The Three-Dimensional Financial Model (2024)

The common way to think about money is holding it in the hand and giving it to others to receive some goods in return. You move money through space, from one pocket to another or, if you do it electronically, from one hard drive to another.

But it is not the only one way. Even more, this is the less lucrative from the financial perspective. That service can be charged only on identity and access control assurance, privacy keeping, transaction consistency completion and private traceability. That is, you are paying to be confident about there are no thieves involved, no one else is able to take a look at your business, the money didn’t get lost in its pathway and you can ask about your past money activity.

Doing it electronically, the underlying cost to do that is trending to zero. Financial regulators like the European Central Bank ruled the interchange fees to the bare bones. There’ll be no business around it in a not too far future.

But wasn’t this banking business a big deal? Well, banking started it all moving money through time, instead space, and there’s still the big deal.

I’m not talking about Marty McFly nightmares. You and I, we’re all moving money through time with Credits and Deposits.

When you contract a credit product in a bank you are asking money to yourself in the future,

and that person in the future (you) assumes the commitment to give it back, plus an extra amount of money (extra charge, interest rate… I’ll call it fee for simplicity shake), which is charged because this is not a simple moving-through-space service with almost zero costs. We’ll come back to this later.

It’s obvious you’re asking money to your wealthy future version of yourself because nowadays you’re not that wealthy. The good thing about credits is they can create self-fulfilling prophecies because being poor and assuming you’ll be rich using some extra money, you can be granted the funds to make it so. Maybe banks are not that bad, as they are prosperity creators.

Opposite is equivalent. When you contract a deposit product in a bank you are sending money to yourself in the future, and those persons in the in-between futures (you again) assume the commitment to let the money there for the whole period. It is money you don’t need nowadays and the bank is happy to do this not-that-easy service because this money you deposit can be used to fund the credit products. You’ll be paid a fee, instead being charged, to incentive you fulfilling the assumption the money will stay there till the end.

If all the assumptions were always true, this money time-travel service would be as easy and low-cost as the space-travel one, but there’s a third dimension. Put on your 3-D glasses.

The measure of the assumptions truthfulness (or the probability they will happen) is called uncertainty, but we are going to shorten it as Risk to make it more commonly understandable. It defines an estimation based upon other present facts and future assumptions. Yeah, nobody can really foresee the future… yet (unless you are Biff Tannen and have full certainty, or risk = 0, based on a printed calendar of future events). Guessing the future it is a very hard job to do, and that’s the root cause of the banking fees.

So, if this is another dimension, we can move money through risk as well. You can send some amount of money you’ll receive in the future with some level of certainty (risk = X) trough that dimension to improve towards a better level (risk = Y < X). It’s like having a lotto ticket with few numbers and exchanging it with another one who has more numbers (more chances) and, as you can imagine, this has a price, of course. Both can hit the jackpot and be a failure, but as Napoleon pig said in Animal Farm, “some are more equal than others”. Lowering risk (increasing certainty / chances) means paying a fee, and nobody will increase his risk (lowering certainty /chances) but receiving the payment of a fee, symmetrically.

Lowering risk means paying someone a fee to accept part of that risk, which can be distributed to others similarly.

Chances. That’s the key word, and that’s the reason the maths some Nobel in Economics Price winners use are based upon gambling (though they prefer to call it game theory, it’s more glamorous). This is not bad at all, those are good maths (quantum mechanics is based upon gambling as well).

There you have the three dimensions of the model, space, time and risk, and there are plenty of different financial products who deal with all three dimensions with the proper maths, created to solve actual customer needs, all of them aimed to improve prosperity.

And what’s up with Fintech products? Many of them are stuck in the first dimension: space.

Moving money from one hard drive to another, even with the best user experience in the world, is cool from the point of view of the customer, but a bad shrinking business, or at least it is going to be profitless sooner than you can expect. It doesn’t create value (I don’t mean added-value, I mean value at all) like in a farm planting seeds to harvest fruits, or a bank who brings prosperity from an uncertain future to fund the means to achieve it.

Yes, Fintechs could eventually move from flatland to the 3-D financial world, isn’t it? Well, it is not that easy. Dealing with a huge amount of money there’s always, as humans, a temptation to cheat, so bank industry has been regulated for a long time, which means the enforcement of a strict set of rules and controls to ensure there’s no cheating. And most of that rules and controls cover… guess what, time and risk!!!

So, if you are a Fintech and want to grow up to a long term valuable company, you must become a bank, and get regulated. There’s no shortcut and things will deal with less freedom degrees (thanks God). Despite the tonnes of regulator controls you probably remember Lehman Brothers bubble crash, isn’t it? You do really need everyone who deals with your money to be regulated.

A banker is like an air traffic controller on steroids.

The bare truth about financial activity is it is complex as hell. It handles millions of commitments to pay or collect money in an uncertain risky future. And the very nature of risk means something will eventually fail, for sure, therefore financial companies must cover the risk with some extra money amount not just to protect their business (they would go bankruptcy otherwise), but to protect the expected result of their customers which are expecting to have some gains in the future (given the volume of activity, a huge part of the society would go bankruptcy). If this wasn’t enough, in order to ensure everything is and will be Ok, someone from the government is periodically auditing to verify there is none missing a number, being it intentionally or, even worse, unintentionally because someone did a poor job dealing with more risk than he should. Anyway, banker can go jail for such failures.

Banker’s life is not as easy as someone would expect. Bad bankers deserve jail, but good ones, the vast majority, deserve respect.

(Special thanks to LUIS SAIZ GIMENO, ARCANGEL MUÑOZ BARTOLO and Inaki Bernal for their kind corrections and healthy brainstormings)