News analysis

Watch out, DBS, they're taking the banking out of cash

DBS Group Holdings' ultimate goal is to take the cash out of banking.

"It's expensive, it's clunky," Ms Tan Su Shan, the lender's head of consumer banking, told Bloomberg TV's Haslinda Amin on Tuesday.

Unfortunately for DBS, the same might be said for banking itself. And if the monetary authorities follow through on some early research, the end result may be to take the banking out of cash.

That sounds like hyperbole, but it's not all that far from reality.The Monetary Authority of Singapore (MAS) is preparing to test its own digital currency, which, if implemented, would allow banks to make settlements directly with each other instead of going through an intermediary.

Those lenders could then redeem the digital currency for cash, MAS managing director Ravi Menon said in a speech last month.

The distributed ledger nature of a digital currency allows banks to take out the middleman and deal directly with each other. Good news, except when you consider that banks themselves are simply go-betweens for transacting parties.

Bitcoin has already connected the coffee-seller with the caffeine junkie. Now imagine if an issuer of national currency decided to go straight to the average citizen.

That's exactly what the Bank of England is considering. In a 92-page working paper published in July, economists John Barrdear and Michael Kumhof studied: The macroeconomic consequences of issuing central bank digital currency - a universally accessible and interest-bearing central bank liability, implemented via distributed ledgers, that competes with bank deposits as medium of exchange.

Under their proposed model, citizens could park their money directly at a central bank.

While commercial banks would still exist for deposits and loans, a "substantial portion" of retail transactions might switch to the monetary authority's digital currency, they said.

With individuals able to have an account direct at a country's central bank - by virtue of holding its digital currency - a lender like DBS would have to offer incentives, such as better rates, to keep money flowing through its doors.

Having access to end-users would also make monetary policy fast acting. Instead of waiting for financial institutions to pass on changes in interest rates, central banks could just do it themselves.

While that might sound like a doomsday scenario for banks and their shareholders, central banks may not mind. Without intermediaries, a lot of the money that flows through lenders could go straight into the economy.

By Mr Barrdear and Mr Kumhof's calculations, issuing digital currency equivalent to 30 per cent of GDP - a figure they estimate as being equivalent to the scale of quantitative easing over the past decade - could permanently increase an economy by  as much as 3 per cent, thanks to reductions in real interest rates, distortionary taxes and monetary transaction costs.

And what economists like to call taxes and costs, bankers prefer to label fees and interest-rate spreads. Now what would be the point of banking without those?


A version of this article appeared in the print edition of The Straits Times on December 01, 2016, with the headline 'Watch out, DBS, they're taking the banking out of cash'. Print Edition | Subscribe