The financial services sector has been largely unaffected by software and the internet. Sure, market preferences have shifted, and banks are doing what they can to balance the online experience of the increasingly personalized, on-demand internet providers to which consumers have become accustomed — but business models have not.
This is in stark contrast to the total chaos faced by many other sectors, ranging from shopping to hospitality to newspapers. The music business is the clearest indication of this, as shown by the following sales breakdown over the last 17 years:
Physical sales were practically the only way to make money in music in 2001. By 2018, subscription revenue had increased by 34% year on year and accounted for almost half of global revenue, leaving physical revenues as a longing, derelict shell of their former selves. Today’s industry leaders (Apple, Spotify, Amazon, and YouTube) were not in the music business at the turn of the century. The internet altered the music industry’s economics, encouraging new competitors with orthogonal business models to enter the market.
Business structures in financial markets, on the other hand, have not undergone a similar transition. Though FinTech systems are used by a significant proportion of retail customers in particular countries, most notably China, FinTech companies have mainly sought new niches — for example, P2P lending sites, investing, cross-border transfers, and underserved clients, such as small enterprises or individuals without a credit background — or they have collaborated with incumbents or major tech firms. Cooperation provides FinTech start-ups with customer access (via white-label, co-branded products) while reducing their regulatory enforcement burden in many situations.
As a result, incremental upgrades, such as improved user interfaces and alternative data outlets on the edges, are not strong enough drivers to unseat big financial institutions. To disrupt the financial services sector, the underlying networks must be re-architected to bear orders of magnitude less risk. Only then would an alternate business model gain enough of a strategic edge to capture a commanding market share.
Blockchains are distinct from other open source programs in that they preserve a shared state. They work as global accounting machines, processing financial transfers and storing the results in stable, public data structures. Both transactions can be validated by ensuring that a record of them exists on the blockchain. This increases the social scalability of financial systems: Since blockchain transaction parties use a shared accounting scheme, there are fewer opportunities for them to injure one another. Blockchain networks can handle larger numbers of individuals on a global scale by offering better protective assurances.