Will an iPhone App Make Your Bank Extinct?

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Photo: Erik Dreyer/Getty Images

A HUNDRED YEARS AGO, THE NOTION OF DEBT was fairly progressive: It was a way to elevate your quality of life today and pay down the cost in the future. Then came revolving debt—handy if you have a good financial head on your shoulders, but difficult to navigate and potentially disastrous for your credit. Through the credit-card industry and the broader lending industry, banks kept customers on the brink of peak financial indebtedness with deliberately complex contracts and concepts like minimum payment, which is essentially a trap.

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Four years ago, post-crisis, our banking system began coming to terms with itself. The Occupy Wall Street movement wasn’t wrong in terms of its observations. Eighty percent of Americans are in debt, one-third of them are being pursued by a debt collector, and many are distrustful of financial institutions. But the movement’s solutions—organized resistance to avoid paying off your debts, for instance, or the “Fight Club”-style attempt to destroy public records—aren’t the answer. That’s a way to destroy the economy as opposed to disrupt the big banks.

A growing number of financial-technology companies are moving away from the complex, exploitative model of lending, and striving for transparency and fairer practices. Many of these companies have decided, like ours, to tell customers exactly what they should expect to pay, instead of obfuscating those numbers through complex rates and terminologies. FinTechs can afford this less profitable approach to lending because their technology is more efficient than that of banks, whose system for transferring funds—designed in the 1960s—is woefully out of date. The computing power of your phone is higher than the power of the IBM IBM 0.75 % mainframe inside the average bank.

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Max Levchin is the co-founder and CEO of Affirm.

A staggering 5% to 7% of global financial inefficiency would be eliminated if banks switched to Bitcoin or a similar digital technology. Bitcoin generated plenty of buzz as a currency, but more important, it created the financial infrastructure to conduct transactions at a much lower cost and at a much higher speed. With a more efficient system to transfer funds and more transparent customer contracts, FinTechs are simplifying the entire banking system. It’s hard to imagine that banks with hundreds of billions in assets will just disappear. But their behavior will have to change if they hope to stay competitive with a new breed of transparent and efficient upstart.