By Simon McLoughlin, CEO, Uphold
The convergence of banks and brokerages happened slowly over decades, culminating with a truly seismic shift in the late 1990s. Glass-Steagall's repeal saw to that. By contrast, neobanks and prediction markets and crypto exchanges have melded together just in the span of a few years.
Banking executives now face a multi-front competitive threat. A comparison of the typical bank versus fintech rivals and digital asset platforms reveals a capability gap that widens by the day.
Traditional banking and deposits, lending, as well as domestic payments and investing, among other business segments, represent areas that are no longer exclusive terrain. Digital asset services and tokenized fund offerings are, on the other hand, likely well out of your wheelhouse.
Just as financial technology has given rise to a host of smart applications done with a click of a screen, blockchain technology is putting in place not just another new-fangled product to distribute while it's in fashion; on-chain nativeness is an entire overarching architectural framework that cuts across everything a bank touches.
Thinking about digital wallets and related functionality as the new bank accounts can open up a panoply of ancillary fee channels. Long gone are the days of "lazy" savings accounts. The retail consumers of tomorrow will expect competitive yields whether in the form of a staking token or a stablecoin reward – and they are beingabetted by AI programs that automatically search these vehicles out. The embrace of blockchain – to prepare an on-chain offering -- is not just a chance to keep clients from going off to some other platform. It's a chance to monetize built-in demand that most likely already exists.
There's also an opportunity to expand internationally through tokenized offerings to some $9 trillion worth of overseas assets that is actively seeking a U.S. financial home and U.S.-linked account experiences. Tokenized assets bring economies of scale and efficiencies to the firms that transact at scale wholesale institutionally; but there's a range of fees to be made by retail-focused banks that are capable of facilitating digital custody, trading. Now add in a layer of cross-selling and next-generation engagements, which could take the form of say, connectivity to a digital predictions market. "It's the same relationship," as one of our sales team members, an ex-banker, likes to point out in pitch meetings. "Just an entirely new asset class."
What to do? Standing still not an option
Bottom line here: digital asset capabilities have crossed from optional add-on into a defining element of the core value proposition. Aspirations should be envisioned, planned and executed at the top-most strategy level with the entire range of offerings considered as part of any such effort.
To compete with fintechs and digital-first platforms, "banks need a unified settlement strategy," one digital-first bank recently pointed out in a paper co-authored by Boston Consulting Group. In the near-term, this approach opens the door to digital asset backed lending and digital asset brokerage steeped in stablecoins and tokenized Real World Assets (RWAs), including money market funds and equities.
It'll sound self-serving but honestly the most important take-away for a digital native aspiring decision-maker is the need for a pragmatic first step, one that is crying out to be undertaken – and yes, that's taking on a partner. The compliance layers alone make it a no-brainer. Handling the on and off ramps into the realms of Ethereum smart contracts and wallet software and hardware are integrations that are best left to a one-stop provider.
The battlegrounds of tomorrow are going to take place at these core layers – money, in digital form, on blockchain rails, weaving in and out of the world's banking system with greater alacrity every single minute. Firms that move swiftly and boldly will enjoy massive advantages over those that fall prey to inertia or wait and see attitudes that came back to haunt so many banks a decade and a half ago.
Easy wins for firms like community banks and credit unions could involve plugging into a third-party platform for cutting edge yield products or basic stablecoin settlement strategies to accommodate more clients moving digital asset holdings into a trusted banking partner.
Inaction has a cost. Banks risk ceding customer loyalty. We've heard repeatedly at industry sit downs and events that the banks that act decisively in the next 12 months will define the competitive landscape for the next decade.
Take the broadest possible view of the shift happening, that's shaping the future and look at it through the lens of the relationship level. At stake is only one of those historic competitive displacement risks that buggy whip makers learned about the hard way. Widen out your lens and realize this movement on-chain is not about one thing (e.g. stablecoins) but rather a whole spectrum of core offerings, from yield to loans trading to custody. Plan ahead. Partner up.
