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Banking Competition in the Age of Blockchain

Old-style bank safety deposit boxes

The banking industry is under assault from multiple innovations – artificial intelligence (AI), robo-advisors and peer-to-peer (P2P) lending to name but a few. However, no technology will change the nature of competition as much as blockchain.

This form of distributed ledgers was invented in 2009 as the transaction mechanism to run bitcoin, the world’s first real crypto-currency. The technology has evolved since then and it had been decoupled from bitcoin.

Hungry startups have come up with hundreds of alternative coins (or altcoins) and other ways to harness its potential. The literature on how Fintechs will use the blockchain to challenge incumbents can fill bookshelves or – most of it being digital – server-rooms. The blockchain-triggered challenge from data collectors has been documented, too. But it will also alter how banks compete among themselves.

From co-opetition to a battle in new arenas

It is common wisdom that in the digital and platform-driven age, technological progress intensifies competition and eventually fosters market concentration. The advent of smartphones, for example, tilted the market to two dominant operating systems (iOS and android). 

In banking, we have a paradoxical situation where innovation brings the industry closer together. With big underlying structures that need to communicate with each other, banks go into a mode called co-opetition; co-operating with each other whilst still remaining in direct competition.

Many large-scale projects were born out of co-opetition. In 1970, 243 banks got together to create the credit card scheme. In 1973, SWIFT, a private exchange network to run all interbank messages (i.e. transfers), was created. Up to this day, SWIFT remains the backbone of most bank transfers.

In the search for a compatible blockchain platform, we already see co-opetition. Many financial institutions have joined the R3 consortium. This is an industry-wide initiative to create a common distributed ledger standard between banks, companies and regulators and to harmonize the multitude of closed blockchains on its open source platform Corda. From its inception, R3 has included banking giants such as BNP Paribas and Deutsche Bank, and by the beginning of 2019 it already counts more than 200 members.

Another big collaboration is the Hyperledger Project. This Linux-led initiative consists of financial and technology giants such as JP Morgan, Cisco, and the SWIFT network itself. The Hyperledger project is an open-source effort that has set itself the goal to develop a “blockchain for business” with a unified and efficient standard.

Most banks seriously pursuing distributed ledger-based transactions are working on the same protocol – namely RippleNet. RippleNet is a network of payment providers that seeks to make value transfers such as remittances, more efficient. Unlike bitcoin, Ripple doesn’t suffer from liquidity silos, meaning that you can do transactions even if the transacting parties have different currencies.

So, does this mean there will be no pioneers and laggards and that banking will move to distributed ledgers collectively? Not exactly. Blockchain will make processes more efficient, in particular for cross-border transactions. This will bring down costs and the time needed to move money. Temporarily, first movers will compete on those two attributes and try to capture some market share. Yet this is no lasting advantage. Rather, banks must aggressively integrate the blockchain into their business models. Yes, distributed ledgers will be a transformation that starts at the back-end, but they will impact the offerings too, enabling new revenue streams and value propositions. Possibilities abound. Banks could become smart contract platforms, digital identity managers, or the one-stop shop for other blockchain services. So the co-opetition dilemma will still persist, and it will even be taken to new arenas.

Blockchain will globalize competition

Banks will compete in more arenas, including products as well as geographies. Blockchain spells the accelerated erosion of national boundaries; its global ledgers do not discriminate according to jurisdiction. The technical costs are the same whether you send money to your neighbour next door or to a webshop on another continent. To be clear, costs like compliance or risk will prevent a situation in which every bank competes in every country.

Yet incumbents will offer services in more and more territories, thus intensifying competition overall. Remember also that startups with international appetite are reaching for the payments pie too. And they, as well as tech giants, have a major advantage when it comes to international competition: Banks have dispersed brands. While PayPal or Google enjoy international name recognition, banks often chose a multitude of locally appealing names or inherited them through M&A activities. This brand fragmentation is very costly. Also, it is not fitting for a tech company. And banks have repeatedly declared they want to be seen as tech companies with a banking license – see the examples of ING and Citi.

Banks will need to seek and stress the right brand attributes

Fixing branding does not mean just getting the names right, but also what people associate with them. Big bank brands have always fostered trust, but people haven’t opened a bank account at Barclays or Bank of America because they thought it is where their money was safest; the banking license has always meant that every certified bank has a deposit guarantee by the government. People choose a bank because it is the first that comes to mind – “top-of-mind awareness” in marketing speak.

Brand presence in ads and branches matter far more than what you associate with it. Messages all sound alike. In a blockchain-world, where tech-companies position themselves as an alternative to banks, brand power will come to mean so much more. Brand attributes, not just brand presence, will become increasingly important. Blockchain might be an immutable ledger, but what happens with your assets before or after a transaction is equally important. The hacks of crypto-currency exchanges are a case in point. In their DNA, banks are brokers of trust that can provide immaculate security along the entire process. It is time they communicate on it.

Conclusion

In a nutshell, while banks will collaborate as long as the technological exploration phase lasts, they will compete even more fiercely once a unified blockchain standard is in place and the hunt for new offerings picks up the pace. On top of these new product markets, new geographic markets will emerge and will get increasingly crowded. To be sure, these changes will not happen overnight as mainstream adoption will take years, yet it is crucial to consider the direction the market is moving into. Analysing possible business model changes down the road will have an impact on which platform to choose or which consortium to join. Along with this must come the systematic reshaping of the brand portfolios.