Over the past 50 years, banks have become the department stores of financial services, providing everything from checking and savings accounts to insurance, mortgage and retirement services.
The model “worked pretty well” for a long time, said Acting Comptroller of the Currency Brian Brooks, speaking Wednesday at MoneyFest, an event sponsored by the financial services industry organization Money20/20 that runs virtually through Oct. 29. Brooks argued that the financial services industry is confronting “two unstoppable forces” that its incumbents must reconcile themselves to, or face extinction.
The first is the unbundling of financial services. The one-stop-shop approach that banks offered for decades is becoming obsolete, just as legacy department stores may have run their course: “Financial services are becoming unbundled because people have more control over their fiscal lives.”
Consumers can easily choose particular financial services providers to manage different aspects of their financial lives, and they’re making those choices based on service quality, customer experience, convenience and other values. “We’re shopping for financial services in a way our parents and their parents could not,” Brooks said.
This shift has had a profound effect on industry incumbents. Prior to 2008, national banks conducted virtually all payment activity and most of the lending, he said. Ten years later, banks’ share of personal loans dropped to 28 percent, and fintech’s share of that market rose to 38 percent. Fintechs like Square, PayPal and Stripe are capturing more of the payments business too.
Banks haven’t delivered big returns to investors recently either, with bank index funds flat over the past five years while companies focused on discrete parts of the financial services system performing well. “Consumers are voting with their feet and investors are voting with their money,” he said. “They’re both telling us that the change to unbundled business models is, to some extent, inevitable. As the Borg would say on Star Trek: Resistance is futile.”
Banks Must Get Ahead of Blockchain — Or Get Run Over by It
The second big change in the industry is the decentralization of finance, or DeFi. Powered by distributed ledger technology, this change “could be tectonic in scale,” Brooks said. “Blockchain is to financial services what the internet was to libraries and post offices. Regulators and incumbent service providers — all of them — need to get ahead of this or be relegated to economic history.”
About 60 million Americans now own some form of cryptocurrency, and a quarter of institutional investors have some in their portfolios. Financial regulators are spooked by cryptocurrency because it’s disconnected from central banks and not easy to control. Still, regulators “can’t ignore the increasingly important role of crypto in the world of finance,” Brooks said.
Blockchain is fundamentally a banking technology, he said: It records transactions and enables the exchange of value just like banks, except it does so instantaneously and more efficiently. It can reduce costs of financial services such as mortgage origination fees, lowering closing costs for homebuyers.
Banks and other financial services are exploring the ways blockchain might be used to power payments and back-office operations. Meanwhile, some fintechs have been deciding that they’d like to become banks, buy banks or partner with banks — and it’s all happening with little regulatory clarity. With a few exceptions, cryptocurrency is regulated by states, not the federal government, which is a big challenge for businesses trying to work with cryptocurrency.
Brooks argued that “companies engaged in banking through new and innovative means” should be able to apply for national bank charters, just like incumbent banks. This would allow fintechs to operate as banks and work within the same regulatory structure.
“The uniform application of supervision levels the playing field, it doesn’t distort it,” he said.
MORE FROM BIZTECH: How data analytics is helping banks make smarter decisions.
How Blockchain Will Power Instant Payments
Distributed ledger technology will also be critical to the development of an instant payments infrastructure, he said, providing benefits to both businesses and consumers.
“It’s an absolute travesty that our country is a decade behind the United Kingdom and Mexico with regard to real-time payments,” Brooks said. “It’s disappointing that we’re optimistically promised a system by 2024 — let me say again, 2024 — for faster payments in the United States.”
Referring to the Federal Reserve’s FedNow payment structure, which is currently being built, Brooks said, “I don’t want to wait four years for that, and I’m sure neither do you. I’m not sure our international competitiveness can wait.”
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