Building the Super Money Engine
How banks can prevent Big Tech from taking over their business
Over the last years technology giants have upended the payments industry. In a world of decentralized finance, they could threaten further core functions of commercial and even central banks. There is one thing above all others that banks should do to fend off the onslaught.
Who of us has not shopped online with Amazon’s single click option or tapped the phone at the grocery store checkout? Big Tech has glided into financial services as smoothly as you add a credit card to your Apple Wallet.
Payments is the window through which technology giants are entering the banking world and once they are in, the opportunities seem limitless. Some (e.g. Amazon) are successfully offering lending services in cooperation with licensed institutions. Others attempted to provide bank accounts (Google) and even tried to mint their own currency (Facebook). While regulators and lobbyist barred some of those initiatives from going live, they weren’t able to trim Big Tech’s ambitions. Those ambitions are stoked by technological progress, which usually plays into their hands. After the spreading of mobile payment infrastructure and open banking regulation, now it is blockchain technology that opens up a host of new possibilities.
Catching the crypto-bug
While the tech titans have early on realized the potential of centralized blockchain applications, they are now keeping a close eye on the maturing world of decentralized finance (DeFi). Unlike centralized blockchains that simply boost process efficiency for banks and companies, DeFi does away with the need for trusted organizations. Initially, Big Tech has been extremely hesitant to look into DeFi, even going so far as banning ads for cryptocurrencies on their platforms. Recently, however, the realization is dawning that they won’t be able to ignore it on the long run. Yes, centrally-run applications will remain the backbone of the monetary system, but DeFi is here to stay. It is not an alternative to classic banking, but an addition. And it is a particularly valuable one for tech giants.
Today the Big Four are hiring crypto experts, setting up blockchain departments, and allowing crypto-credit cards in their mobile wallets. The rationale is clear: Decentralized crypto-assets are not just growing in popularity with users, but they also allow non-banks to control multiple layers of the payment business: Issuing assets, processing their settlement, running applications to manage them, and ensuring interoperability across applications with gateways. There is no need for central banks, retail banks, or companies such as SWIFT.
The opportunities for Big Tech are even broader than consolidating the payment supply chain. In a DeFi world those digital assets cannot only be transferred from one wallet to another, but can be used in an entire parallel banking universe, in which every segment is up for grabs. Decentralized insurance can be provided without insurance companies. Loans without banks. Currency swaps without exchanges. The beauty of DeFi is that computer code is replacing manual interventions. And who is better equipped to write this code than the tech giants of our time?
So, what does that mean for incumbents? They might ignore DeFi altogether, assuming it will never reach the scale of traditional financial services. And they might turn out to be right. But it would be a mistake to disregard it. Digital assets will grow and become an essential part of the system of payment and value transfer more broadly. It means that on-chain and off-chain assets will not just co-exist, but will increasingly be interconnected.
Building the super money engine
Even today moving money is a highly complex affair. In future it will require an exponentially more complex engine that can handle traditional as well as decentralized finance. It is what I call the super money engine. It will be the heart of every dominant platform.
This must be more than just a wallet that can hold balances of dollars and bitcoins. It must be compatible with all types of fiat and cryptocurrencies, private stablecoins (i.e. digital currencies pegged to fiat), digital central bank money, as well as non-fungible tokens (NFTs). NFTs are a category of blockchain asset that is one of a kind and cannot be exchanged on a like-for-like basis. Think of NFTs representing a piece of art, real estate, or intellectual property rights. Moreover, this new powerful engine must be capable of more than just processing those assets. As a user I should be able to buy, hold, sell, invest, or swap an asset for another one – all in one place.
Finally, a super money engine must also be able to build and execute smart contracts, which are basically if-then scenarios on a blockchain. In short: It must be the one-stop shop for all things that have to do with money and assets. The user should not have to go to another marketplace to sell his NFT and then to an exchange to convert the cryptocurrency he received into dollars in order to buy stocks or securities. It should all work seamlessly in the super money engine.
The possibilities of such an engine don’t end there. The next logical step is that banks transcend their function as vaults for monetary value and also evolve into vaults for things such as personal data. Whether you safeguard digital security for bank account numbers, zip codes, health data, or identities makes no difference. If you have a trusted wallet, this is where you keep all things of value. This is your central hub for your entire digital life.
Tech titans are already assembling the engine
Banks are responding to Big Tech’s threat by joint payment initiatives. This kind of cooperation is welcomed, but will lack the appeal to customers if their functionality is limited to traditional financial services. Assuming that regulators don’t block banks from handling crypto-assets – which they shouldn’t – there is no reason why banks should wait any longer with building a super money engine.
The social media giant Meta (Facebook’s parent company) is already working on one. It has filed five trademark applications that let us peek into the company’s future strategy. Meta Pay is designed as a wallet to hold crypto and fiat assets of all kinds, ranging from NFTs, stablecoins, cryptocurrencies to pounds and dollars.
Whoever controls the gateway, controls the customer interface. Ergo, moving money is just the first step. From the texts of the trademark applications, it seems that Meta Pay will also have a crypto exchange function, and later might offer lending and investment services. For banks this should be a wake-up call. The time for embracing the entire panoply of future financial services is now.
Understand the full picture of Big Tech’s move into finance
While commanding a super money engine is the most important tool in tomorrow’s race for domination in banking, it is by far not the only one. And building such a highly capable engine requires time and a lot of strategic savvy. It requires decision makers to understand the full picture of how technology alters the ways of competition. And it requires them to be quicker than their peers in understanding the direction into which breakthrouhgs in blockchain will be moving the industry.
This is why I have dedicated the past one and a half years to intense research and analysis on what tech titans are doing with blockchain and how they will shape the future of money. I have documented the lessons learned in my new book Big Tech in Finance: How to Prevail in the Age of Blockchain, Digital Currencies and Web3.
Can the Big Five – Google, Apple, Facebook, Microsoft, and Amazon – succeed in capturing the global financial system now that blockchain and decentralized finance are radically changing the way money works? Get a copy of Big Tech in Finance and find out!
