The Future of FinTech is Internet, digital, and cloud-native
Matthew Leybold
Managing Director at BCG & Army Veteran, focused on FinTech + Aerospace & Defense Tech. Follow me for perspectives on Enterprise Tech, Cloud, Data Center & IT Infrastructure, AI, and Digital Transformation.
Introduction.?
Finance technology (FinTech) has evolved significantly over the last five decades, and the latest wave of developments suggests that more change than ever before is coming for the remainder of 2021 and beyond.?
The last 50+ years has evolved a variety of financial and technological disciplines that are enabling what is being created today, across computer science, cryptography, telecommunications, cybersecurity, and even the philosophy of how financial products and institutions should behave and be governed. This post is by no means comprehensive but meant to explore some of the major historical events that have brought FinTech to the brink of another significant evolution towards open standards, interoperability, decentralization, and a focus on privacy and power back to the customer or user.?
This evolution has given rise to new financial paradigms, which directly have led to entirely new constructs built into modern finance technology (e.g. peer to peer, decentralized autonomous organizations, democratization), but also have forced traditional financial institutions to rethink their products, customer journeys, and innovate and modernize to maintain competitive advantage.?
This leads me to believe that a very complementary, symbiotic relationship is developing and converging between traditional financial products, services and institutions with modern financial technology innovations, rather than a competitive environment where one model or set of institutions win out in the end.?
Figure 1: A complementary, symbiotic relationship is developing and converging between traditional & modern FinTech
Let’s start with a short summary of the history of finance technology to get our bearings on how we got to this point and where the future might be headed.?
Preface - Brief History and Context of FinTech.?
First, let’s preface the conversation with a bit of history and context. This list is far from exhaustive, but can provide a point of reference for where we have come, to where we are today and might be heading in the future.?A good additional read for more contemporary FinTech can be found here.
First phase - The origin of money replacing the barter system, and a progression to paper based and fiat currency:
Second phase - Establishment of “electronic money”, the shift to a cashless society, and the birth of FinTech:
Third phase - “Digital, internet and cloud-native applications, platforms and infrastructure” and the shift towards the crypto economy.?
But what is actually changing, across which dimensions of technology, and what traditional technology is being disrupted? I personally like to use the standard technology stack reference architecture as a good organizing framework and analog to categorizing the “infrastructure, platforms and applications” of finance technology… the framework may not be perfect for all categorizations, but will hopefully serve as a rough alignment for the components that are being built before our eyes to establish the finance technology of the future. Recall this later for when we deep dive into each band:?
Figure 2: FinTech organizing framework across infrastructure, platforms, & applications
Band 1 we will refer to as Infrastructure, comprising the movement that is Web 3.0 and its respective components that are enabling a new Internet backbone for finance, payments and money movement. Band 2 we will refer to as Platforms & protocols, covering the evolution & convergence of traditional financial platforms, payments networks and modern payment rails.
Band 3 we will refer to as Applications & institutions, and explore the Internet, digital, and cloud native financial institutions that are rebuilding financial technology from the ground up, and forcing legacy institutions to do the same by way of modernization and innovation. (NOTE: using the term “bands” as not to confuse with Layer 1 and 2 commonly associated with Ethereum and smart contracts).?
Let’s dive into the framework bands that represents the current phase of financial technology and its future.?
Figure 3: A detailed look at how traditional and modern financial technology components, products & services are creating a blended, future state ecosystem
Additionally, we will cover examples across each band of what Traditional and Modern technology stacks are building upon and delivering to end customers and users. Here are a few examples across each category:
Figure 4: Examples across each band
… there are many other representations on the Internet that cover core components and the ecosystem of crypto and DeFi. For another view, check out The Digital Finance Stack from Bankless.?
Band 1: Infrastructure - Web 3.0 enabling a new Internet backbone and core components for payments and money movement
Summary: Traditional infrastructure has built the web and core financial technology as we know it today, from the establishment of the World Wide Web and networking / telecommunications protocols that are still used today, to conventional IT infrastructure like mainframe for mission critical core financial systems and physical or virtualized server technology?
