Will the upstarts replace the incumbents?

Is it just me or has the whole digital currency space become hot, hot, hot? Every five minutes, I see stuff about CBDCs – who needs them?; cryptocurrencies – who’s using them?; and stablecoins – what’s that all about? The last one is intriguing me the most at the moment, as I’ve said for years:

A global currency is coming, whether you like it or not (2017)

Banks form alliance to stop G20 (2011)

…  that a digital basket of currencies will win and continue to do so (more here).

The age of national currencies controlled by central banks with domestic borders is over. We live in the age of digital currencies controlled by the network of the people who believe in those currencies, which have no borders. Get over it.

The thing about this is that many entrepreneurs and visionaries are expecting SWIFT, Visa and MasterCard to die as a result. Almost every day I see these reports of the end of the last century’s payment institutions, but I’ve seen those reports for almost every day since I started talking about payments. Yes, since the age of the dinosaurs and horseless carriages, I’ve always said that SWIFT, Visa and MasterCard, no matter what anyone says. I say the same about banks. Every day, someone tells me banks are dead and yet, after decades, they are all still here and thriving and surviving. So, who is wrong and who is right?

Well, I would claim the hoards who want to dethrone the traditional financial firms are wrong. Why? Because the traditional firms have dominance of channels, connectivity and trust. Some of that has broken down but, even with a crisis in 2008 that lost billions, the banks who caused it have gone on to gain trillions. Trillions in deposits and assets, and heavily reduced leverage and debt ratios. Some think so, anyways.

Since 2008, has any major bank failed? No, they’re too big to fail. Has any major financial institution been replaced by a fintech? No, they’ve been augmented and inspired by them. Has any network disappeared? Not yet.

In fact, what’s interesting when we talk about fintech is that the most successful firms have been those focused upon extending, augmenting or offering financial connectivity to those who never had it before – the unbanked – than those who have always had financial firms in their space.

Take Alipay, Tencent, PayTM, NuBank and co. They have all made a massive success of reaching those who had zero financial access through technology. Something particularly noteable is that the markets they serve were heavily underserved by the likes of SWIFT, MasterCard and Visa, which is why we have China UnionPay and China has its own Cross-Border Interbank Payment System, CIPS.

Meanwhile yes, we have successors like Stripe, Adyen, Revolut, SoFi and others who have attacked the traditional financial system; but none of them have replaced the core players, such as SWIFT, Visa and MasterCard.

So, now we have several developments that claim to dethrone the old players.

First, Amazon and Walmart are working on stablecoins to replace Visa and MasterCard or, more specifically, to wipeout interchange fees. Second, Tether is building the rails to replace SWIFT. And then Google, Tether, Circle, Stripe and more are building new settlement systems that could displace the whole banking system, some would claim.

The thing is I don’t see it, because I’ve heard it all before and every time the barbarians reach the gate, the system finds ways to respond and adapt. As per my most favourite quote …

“It is not the strongest of the species that survives, nor the most intelligent, but the one most adaptable to change”

… which is attributed to Charles Darwin, but he never actually said or wrote it. The quote was actually penned by Leon C. Megginson, a business professor, in 1963. Ah well … I guess that just shows that the traditional wins over the new by being the first to have been there and done that.

Meantime, I’m going to come back to each of these three areas this week as they intrigue me. In particular, if you have a world leader – a Ford, American Airlines, Visa, Walmart – can they ever be replaced? The answer is yes – a Tesla, SouthWest Airlines, Stripe, Amazon and yet the incumbent still survives because it is forced to change to keep up. Ford, American Airlines, Visa and Walmart are still here and, in many examples, are actually inspired by the Tesla, SouthWest Airlines, Stripe and Amazon of this world. Just look at the fact that Walmart and Amazon are working on stablecoins and you get the idea.

Nevertheless, what is most intriguing in these headlines are the comments, and that’s what I’ll come back with over the next few days.