Are Banks About to Go Downhill as Telecom Did Twenty Years Ago?

Technology has grown exponentially within the last couple of decades. In turn, it has led to the banking industry revolutionizing over the years. This has also led to the emergence of internet payment technology. This means banks are no longer the only financial institutions that handle money transactions.

A question I secretly dread is whether the global bank regulators are on the brink of making decisions that may unintentionally obsolete the banks by prohibiting a coming technology pivot. When you think about it, this mistake guarantees that the tech industry will continue going around the banks right as the internet-native-payment technologies start to scale.

The Downfall of the Telecom Sector

In 1955 when the Voice-Over-Internet-Protocol was formulated most people disparaged it as a technology that would not scale. Nobody considered it a threat to the telecom giants. The technology to scale VOIP- Circa 2003- arrived, and within no time, most of the telecom copper wire networks became useless relics. It eventually led to the downfall of this sector. This offers a cautionary tale to the banks because the same thing might happen to them.

The Rise of Internet Currency and The Slow Fall of Banks

Typically, cryptocurrency exists digitally and uses cryptography to secure transactions. Bitcoin and Ethereum are some of the major cryptocurrencies that have grown within the last few years. Just as VOIP moves voice data around the internet, cryptocurrency moves value data around the internet natively. The majority disparages bitcoin and Ethereum as protocols that can’t scale nor threaten the incumbent financial industry.

However, scaling technologies for Internet-native money protocols have arrived. A good example is the lightning network which is the bitcoin layer two protocol. It’s considered to possess a throughput capacity that roughly equals that of Visa, and payments made cost virtually zero. On the face of it, many legacy systems operating within the financial set-up today will be obsolete within the next few years. Banks have a history of developing complex IT systems. As a result, Fintechs sprang up to act as a middleware between antiquated back-end systems and also the user experience demanded by customers. Banks’ reluctance to embrace new technology has allowed Fintechs to flourish.

All in all, banks still had a significant role since Fintechs needed to partner with a legacy bank to settle their consumers’ payments. This was until the Money-Over-Internet protocol came along. Banks have lost a significant deposit base to the cryptocurrency industry. This is alarming since it happened before the Money-Over-Internet protocol scaled. In hindsight, they truly are a threat to traditional banking since they enable money to manoeuvre outside the old-fashioned payment trail.

The Bottom-line

Money-Over-Internet protocol can solve the problem of integration speed and cost. Anyone in the world can become a member of these emerging payment networks in a span of a few hours and at a minimal cost. The bank IT system cannot be able to compete with that. Bank regulators are proposing bank capital treatment that would effectively block banks from interacting with open, permissionless protocols. Once this happens, it guarantees that the tech industry will keep going around the banking sector.

It’s no secret that it will take time for internet currency to hit its tipping point scale. But make no mistake; it’s happening. Banks face major disruption on the horizon, and they’ll have to do more than just hold onto their bottom line. Banks will have to meet demands that their competitors can’t while also driving innovation and providing customers with better, faster services.

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Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.