A couple of days ago, Plaid, a fast growing FinTech company that lets users connect their bank accounts to a variety of financial services, announced that it was being acquired by Visa for $5.3B.
The first thought that came to my mind is that I wished Plaid would have rather been acquired by a large blockchain company, like Coinbase. The only issue is that $5.3 Billion is a hefty price for even the largest of blockchain companies, whereas it’s only a digestible bite for a behemoth like Visa.
Many analysts referred to Plaid as “FinTech plumbing”. For me, Plaid symbolized more than plumbing. It was an essential on-ramp/off-ramp component that enabled consumers to loosen their reliance on banks. I have previously written about and continue to believe that FinTech, DeFi, and blockchain-based financial services are allowing us to gradually depend less and less on large banks as our primary financial services providers. In Banks as Back-ends: The Decentralization Has Started (January 2016), I gave examples of that trend, asserting that the decentralization of banking is already here, but it hasn’t been evenly distributed yet.
I became aware of Plaid in the past years as it is used by some cryptocurrency wallet providers to provide an essential on-ramp to bank accounts. Basically, Plaid users connect their bank account to participate in off-banks personal finance, payments, lending, brokerage, wealth management, and a plethora of ancillary financing services. Plaid’s metrics were impressive: they signed-up 11,500 banks/credit unions and touched more than 20 million consumers via popular apps like Venmo, Robinhood, Betterment and 2,500 others.
Of course, FinTech broadly is a big culprit in this unstoppable finance decentralization trend, but I had wished that the companies leading this trend (such as Plaid) would not be swallowed by incumbents.
I don’t know the Plaid team, and I congratulate them on this amazing exit. At the same time, I’m a little apprehensive because we all know too well how these types of acquisitions typically end. Will Plaid services continue to flourish as before providing more freedom to consumers, or will that service become eventually suffocated and dictated by what’s important for Visa before what’s important for decentralized finance?
When big companies think of innovation, it doesn’t mean the same as when startups do. Big companies are restrained and chained by their current business models, and everything gravitates towards, and aligns behind their existing strategies and direction. This means that innovation will be boxed-in instead of flying according to its own path.
Just imagine for a moment how different the significance of this acquisition might have been if Coinbase had acquired Plaid, and not Visa.
I see this acquisition as another successful FinTech company that was supposed to give users freedom from big banks, yet it is brought back under the claws of big Fin.
The Blockchain is Still Waiting for its Web, Here is a Blueprint for Getting us There. With the web, you can’t fake it. Either the app runs on the web or it doesn’t. On the blockchain, how can you be sure that you are using the blockchain, and using it properly? We are still learning how to prove this. Of course, each blockchain has its set of explorers and tools, but they are very technical and are not appealing yet to a general purpose user audience. With external factors, the key ones relate to the friction between the existing financial system and its players during interactions with the blockchain-enabled financial system and world that are emerging and developing. This includes pressures from existing regulators who prefer to impose their current regulations rather than try to go the extra mile in regulatory innovation that goes outside of their old boxes. Along with that comes the friction of moving money between fiat and cryptocurrency accounts. I don’t understand why traditional large banks continue to frown at legitimate businesses and individuals who are making bona fide earnings in crypto land, and won’t let them make fiat deposits that originated in cryptocurrency. Citing AML uncertainty is an excuse more than a reason, because we have made some good advances in AML and KYC practices for blockchain networks. This is why new alternative jurisdictions with friendlier fiat-to-cryptocurrency practices are emerging in Liechtenstein, Malta, Gibraltar, Caymans and Estonia. In the US, Silvergate Bank, Cross River Bank, and Metropolitan Bank are other smaller banks that are also friendly to cryptocurrency originated accounts, although their bar is high for on-boarding institutional clients. In Switzerland, Falcon and Vontobel are two banks that are also friendly to cryptocurrency, in addition to Zuger Kantonalbank, the regional cantonal bank in Zug (assuming your company is based in Zug). Cryptocurrency custodial practices is another area with friction, and we have just written-up about the many solutions (and their characteristics) that exist in this sector, Where Are All The Cryptocurrency Custody Solutions? Over the long term, the blockchain financial system will grow on its own as an alternative financial system to the current one. These friction points will eventually fade away, or become less of an issue, as the blockchain financial system matures and gains wings of its own. Eventually, I am sure that some cryptocurrency exchanges will start to become like banks, and that should be an interesting development to see. In the meantime, let us continue to work on lowering the blockchain evolution friction points via: 1) the development of easy-to-use blockchain middleware 2) stronger blockchain infrastructure and protocols 3) more acceptance of attempts in bridging the cryptocurrency and fiat worlds together]]>
I recently spent a few days in Geneva, Switzerland, and rented a car on the week-end to make side day trips to neighboring France. This wasn’t the first time I had driven across Europe in a car, but it was the first time since the Schengen Agreement abolishing border checks and enforcing a common visa policy went into effect.
What struck me as we passed multiple times the pseudo-border between Switzerland and France was the openness and ease of passage between the two countries.
