Innovators and Troublemakers: 3 innovations pioneered by the Medici family

October 11, 2019 James Hayward

The Medici family is famous for bankrolling the Renaissance and dictating the fortunes of kings, queens, and popes. But fewer know that they pioneered many of the tools and conventions used in modern finance. 

The family, which amassed its fortune through its banking empire, ruled over the city of Florence in the 15th century. They spent vast amounts of their fortune supporting the arts. In fact, scholars argue that the Renaissance only began because of the family’s investment in the arts.

But it’s their impact on the world of finance and trade that we are most interested in. Let’s take a look at what they did.

Branch banking

Anyone that’s opened a bank account would have set foot in a bank branch. And it’s the Medici’s that pioneered the concept. At the height of the family’s powers, you could find Bank of Medici branches across all major European cities. These outposts enabled the family to extend its reach and influence and also maximize profits. 

By creating the branch network, the Medicis also pioneered the holding company structure. The Medicis set up each branch as a partnership and the Medicis were the majority shareholders. They used this structure to protect the family’s riches should one of the bank branches ever come into financial difficulty. 

Both the bank branch and holding company structure provided the blueprint for banking for centuries to come.

Letters of Credit

In the 15th century, global trade was booming as merchants and traders travelled back and forth from Europe to Asia along the Silk Road. And the Medici’s were at the heart of this because of their banking network and pioneering use of the Letter of Credit.

A Letter of Credit provides an economic guarantee from a creditworthy bank to an exporter of goods. It was a crucial innovation as it meant that traders no longer had to carry vast amounts of cash when trading across the Silk Road. 

As well as enabling global trade, Letters of Credit were a revenue driver for the Medici family. They allowed the family to circumnavigate the Catholic cardinal sin of lending money at interest. This is because the Medici's used Letters of Credit and arbitraged FX rates, allowing them to charge interest but disguise it as a currency exchange from the religious authorities.

The Letter of Credit remains one of the most common trade finance tools, underpinning trillions of dollars in global trade.  

Double-entry bookkeeping 

The success of the bank posed a problem for the Medicis. With so much cash flowing through the bank, it needed a sophisticated method to track incomings and outgoings. To solve for this, Giovanni de Medici turned to double-entry bookkeeping. The accounting technique records a debit and credit for each financial transaction and provides a complete record of financial transactions for a business.

Although the Medici’s didn’t invent double-entry bookkeeping, the family pioneered and popularized its usage. And in doing so it gave them a better understanding of their financial position. This allowed them to make more informed decisions and grow the business. And because double-entry booking makes it easier to spot errors the family reduced instances of fraud, helping establish Medici Bank as one of the safest financial institutions in Europe. 

The Medici Bank is back

Although the Medici’s power waned towards the end of the 15th century, their legacy lives on. And, in fact, the family is making a comeback. 

Earlier this year, Prince Lorenzo de Medici announced he’s revitalizing the Medici Bank brand for the 21st century. Harnessing the innovative prowess of his forefathers, Lorenzo is building a digital-only international bank designed to support SMEs trading around the world. 

It remains to be seen if his efforts will have a fraction of the impact of his forebears. But one thing is for sure: the Medicis, both past and present, are well deserving of the Innovators and Troublemakers title. 

Learn more about the Innovators and Troublemakers from yesterday and today by subscribing to our blog. 

 

About the Author

James Hayward

James is Tradeshift's Editorial Manager and a Content Writer obsessed with storytelling and providing finance professionals with insights and advice on how to take their finance function to the next level.

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