Web 1.0 and 2.0 concepts of initially static HTML web pages with centralized data sources, and eventually shifting towards more digital-native and interactive applications and websites, have enabled the current era of e-commerce, online banking, and electronic methods of payments and money movement. The shift towards Web 3.0 intends to enable openness, decentralization, repatriation of power and privacy to the user, and self-governance… all of which are making way for a new kind of infrastructure and foundational constructs for the next wave of finance to include cloud-native infrastructure, blockchain technologies, and digital currencies.
Web 3.0
Web 3.0 is a concept that suggests the current model of the Web is in need of change, which is highly dynamic and interactive but significantly concentrated and dominated by the Big Tech and hyperscale players, and also features a high degree of data capture and limited privacy features. The current demand for the next evolution of the Web is trending towards things like openness, decentralization, repatriation of power and privacy to the user, and self-governance.?
According to Gemini, Web 3.0 refers to a vision of the third generation of computing, which anticipates that technologies like blockchain will decentralize the internet and disintermediate web 2.0 companies like Facebook, Amazon, LinkedIn, and Apple to enable the online exchange of value, and allow users to own their data. Web 3.0 carries the unique, new characteristics of being open, trustless, and permissionless in design. This macro level shift of the next generation Web is driving behaviors for how all industries operate and are architected, to include Financial Services Institutions.?
Read here and here, as well as watch here to see more from Tim Berners-Lee, known as the inventor of the World Wide Web, on the next Web of open, linked data. A good example of a modern browser that meets the vision of Web 3.0 and user privacy is the Brave browser.?
Cloud-native IT infrastructure.?
The bedrock of modern infrastructure includes the big 3 Cloud Service Providers (CSPs), which host elastic, on-demand computing infrastructure for all industry workloads to include financial services. Cloud is becoming the center of gravity for the vast majority of innovation in this space:?
The well known story of CapitalOne as the flagship legacy financial institution to fully exit the data center and host the majority of its workloads in public cloud is one of the few outliers of traditional financial institutions that has undergone a complete digital and cloud-native transformation. This case study aside, Financial Services Institutions are generally on a very deliberate path to cloud adoption, with a set of unique hurdles to adoption across business, technology and regulatory imperatives.?
Blockchain.?
On top of this modern IT infrastructure sits a number of blockchain use cases that span a variety of different instantiations, often most associated with Bitcoin and Ethereum as the most widely adopted blockchains. If you are starting from square one and need to better understand blockchain and distributed ledger technology (DLT), start with the basics on Blockchain and Ethereum at Consensys.?
For more on the Bitcoin Whitepaper: the original whitepaper discussing a Peer-to-Peer Electronic Cash System, which brought about Bitcoin. Read here.
For more on the Ethereum Whitepaper: the original whitepaper discussing a Next-Generation Smart Contract and Decentralized Application Platform. Read here. You can go even further down the rabbit hole with the Ethereum Organization, Ethereum Learning and Ethereum Wiki.?
Also, understand the blockchain managed offerings that are springing up across technology firms and open source communities to include Consensys Quorom.?
Cryptocurrencies and infrastructure.
Cryptocurrencies are a new form of digital-native currency that is created, maintained and secure with strong cryptographic mechanisms. These currencies are not controlled by a central authority and by nature are intended to be decentralized from a governance perspective. Read more here from Consensys on the basics of cryptocurrency.?
Powering all of these digital currencies include core cryptocurrency technology and mining infrastructure, such as Blockstream and Infura, as well as decentralized infrastructure such as Ethereum staking nodes.??
Stablecoins, a type of cryptocurrency, are a new digital asset that is effectively a cryptocurrency with a value that is pegged to a stable asset as well as fully backed with reserve assets, such as the US dollar. Some of the most notable examples of these “digital dollars” include Circle’s digital dollar (USDC), the Gemini Dollar (GUSD), and DAI.?
Stablecoins are a great mechanism for bridging traditional and modern financial platforms and markets, and they also provide a stable and reliable base value for constructs like borrowing and lending. Today, 74% of all stablecoins are issued on the Ethereum network as ERC-20 tokens and nearly $1.6 trillion in USD in stablecoins and ETH was transacted on Ethereum in 2020, according to Consensys.?