Over 4 crossings (twice back and forth), the range of experiences included total openness across a deserted border crossing, to officers signaling cars to keep moving, to being stopped briefly once for 20 seconds and asked 2 simple questions by the French authorities: where we were headed, and where we came from. Perhaps due to my impeccable French, no documents were ever requested.
We can expect this kind of openness within the EU, and I had already experienced it flying or taking the train between EU countries. But Switzerland is a special case, being surrounded by EU countries (except a tiny border with Liechtenstein), while not being an EU member. As it turns out, Switzerland has reciprocal agreements whereby the Swiss Confederation has adopted various provisions of European Union law in order to participate in the Union’s single market.
Within the EU, this openness is possible because EU countries respect and accept each others border crossing practices and procedures. Had I been crossing outside of the EU, the scrutiny and passport checks would have been different and elevated.
This frictionless experience made me think of the blockchain analogy.
Once you have an account with an exchange or receive cryptocurrency to an address, you can start sending cryptocurrency without permission to another address that is part of the blockchain world, the “Blockchain Union”. This permission-less environment is an operating trademark of the blockchain. Your transaction’s flow isn’t interrupted while it traverses the ebbs of blockchain networks, accounts and wallets.
Contrast that to the global banking environment that is full of “border-crossing” checkpoints, and subject to strictly managed entry and exit points for money deposits, withdrawals or transfers. Each bank has its own borders, often dictated by geographical regulation. You can only open a bank account where you reside or do business.
The irony of this analogy is that- while the intent of the current banking system is control and “knowing who their customers are”, that system breaks as soon as the customer or their transaction leaves one bank and go to another. While each bank administers its own independent “know your customers” processes, these processes aren’t connected or related to one another.
Blockchain networks are more cohesive and transparent. You can easily traverse them and see transaction history across addresses, regardless of geographical or location origins.
Related to this, I ran yesterday this Twitter survey, wondering what would happen if fiat-to-crypto linkages were more seamlessly connected.
If more banks allowed crypto/blockchain companies to easily open bank accounts, and provide seamless transfers between exchanges/wallets and online banking, would this create more Fiat-to-crypto or Crypto-to-fiat inflows?— William Mougayar (@wmougayar) January 20, 2018
I was surprised by the results, expecting to see more crypto-to-fiat inflows initially, because I thought that many crypto-wallets were bursting at the seams with crypto holdings that are looking to be converted into fiat. However, the crowd seems to think that more fiat will flow into the crypto side, initially at least.This tweet replying to my survey probably echoes the sentiment of many:
I dream or more crypto to fiat options. @AriseBank— Patrick Konshak (@Konelectric) January 20, 2018
Regardless of the real outcome of this survey question, the banking world is getting surrounded by the crypto world. More than 2 years ago, I’ve wrote a post about Why There is No Global Cryptocurrency Bank yet, and much of it still applies. For traditional banks, resistance to the crypto world will be futile. Their existing set-up had a purpose: they didn’t want a borderless world to interfere with their monopolist operations, something that the blockchain threatens.
If the fiat-to-crypto-to-fiat borders were more fluid, we could imagine a scenario where users can use the crypto world as a global on-ramp to make money transfers seamlessly, in essence by-passing the proverbial SWIFT system. For example, a user could send fiat to their crypto account then use that to transfer to another recipient’s crypto wallet. The recipient can then move the money to their bank account. The whole process could take 15 minutes and cost minimal transaction fees, certainly less than the cost of a standard international wire transfer.
The blockchain world is like a global Union. Once you’re in, the borders and barriers are minimal, frictionless and permission-less. But it is full of friction as soon as you want to leave it, or enter it from the traditional side. The friction between the non-blockchain and blockchain worlds is real. It is not dissimilar to the difference between travelling within the European Union and outside of it.]]>
The more people understand the blockchain, the more we will see a proliferation of useful cases around it. Just like any technology, those who invent it have not necessarily thought of all of its applications, which is why I believe that the best use cases are yet to come from a growing number of entrepreneurs and subject-matter experts that have deep expertise into a particular field or domain.
But the first step is to have a fundamental understanding of how blockchain technology is different from what we are currently doing today. Almost everything in life is about taking evolutionary steps. Even the brightest startups need to understand the behavioral switching psychology for their users (e.g. Facebook understood really well the concept of sharing), while large enterprises have ambitious change management challenges ahead of them in order to get blockchain projects moving.
The blockchain as another kind of database is a popular analogy that has been used a lot, especially after I wrote more about two years ago, The Blockchain is the New Database, Get Ready to Rewrite Everything. In reality the blockchain doesn’t disrupt databases, but it disrupts how databases get synchronized between each other. Image two entities (e.g. banks) that need to update their own user account balances when there is a request to transfer money from one customer to another. They need to spend a tremendous (and costly) amount of time and effort for coordination, synchronization, messaging and checking to ensure that each transaction happens exactly as it should. Typically, the money being transferred is held by the originator until it can be confirmed that it was received by the recipient. With the blockchain, a single ledger of transaction entries that both parties have access to can simplify the coordination and validation efforts, because there is always a single version of records, and not two disparate databases.
Let’s take that analogy further into the shared documents domain, and think about what happens when we share a document where two or more users need to make changes to it.
