Fintechs are causing major shifts. Non-banks and phone apps are increasingly taking over banking activities. New governance models emerge, inspired by peer-to-peer and community logic. Banks could end up in roles of trusted advisors and safekeepers in a more decentralized ecosystem.
The future of finance is the topic of the day. Dozens of conferences about fintech companies and cryptofinance try to get to grips with banking disruption, the rise of mobile banks, pressure on classical business models, and the new decentralized way of thinking.
Old governance models are being challenged. Classic pyramid models with shareholders at the top are made less relevant by the rise of decentralized models and the logic of peer-to-peer, as innovation, including in finance, no longer comes from banks and industry but from web technology.
Some leading thinkers in the cryptofinance space such as Cyrus Fazel, CEO of Swissborg, stress how blockchain technology can bring a major shift from shareholder-centric to community-centric models.
«I tend to think of Napster as the first innovation that heralded blockchain – well before Youtube and Spotify –, as it made it possible to exchange files on a peer-to-peer basis, creating the first decentralization movement. Then in 2002, we came even closer to blockchain with eMule, where you could upload or download whatever you wanted, and be part of a community. I would argue that this trend has mightily inspired blockchain», says the co-founder of Lausanne-based Swissborg, one of the biggest ICOs among Swiss crypto startups, with over 50 mio. $ raised two years ago.
Cyrus Fazel is committed to the decentralized autonomous organizations (DAO) model, which he views as the future of governance. Today’s highly centralized giants such as Uber or Airbnb may soon be antiquated: «There is an asymmetry: no one remembers the names of the first users of those platforms, while everyone knows the investors», he notes.
Users are not rewarded for taking initial risks or giving their data, while investors are richly rewarded. So, when service quality declines, or the service is available more cheaply elsewhere, users have no loyalty. The community model offers the right incentives: everyone is rewarded equally in exchange for contributing to the network.
Based on these self-governance principles, Swissborg conducted a «referendum» with its own community of token holders. As a result of their wishes, the company is about to launch a wealth app that will aggregate the main crypto exchanges and make it much easier for any investor to buy and sell cryptocurrencies at the best price.
Even before the blockchain and peer-to-peer revolution, banking faced a dramatic shrinking process. Switzerland went from 408 banks in 2006 to 248 banks today, mainly due to the end of offshore banking secrecy, which triggered sector consolidation.
On the capital markets front, battles were lost as well. Tougher balance sheet rules after the financial crisis 2008 caused a huge chunk of lending activities to migrate to peer-to-peer platforms, while the proprietary trading part found refuge in the shadow banking system and dark pools. For a decade now, non-banks (online brokers, asset managers, broker-dealers, pension funds, insurers, private equity funds and crowdfunders) have been extending credit and mortgages, blurring the barriers between traditional and new finance players.
And fintechs are only beginning to join in. As cryptofinance emerges, with gradually clearer regulations, banks are no longer taking center stage in product creation. Fintechs are quicker to innovate. While they do need banks for their distribution power, they are also joining forces with self-regulated intermediaries and independent custodians to offer competing products and innovations, as in the case of Amun and Bitcoin Suisse who launched a crypto-certificate in October, with no bank involved.
The other major disruption is on the retail side, and it comes from the mass adoption of mobile money in Asia and Africa. All it took was apps and cheap mobiles. No banks were needed. With the help of low-cost Chinese smartphones by the likes of Xiaomi or Itel, popular pay apps like WeChat Pay, Alipay and M-Pesa are flooding China, India and Africa. The Southern Hemisphere has jumped on the «smartwagon», doing mobile-to-mobile transfers, contactless payments, replacing banks’ credit cards and connecting its unbanked populations.
Closer to us, smartphone banks like Revolut and N26, born from the IT world, are now among the top retail banking players in Switzerland. «The business model of traditional retail banking as we have known it is dying», believes Frederik Gregaard, Head of digital financial services Switzerland at PwC.
In the future, current accounts and credit cards will no longer be in demand. According to the PwC expert, as we enter the age of blockchain, «we will be transacting with less intermediaries, and more with robots or digital autonomous entities, which are not incorporated. The whole institutional world was not built for that».
So what functions will banks manage to keep? That of an advisor, basically. «Private banking as we know it today will be the new normal as the bankers are becoming amplified by technology. Financial planning, market access, brokerage, mutual funds and much more holistic advice around business and life decisions is what we will still define as banking in the future», says Frederik Gregaard.
He also sees banks in a custodian role for digital assets, as a safekeeper between humans and technology, instead of between clients. «Entrusting them with safekeeping private keys adds security to the system». But there are other contenders: Coinbase claims this role, too.
This all explains why the future giants won’t be banks. The biggest companies are now the GAFA (Google, Apple, Facebook, Amazon). In 2023, either the Chinese version of GAFA will dominate (Alibaba, Tencent, ByteDance, Baidu). Or blockchain platforms will triumph in a privacy-first world, says Frederik Gregaard. «If blockchain evolves to let people own their data, the biggest companies could be Ethereum, Neo, or infrastructure players around blockchains such as the bitcoin miners from Bitmain».
One thing is certain: major disruptions will not come from the banks. The monolithic banking sector is in for an atomization phase and a potentially massive blockchain conversion, leading to a digitally remastered financial world.