Game Over for Banks? Au Contraire

A new EU Parliament study shows how banks can stop crypto from eating their lunch.
by Edmund Yong, Co-founder of Celebrus Advisory

You’ve heard this countless times before, the narrative goes like this: Blockchain will remove trusted intermediaries like banks and decentralize power to the guy on the street. Hundreds of millions worldwide are shut out by the banking system due to high entry barriers and account requirements. Moms and pops cannot put food on the table because they are turned away by poor credit scores and bloodsucking fees.

Now they can all bypass banks, flip them the bird, and go on the blockchain!

Just about any ICO on financial services will tout “financial inclusion” as if it is the cure for global poverty. It has become their standard schtick (and ennobles the ICO founder to raise donations for more snake oils). To be fair, the concept does have merits but is shiftily used: Many of those who are unbanked are simply unbankable, not by some evil grand design but due to a pattern of default. There is a huge thriving ‘shadow banking system’ that supports these non-target segments. And e-money has penetrated masses and displaced cash long before the world has ever heard of blockchain.

But the fact remains. When they talk about financial inclusion, they imply banking exclusion. “Banks are the enemy!” This time, banks are the ones left out in the cold.

So henceforth, we assume that banks are folding their hands in idle horror as they watch crypto take away their lunch. This explains their mass cryptophobia, stonewall resistance, and intense lobbying to regulators. If crypto exchanges hold themselves as the ‘gateway’ to the new financial order, banks will double down as the ‘gatekeeper’ to the current one. Crypto will be choked off without fiat, and banks (central ones included) wield the keys to close the gates. Oh yes, real banks have real keys 😉

Or there is another opinion:

Banks have not showed their hand yet and are holding the cards close to their chest. They are poker-faced as the stakes get higher.

Which brings us to the new and exciting 136-page study commissioned by the European Parliament’s Committee on Economic and Monetary Affairs released this month (July 2018) on the competition issues and dynamics of the fintech industry. Chapters (plural) have been devoted to crypto!

1. Big banks could find a way to barge into the market and bully the small players:

“The market power of incumbent banks might be used to limit competition through pre-emptive acquisitions or predatory pricing schemes. The role of banks in accessing and processing data as a source of market power can give rise to an unassailable competitive position.

2. Banks may rein in what they do best e.g. payment, exchange, and transfer of fiat:

 “Incumbent banks may engage in anticompetitive practices by denying access to their gateways for exchange or wallet services, such as bank payment and transfer systems or card processor schemes. This may be conducted by means of low service quality, delays in negotiation, proprietary technical standards or excessive pricing.

 3. Banks can mint their own crypto with full state backing and upend the industry:

 “The arrival of permissioned cryptocurrencies promoted by banks, even by central banks, will reshape the current competition level, broadening the number of competitors. This may deter consumers from using the permission-less cryptocurrencies in favour of the permissioned ones promoted by banks.

Truth be told, people have been predicting for the last 10 years that banks would be disrupted by fintech but it hasn’t happened yet. For one, disintermediation is not disruption. Bank profits are still on the rise. Fintech adoption is still not pervasive, and banks are not going away. Fintech and banks end up co-existing preternaturally.

There is one curious insight: The EU study shows that despite elevated M&A activity for fintech in Europe, there is still “strong geographical endogamy” i.e. consolidation is within the limits of a particular country rather than internationally, and market concentration is not taking place as feared. Simply put in our case: Crypto will gnaw on the banks’ lunch. But banks will not gobble up crypto.

Why is that though? Because regulators will not allow it. Sure, we will see a lot of interesting overtures from banks in the near future. But regulators will ensure that the competition will continue to heat up. The study cites an example of the niche cybersecurity industry in France and how regulators intervened to maintain a certain level of market rivalry.

It will be fascinating to see how this applies to crypto as the dynamics clearly favor incumbent banks: “the borderless rogue corporate entity vs sovereign regulated corporate citizen” (or for imagination’s sake: a Binance vs Barclays showdown). Je croise les doigts! Fingers crossed as they say.

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