Software Ate the World, Here's How It Eats Finance

I’ve got a simple, modest goal. Let’s move $15 trillion of global gross domestic product to open-source programmable blockchains. No more, no less. 

We don’t need to change the nature of the human animal, short-circuiting its dopamine receptors with moon-shot fantasies. We don’t need to break the artificial intelligence attention platforms, and somehow pull two billion people from one honeypot to another. We don’t need to flip money upside down, throwing a stone into our own bullet-proof window. Those changes are all consequences of what I propose – not precedents. Let us begin instead with all of finance. 

To understand the full picture, zoom out for context. Bickering over protocols and forks is a great Twitter strategy. But doing the actual software and market development is what matters. So let’s describe where we are from the perspective of digitization and the global economy. 

Over the last several decades, multiple industries have been gutted by disruption. It starts with a cheaper, simpler version of a familiar product, which has some structural advantage. The product improves cumulatively, until the traditional industry can no longer compete, despite its initial market share. Napster pulled apart the music industry such that revenue collapsed 50 percent and the remainder was Spotify, not the music labels. Google did the same to the media industry as it incorporated all of the internet into its advertising maw. Uber leveraged GPS and Apple’s hardware footprint to create a substitute for the traditional taxi, cutting prices of New York taxi medallions by 80 percent. Amazon and Alibaba sliced deeply into retail, pushing cultural norms and payment volume to a new chassis. 

In all these cases – which became venture capital cliches because they ring true – something fundamental happened. The software equivalent of the core product in that industry became free to manufacture. I cannot build a Spotify of CDs, but if digital music files are an available Lego piece, then a blue ocean of opportunity awaits. You can think of these developments as fractals emerging from shifting societal tectonic plates. As humanity levels up its technical capabilities, the shape (but not the nature) of human activity changes. We may not know every recursive fold of the fractal, but we know its spiral tendency. 

Unlike the examples above, financial services can be a much more difficult beast. Its sectors are highly technical and arcane. Its language is specialized and protected. Barriers to entry come from relationships with power in the form of regulation and licensing, and from network effects in the form of market infrastructure, liquidity and payment rails. It is more difficult for the vector of digitization to digest finance. But like all things, we already know the answer. Revenue pools and fees will continue to collapse, consolidation will create power laws and the remainder of the industry will be natively digital. 

Bankers today still struggle with questions about how Amazon and Apple will enter financial services, or whether digital currencies will be launched by central banks, or what shape regulation will take for tokenized assets. The answers are fated – you just need to know where to look.

I segment the financial services industry across (1) sector, and (2) value chain. Historically, financial sectors developed independent infrastructures under separate, local regulations. However, as super apps and bundled fintechs move to consolidate these products in unified experiences, everything starts to meld together. Payments sit on top of information exchanges (i.e., chat apps), rapidly moving value between participants. Once money settles and is no longer in motion, it becomes money at rest – to be banked, lent or invested. And if you are making asset allocation decisions, both in terms of risk management and consumption smoothing, a variety of asset classes become relevant. You may be looking at trading equities frequently or holding a corporate bond for a long time or building out a tax-deferred pension strategy. Hedges, insurance, derivatives and other techniques create further certainty across one’s financial journey.

In terms of the value chain, we can boil this soup down to the essentials. Financial products are made in the factory, manufactured as deposit accounts, exchange-traded funds, underwritten debt or insurance policies. Some capital-provider makes the thing itself from various financial ingredients. They then travel across some middle office or connecting set of providers. Think of CRM, KYC/AML, trading software, collateral management, financial planning, and other feature sets as the intermediating set of steps to get a financial product into the hands of its final customer. At the very end of this labyrinth is some distribution channel – a store. This store may be a bank branch, a financial adviser or a lending officer. Increasingly, it is your mobile phone or some crypto YouTube influencer. Financial products are sold, not bought, which means that distribution remains valuable, regardless of the form. 

I say all this to bring us back to the macro story. Over the last decade, venture capital has funded an incredible assault on financial incumbents. Annual investment increased from several billion in the late-2000s to nearly $70 billion per year in 2019. The percentage of venture capital focused on fintech similarly grew from 5 percent to nearly 20 percent. A seismic rebalancing of financial services “disruption” investment occurred – but it focused primarily on distribution. This is why today we have a dozen global unicorns all making the same fintech bundle bet. Though Robinhood, Revolut, Wealthfront, N26, SoFi, Chime, MoneyLion and others started in different verticals, today they face each other for the heart of the millennial customer. It has never been easier to swing for the fences. However, JPMorgan, Goldman Sachs, Santander, DBS, Schwab, BlackRock, Amazon, Apple and Uber are not far behind – the fractal unfolds parametrically.

So what is left for the entrepreneurs? Knowing that finance comprises 20-30 percent of global GDP, what we should do is shift aim towards manufacturing its core product for free. Other entrepreneurs are trying to build the largest attention platforms selling deposit accounts sitting on 30-year old core banking software. Our advantage lies instead in global networks, public and private chains, and programmable, decentralized finance. 

Just like Linux powers the majority of mobile operating systems in the world, open-source projects like ethereum (and others) can one day power transaction, market and settlement infrastructure across all asset classes. Trillions in value-added economic activity can flow through modular, expandable rails that standardize and mutualize identity, accounting, financial instruments, and the workflows that today are captured across thousands of niche software platforms. This is the work left to be done! But to appreciate progress in that context, we have to follow all the chess pieces, which means tracking the efforts of AI-first tech companies, large financial incumbents, and Web 2.0 fintech startups – all the contributing to the Borganism.