There are an incredible amount of benefits to stablecoins, including not having to fully exit the crypto markets when trading in and out of other assets, strong integration between traditional and modern financial environments, and a digital asset that is increasingly able to traverse both environment types as well. Read more about how Circle is accomplishing this with the USDC and is even pursuing to become a national digital currency bank. Additionally, while payments integration with traditional and modern is a great step forward, the traditional payments space is desperately in need of modernization. For example, over 65% of non-cash payments are used via ACH, which is a technology invented in the 1970s and can take multiple days to clear a transaction.?
Other good concepts to look at include how governments are researching Central Banking Digital Currencies (CBDCs), and how institutions like Maker, AAVE and Compound are more broadly completely rethinking the need for centralized, administrative entities for governance on a variety of financial services.?
Band 2: Platform - Evolution & convergence of traditional payments networks and modern payment rails
Summary: Over the last few years, traditional payments networks have made big strides to modernize payments networks and money movement. In parallel, more greenfield, digital-native solutions from the blockchain and crypto space have also come about in building the future of payments and money movement.?
Until recently, the digital-native and fiat worlds operated in different domains and technology ecosystems. We are hitting a convergence point most recently where the connective tissue is being built out for these traditional & modern networks to work with each other, rather than compete. Interoperability and integration is continuing to bring these networks together.?
Let’s explore some of the key components of each and how they are creating a symbiotic environment for the future of finance platforms.?
Ethereum and Decentralized Finance (DeFi) for platforms, brokerage, exchanges and protocols.?
The development of Ethereum as a foundational platform to decentralized finance (DeFi) products at scale has established the platform and ecosystem of the future, as well as inspired a number of competing projects that are attempting to accomplish the same.?
Read more here to better understand Ethereum as a platform for the future of decentralized finance by way of smart contracts and other next generation financial products and constructs. Additionally, check out some of the other up and coming platforms that are attempting to accomplish similar objectives, including Cardano, Polkadot, Solana. You can read more about these projects here as well as better understand other DeFi projects that reside in the Ethereum ecosystem.?
Centralized exchanges are broken down into a few categories. First are the traditional financial exchanges for retail customers, such as TD Ameritrade. Second are the pure cryptocurrency exchanges, such as Coinbase and Gemini. And third, some exchanges are starting to offer both, to include Robinhood and many more that are following with expanded asset classes and offerings. Financial services and crypto are converging in this regard as Robinhood and Square are seeing a majority of their revenues realized from cryptocurrency trading.?
Decentralized exchanges (DEXs) have also given rise lately, and are cryptocurrency exchanges that operate without a central authority, allowing users to transact peer-to-peer and maintain control of their funds. Uniswap is an excellent example of a DEX, as it provides a DeFi protocol that is used to exchange cryptocurrencies from most crypto wallets, such as Argent, Coinbase Wallet or MetaMask.?
The DeFi space is growing exponentially, and at the time of this writing, according to DeFi Pulse, over $87 billion USD in total value is locked in DeFi products. Additionally, Ethereum, the primary platform by which DeFi projects reside upon, settled approximately $1.5 trillion in total transactions in Q1 2021, and as a point of reference that is equivalent to approximately 50% of Vias's total payments volume.
Core financial systems vendors going digital and cloud-native.
Core financial systems and software vendors (e.g. core banking) that are leveraged by most Financial Services Institutions have recognized the shift to digital, cloud and blockchain and are modernizing their offerings appropriately. This shift gives institutions a great glide path to modernization that is joint with third party vendors and systems integrators so that they can reduce risk in modernization and not have to walk the journey alone.?
Good examples here include nCino, a cloud banking technology solutions company, and FIS which has made strides to modernize its core banking offering among others. In addition to establishing a Modern Banking Platform that is both digital and cloud-native, FIS has also opened the door to buying, selling, and holding Bitcoin as part of its native offering.??
Crypto and Traditional payment rails and financial networks converging.?
Recently, MasterCard also announced a partnership with Circle and other institutions to enhance its card program for cryptocurrency wallets and exchanges, making it simpler for partners to convert cryptocurrency to traditional fiat currency. The intent to enable more banks and crypto companies to offer a card option to people wanting to spend their digital assets anywhere Mastercard is accepted will be a huge uplift for those looking to continue their normal consumer habits within the context of processing stablecoins, earning rewards in crypto, and other ways to weave the crypto ecosystem into the existing payments world.?
