app-based cabs (like Uber). We are loathe to get into any random car not knowing who the driver is. But if there is an organisation that can be held responsible for any untoward incident (like Uber!) then our resistance to using a service from an unknown person drops significantly. 

There is yet another business that is not apparent as a 'trust' business, but it is! That is the business of banks. The lender does not know the borrower, so he deposits the money in the bank and accepts a lower return on his funds in exchange of the perception of safety. The bank lends the money to the borrower and gets a higher interest rate, in effect earning a spread for taking the risk and for the costs of administration. 

There is a common thread that is noticed in all these businesses. That is of an 'institution' serving as the basis of trust. Whether that Institution is a Bank, or an app company, or a stock exchange etc.The advent of BCT, puts all these businesses to risk. 

BCT represents the replacement of an "institution based trust" (IBT) mechanism with a "technology based trust" (TBT) mechanism".

The lowest threshold businesses will be threatened first. Imagine a block chain based taxi app that requires almost no administrative resources to run, but is exactly as trustworthy as the apps available today. Lower costs mean it would charge cab drivers a fraction of what current app companies charge them. Every cab driver would shift to such an app. The app company does not need to market the app, the cab drivers will do it for them, for free!

Another area that will be positively impacted by TBT is that of peer to peer lending. If the blockchain has complete access to a person's history of repayments, it will foster a much safer, much credit-risk robust environment for peer-to-peer lending. In fact, in a relatively free market I do not see any obstacles for a peer-to-peer lending mutual fund to be launched. In an era of low interest rates, such a MF will undoubtedly be able to give better rates, and reduce specific risk of lenders as well.

In such a case, why would someone save money in a bank account? Of course there will be those who do it out of habit, or those who will leave some money there out of a sense of 'diversification', but over time people will move on to more lucrative savings options. 

This creates some interesting side effects though. Banks are traditionally large buyers of government debt. Partly for its perceived 'credit risk-freeness', and mostly because of regulatory requirements. In fact in India 40-45% of all government bonds are held by banks. This will raise questions on the ability of governments to fund themselves. Undoubtedly, government's will respond the only way they can, ie. by more regulation. 

But how long, can you stop an idea whose time has come?