Do you want to see the future of banks? Take a look at Telcos.



The history of the U.S. telecom industry may be a useful guide for those who want to see how Defi will transform the banking sector.

The “Bell System,” a national monopoly in telecommunications, was established in 1983. These included voice, data, long-distance and network equipment, and local and long-distance voice and data. In 1983, AT&T was the only company with more history, power, prestige, and power.

Paul Brody, EY’s global Blockchain leader, is a CoinDesk columnist.

This monopoly ended on January 1, 1984. The Bell System as it was once known was dismantled into its components, sparking one of the most significant industry reconfigurations in history, which is only now being seen.

Initially, the competition was limited to a small number of these businesses, mainly the long-distance industry. However, as new technologies like wireless and Voice Over Internet Protocol (VoIP) began to disrupt the company, it became more widespread.

The finance industry is changing, just like telecom. The industry’s traditional deposit, lending, and securities operations are being challenged by fintech services, challenger banking, and crypto.

Telecom network operators used two major strategies to respond to increased competition. First, the industry was to be consolidated through mergers and acquisitions. The original ten long-distance operators and regional operators of 1984 have been reduced to just four through consolidation.

Vertical integration was the second strategy. Many industry leaders feared that they would be “dumb pipes” as competition increased. Telcos looked envious of the “over-the-top” providers (OTT). OTT startups and media companies rely on data networks for their content and services. But the telcos lost no margin.

The conflict between telcos, OTT companies, and wireless operators became so fierce that they refused to sell smartphones with Wi-Fi. They also tried to block third-party navigation services and maps services to allow them to sell their phones for an additional monthly fee. As new aggressive entrants came in, they offered phones with Wi-Fi and unlimited data plans.

Moreover, many telecom operators realized that their strategy was hampered by their inability to develop and maintain software apps, media, and entertainment services. Their large infrastructure was a significant barrier to entry.

Although it might not be considered “cutting-edge” or earn Wall Street respect, being able to navigate San Francisco’s zoning rules and install a new cell tower is highly specialized knowledge that restricts competition. App creation and launch cost millions. Running networks and creating them cost billions.

Today, after hundreds of billions in mergers and acquisitions and equally large write-offs or divestitures, telecom operators are back (mostly) running their telecom networks.

Similar pattern?

This same pattern could be seen in the finance and banking worlds. Decentralized Finance (Defi) looks more like a collection of OTT apps. Defi services can be quickly launched at a low cost, just like content and apps for smartphones. Defi services do not have to be compliant with legacy technology systems or compliance costs. Defi services are often faster, cheaper, and more efficient than legacy banking options.

Just like OTT services, there is a catch. You can’t use Defi or an app without a smartphone. Each user must be able to convert their fiat into tokens and later out of them. Because this fiat on- and off-ramps require regulatory compliance and control, they are more difficult to manage and maintain. Keeping these records up-to-date and integrated with other financial systems is expensive and complicated.

The next few years will see banks worldwide face similar competitive challenges to those faced by telecom network operators over the past 30 years. While they may gain significant market share by allowing their customers access to the Defi and crypto ecosystems, this market share may not prove as lucrative as it was in the past. New customers will no longer be required to obtain loans or financial services from their own offices. They can instead compare the entire Defi ecosystem.

Some banks will also launch competing Defi services. Banks will need to determine where they have a significant competitive advantage, from secured lending to stablecoins. An algorithm-based offering might not be as popular as a telecom operator doing stand-up comedy.

It may be difficult for the best crypto developers to find a place in the largest banks. However, there are opportunities to differentiate by integrating on-chain and offline services. Secured loans with more stable assets off-chain like homes may be larger, cheaper, and less risky than those based purely on-chain. Banks will be more successful if they are closer to their competitive strengths.

Peter Drucker once said, “Culture eats strategy for breakfast.” A financially conservative, regulatory-focused culture will find the hyperactive innovation and decentralization-first ethos of the Defi ecosystem hard to sustain internally. Banks that focus on their core culture and businesses than trying to be something else will likely be the most visionary.


Exit mobile version