领英推荐
In an example of pure market convergence and collaboration, Consensys recently closed a formation round of $65m to accelerate the convergence of DeFi and Web3 applications on Ethereum with enterprise blockchain infrastructure. A variety of both traditional FSI’s (JP Morgan, Mastercard, UBS) as well as modern blockchain institutions are involved (Protocol Labs, Maker Foundation, etc.). Consensys is one of the leading institutions that is driving the collaboration between traditional and modern institutions, and even acquired Quorom, the enterprise variant of Ethereum, from JP Morgan as part of these efforts.?
Bringing it all together with the modern FinTech service fabric.
Blockchain interoperability is a big new challenge to solve for both blockchain-to-blockchain and blockchain-to-legacy integration and data sharing, as the future will likely remain hybrid and heterogenous, requiring data sharing, integration methods and some form of a “service fabric” for both old and new technologies to coexist.?
Enablement of modern banking interoperability both with each other and with more modern tech via Open Banking and APIs is critical – e.g. Stripe, Plaid, Google Open Banking API’s. The Plaid CTO agrees with this and states that data sharing is necessary to both build a full picture, or mosaic, of the financial and customer data landscape, but also sharing and integrating this data in the right way.?
From a pure play crypto perspective, the Baseline Protocol to enable enterprises to build on Ethereum is a great example of protocols that are being developed to hook into the enterprise community.?
Chainlink is another excellent example of blockchain integration, as it provides a reliable and tamper proof network that can retrieve data from any API, and integrate with any current or future blockchain. Chainlink is best known for “decentralized oracles”, or providing an authoritative mechanism by which other systems can look to for real world data and events, like market prices of assets. Additionally, Chainlink’s ability to securely connect smart contracts with off-chain data and services opens a number of doors for traditional and modern institutions to connect and collaborate.?
Enterprise customers wanting to build blockchains solutions want enterprise grade methods of building blockchain environments and enabling interoperability with other conventional systems of record and database technologies. Solutions like the Hyperledger fabric, Consensys Quorom and others are available to build in a modern way that can also nest within an existing, heterogeneous technology ecosystem. Read more here on TechCrunch.?
Read more here on The Great Protocol Sink from Bankless to understand how protocols will establish the integration between traditional financial institutions and DeFi for a more integrated future.?
Read more here from Andreesen Horowitz on how the fiat and crypto worlds are converging.??
Where modern tech is actually replacing legacy technology.
To caveat this overall theme of traditional and modern tech symbiosis, there are certain areas where modern tech is actually replacing conventional methods, or presenting alternative options of better performance and lower cost where large enterprises may eventually modernize to these methods. Some of these could include remittances, lending, transaction processing, core banking functions, and payments. The underlying infrastructure for many core functions has the potential to be eroded and replaced by much simpler, greenfield, efficient solutions that are being developed in the crypto space.?
Read more from Bankless about how DeFi is eating finance.
Band 3: Application - Internet, digital, and cloud native financial institutions?
Summary: The “front end” or application space for Internet and customer facing applications is actually where the most progress has been made in the traditional finance space, as well as where the highest degree of convergence and integration with the modern space has occurred.?
As many traditional financial institutions find that the shift of a core modernization effort is highly complex, high risk, and extremely expensive, the use cases on the edge are often the most cloud-friendly, easiest to launch, and most critical to enabling a digital-native experience for customers.?
Mobile wallets, cards & payments vs crypto wallets.
There are a few categories of wallets in the traditional and modern space. First, you have mobile wallets and contactless payments from traditional financial services institutions as well as Big Tech, to include American Express Contactless Payment, Apple Pay, Android Pay, Zelle, Samsung Pay, Cash App and Venmo.
Second, you have crypto native mobile wallets like MetaMask, Coinbase Wallet, and Argent, as discussed earlier.?
Finally, a number of hybrid convergence models are starting to show themselves, including PayPal Crypto as it expands upon its existing payments platform and services.?
From a cards perspective, expect to see many crypto natives to offer their own products such as Coinbase Card which recently launched in the US, as well as traditional players and issuers that provide crypto rewards.?
The rise of Internet and cloud-native platforms and applications - Venmo, PayPal (Crypto), Square, CapitalOne.
These new applications are often referred to as “born in the cloud” are institutions that have been started from scratch to provide financial products and services in a modern, digital and cloud-native way. Many of these new models are driven by either traditional firms establishing siloed, greenfield digital only offerings, or by new players that offer standalone services not associated with any large financial incumbent.?