Blockchain as Google Docs vs. Microsoft Word
The traditional way of sharing documents with collaboration is to send a Microsoft Word document to another recipient, and ask them to make revisions to it. The problem with that scenario is that you need to wait until receiving a return copy before you can see or make other changes, because you are locked out of editing it until the other person is done with it. That’s how databases work today. Two owners can’t be messing with the same record at once. That’s how banks maintain money balances and transfers; they briefly lock access (or decrease the balance) while they make a transfer, then update the other side, then re-open access (or update again).
With Google Docs (or Google Sheets), both parties have access to the same document at the same time, and the single version of that document is always visible to both of them. It is like a shared ledger, but it is a shared document. The distributed part comes into play when sharing involves a number of people.Imagine the number of legal documents that should be used that way. Instead of passing them to each other, losing track of versions, and not being in sync with the other version, why can’t *all* business documents become shared instead of transferred back and forth? So many types of legal contracts would be ideal for that kind of workflow. You don’t need a blockchain to share documents, but the shared documents analogy is a powerful one.]]>
The more we link our bank accounts to external services and applications, the more we realize that we are living in a world of decentralized banking.
The trend has started, and it is more than anecdotal because it’s happening frequently and with greater impact.
Here are some examples:
Linking your Eventbrite event lets you get paid immediately into your bank account.
Linking a Bitcoin account lets you move money around the world in less than 10 mins at the cost of pennies in fees, and then you can transfer the money back and forth to your bank account. Actually, here’s an example of a Bitcoin exchange (QuadrigaCX) that provides 9 ways to fund an account via various deposit methods, and 11 ways to withdraw money. Many of these are to/from a bank account, and several of them are free.
And here’s another cryptocurrency exchange (Kraken) where you can perform currency exchange in real-time between 12 different fiat and cryptocurrencies. I can’t do that via my bank unless I have a more advanced foreign exchange account (typically with a large deposit balance), and certainly not offering this wide array of currency choices.
Linking your Kickstarter account lets you get paid for your creative project before you even deliver it, and the money is directly deposited into your bank account.
Linking your PayPal account lets you receive money from a variety of services in real-time (e.g. from Eventbrite), because PayPal acts as a payment processor, and they deposit money in your bank account within 2 days.
Linking ApplePay to a debit card (or credit card) lets you check-out and pay for items in seconds, but the money is really coming from your bank account.
Linking your Venmo account lets you receive money instantly from a friend, then you can push that balance back to your bank account (or vice-versa).
These examples are few but significant, and I know there are others. The point and reality of all these situations is that we, as consumers are doing more interesting things with these new ancillary services than we can, directly from our bank accounts. More importantly, the banks alone would not allow us to accomplish what these linkages enable, which is why we have to go through these intermediaries.
These new services are liberating us from the restrictive features of a traditional bank account.
I can see a not-so-distant future where the bank account becomes more of a back-end service, as we’ll be manipulating money externally via our smartphones, apps, cryptocurrency accounts, or web services directly (e.g. via money pulls following an UBER ride or a Square payment by email, without touching money or cards).
B2B merchants have had a taste of this two-tier separation for a while, via their Point-of-Sale terminals that take money from customers and automatically deposit it in their bank accounts. That was their version of linked services, but now this is more widely expanded to consumers.
Global to Local or Local to Global?
Concurrently, the pendulum is swinging between local and global linkages. Traditionally, banks have had strong local anchors because that’s how they were started. Then, they built global linkages between them at great expense and effort, and as an afterthought, via linkages that are proprietary and relatively expensive to maintain.
But with the advent of Bitcoin as a global rails network, other global blockchains and many online services that work from any country to any country, we already have powerful global networks that are seamless across boundaries, and we are now complementing the reach of those new networks by adding local anchors and local users, via your bank account. Suddenly, your traditional bank account will look like no more than a node on the global cloud of financial networks.
In hindsight, geographical regulation which the banks were subservient to (ironically to protect them), became a barrier to the global melding of consumer activity. And by global, I mean across countries and across web services. Operating locally has killed the banks’ abilities to join the more open global web of financial services, except via onramps and offramps, but they aren’t anymore the main money highway. And I’ve already discussed this question, Why Isn’t There a Bitcoin Global Bank Today?
A senior banking executive recently told me that, dumbed down, banks provide three basic services: 1) deposit your money, 2) loan you money, 3) facilitate payments.
With the advent of FinTech and Blockchain Technologies, these three areas are now leaky buckets for the banks. Actually, if you get close to a banker, they will tell you that ApplePay and PayPal are very vexing successes to them, because they erode their payment margins. And although regulation has given us benefits relating to consumer protection, knee-jerk regulatory reactions occur and end-up erecting higher barriers for local entry, resulting in pushing users to more global and seamless services because the game is now happening via the web’s interstitials.
This article has covered the consumer and small business side of banking implications. Investment banking, trade finance and capital markets are still wiggling their way with traditional practices, but even in those segments FinTech and BlockchainTech services are coming.
The decentralization of banking is here. It just hasn’t been evenly distributed yet.