The death of the middleman: how tech dismantles financial gatekeepers
In short: For millennia, banks have thrived by controlling a single, scarce resource: information. By acting as the gatekeepers between those with capital and those who need it, they created a lucrative monopoly on trust. Today, a technological revolution is challenging that dominance by automating the very mechanisms of trust.
Financial intermediaries like banks, brokers, and mutual funds have existed for thousands of years primarily because they solve three specific information problems. First, they manage imperfect information, where data is simply missing. Second, they address asymmetric information, where one party knows significantly more than the other. Finally, they mitigate behavioral biases, helping people act rationally when they are overwhelmed by the data they do possess. Because these intermediaries control the flow of information, they are inherently expensive to use.
History shows that when technology reduces the cost of information, the structure of finance shifts. In the mid-19th century, the telegraph revolutionized markets by allowing prices to be synchronized across vast distances. Before its widespread adoption, agricultural prices in cities like Buffalo were out of sync with New York City by several days. Once the telegraph linked these markets in 1848, prices were set simultaneously, leading to the rise and fall of various regional exchanges. This demonstrated that technology could collapse the distance between markets, reducing the need for localized, fragmented systems.
Modern technology is repeating this cycle by targeting the same three information problems through cryptography, big data, and artificial intelligence. While the telegraph centralized prices, decentralized platforms and crowdfunding are now creating new ways for investors to meet firms directly. This competition between centralized institutions and decentralized platforms represents a fundamental shift in how capital moves. By automating the verification of identity and the distribution of data, technology allows users to bypass formal intermediaries, potentially removing the 'middleman tax' that has defined the financial world for centuries.
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Sources
- Summary by Intellect · source: Bypassing Banks Using Tech
- Also: Bypassing Banks Using Tech
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