As noted earlier, in the traditional FinTech space, Financial Services Institutions are generally on a very deliberate path to cloud adoption, with a set of unique hurdles to adoption across business, technology and regulatory imperatives.?
Neobank and Challenger banking models - e.g. Marcus / Goldman Sachs
Two offerings are emerging here in the traditional FinTech space. First are the Neobanks, or digital only banking offerings from standalone players in the market, including Chime, Revolut, N26, and Atom Bank.???
Second, you have the digital challenger banking models where incumbents are offering digital only models, some of the best examples including Marcus by Goldman Sachs and Openbank by Santander.?
Tech in Finance.
Amazon, and many other Big Tech firms, are working into payments and other financial products and services without registering or operating as conventional banking institutions according to CB Insights. While Amazon is not strategically attempting to reinvent financial services and banking, they are making strides in payments that are primarily focused on increasing adoption of the Amazon ecosystem. Most notably, Amazon Pay is an online payments processing service for external merchant websites. Amazon now provides a digital wallet for both customers and a payments network for merchants.?
Separately, Apple has partnered with Goldman Sachs to create a credit card. At one point, Google was pursuing banking services and a push into finance, showing the intent to move into financial services in some form is present by most Big Tech firms. This trend of non-financial services natives expanding into finance fits well into the view more broadly by a16z (Andreesen Horowitz) that every company will eventually be a FinTech company.?
Additionally, many financial incumbents have made strides in becoming tech-centric companies. Some examples:
… so what happens from here? A hybrid hypothesis for the future.
When you look at each band top to bottom, and understand how each of TradFi & DeFi are independently modernizing the FinTech space, you also see a significant amount of hybrid & shared constructs where the lines of demarcation between traditional and decentralized finance are starting to blur (see Figure 5 below).?
I would submit a hypothesis that today’s independent organizations, products, technology, and modernization paths across both TradFi & DeFi will evolve tomorrow into a future of integrated and symbiotic organizations, products, technology, and modernization paths:
Figure 5: a hybrid hypothesis for the future on how TradFi & DeFi might converge, integrate, and create a symbiotic relationship rather than a competitive one
Appendix: How does regulatory guidance & compliance fit in with the future?
Regulatory guidance and controls in the cryptocurrency space is extremely nascent, with a significant amount of runway ahead for education. If traditional and modern FinTech components and services continue to merge, with increasing adoption of crypto-native solutions, sensible regulation will be key to increase institutional, enterprise, and even consumer participation in this space.?
While a comprehensive strategy and view has not been truly set by the US Federal Government, some incremental regulations have been enacted, to include reporting requirements to the IRS and the SEC investigating Uniswap Labs, the startup developer behind the largest DEX in the world.?
Most recently, the $1 trillion infrastructure package set forth in 2021 by Congress has included proposed cryptocurrency regulation with a significant degree of controversy and different schools of thought for how crypto should be regulated. Most recently, a crackdown on certain cryptocurrency products and services has been seen to include the SEC’s stance that yield products, such as Coinbase Lend which was recently pulled from launching, should be considered a security.?
You can find more depth here on Bankless regarding the state of crypto regulation. The World Economic Forum also recently posted a thought piece on the path forward for navigating cryptocurrency regulation.
Wrap Up.?
From all of these observations, summary points are as follows:
Modern FinTech has created a number of extremely innovative and disruptive solutions and approaches to financial constructs that are gaining adoption and market share of financial services.
Traditional financial services institutions and other incumbents have seen this change and are responding accordingly by launching crypto-native offerings, challenger offerings, rethinking the customer journey, and modernizing underlying infrastructure.
The future is Internet, digital and cloud-native, and the vendor and solution landscape is much more collaborative and symbiotic than competitive.
Recommended further reading.
Icons made by Freepik, Dimitry Miroliubov, DinosoftLabs from FlatIcon. Title photo by Chenyu Guan on Unsplash.
Apart from FinTech, blockchain technology has applications in other industries and for other use cases. What's useful to know for businesses developing blockchain technology is that recently the Australian Patent Office affirmed that blockchain technology is patentable, I wrote about it in a recent post: https://www.dhirubhai.net/feed/update/urn:li:activity:6840735516518948864/