EXCLUSIVE: “When Worlds Collide” – Wayne Lloyd, Smarter Contracts in “The Fintech Magazine”
Wayne Lloyd, founder and CEO of Smarter Contracts, the fintech behind consent management platform Pulse, says the trust multiverse is heading for its own big bang
Back in 1956, physicist Hugh Everett’s “many worlds” theory described how the entire universe exists in multiple states – something he called the “multiverse”. Since then, physicists have proposed many types of multiverses, including parallel worlds. While these coexist, physics dictates that “no communication occurs between them, so neither universe is aware of the presence of any other”. However, it does support the notion that they could collide! The principle behind the theory aptly describes how I see the last 13 years of digital change and innovation across financial services – specifically, two parallel worlds that have grown under two very different realities: the fintech and crypto worlds. The “big bang” that accelerated the growth of both these worlds occurred in 2008.
Known as “The Global Financial Crisis”, its impact spread across all parts of the financial industry with devastating effect. It caused huge economic losses, mass unemployment and led to the collapse of significant financial institutions, resulting in a loss of customer confidence in the banking system. This event, combined with the fact that banking had not seen real change for centuries and that the wider world was becoming increasingly mobile and digitally savvy, created the perfect storm for change. Fintech describes technologically enabled financial innovation that gives rise to new business models, applications, processes and products that have the potential to change financial markets and institutions.
“The crypto world has evolved in such a way that it is impossible for the fintech world to ignore it anymore. And then we will begin to witness their inevitable collision.”
So you might think the term fintech also describes crypto. One only has to read crypto community forums to appreciate the disdain with which such an association is viewed, some arguing that fintech is merely iterating on the old rails of traditional finance, while crypto is building something entirely new and fundamentally transformative. Such opinions emphasize why it is important that both worlds always remember their “why”. Most companies know what they do and how they do it, very few companies are able to clearly articulate the reasons why they do what they do. Reminding ourselves that the growth of the fintech and crypto worlds were both accelerated from the ashes of the financial crisis, it is fair to conclude that the “why” of both worlds is to restore public confidence in a broken financial system. after the Bitcoin genesis block was mined, its creator, Satoshi Nakamoto, confirmed trust as the “why” of the crypto world. Nakamoto wrote:
“The root problem with conventional currency is all the trust required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is littered with breaches of that trust.”
Trust here refers to an individual’s reliance on another person or entity under conditions of dependence and risk of taking control of one’s assets. It’s how each world has approached the building of trust that really defines how remarkable both are, if you look from one world to the other. The fintech world has built trust by adopting a laser focus on disrupting lower-margin or niche businesses that established banks had previously overlooked. Fintechs have been able to provide individuals with access to cheaper services via well-designed platforms or mobile applications that are easier to access and use. While trust is one of the central goals of UX design, creating trust goes beyond this. So the fintech world also introduced 24/7 customer service via non-traditional channels, such as social media. This enabled customers to disclose any errors in these services in real time and to a wider audience. So fintechs have been forced to deal with complaints as quickly as possible, while demonstrating that they have learned from those mistakes accordingly.
Beyond community trust, the fintech world has also been effective in winning institutional trust. This has accelerated from the passage of legislation such as open banking and the revised Payment Services Directive (PSD2), which gave fintechs unprecedented access to banks’ customers and their banking data. This has enabled fintechs to build personalized products and services that benefit customers in ways that traditional financial service providers had previously been unable to offer. Personalization is seen by some academics as a key ingredient of trust because it fulfills the customer’s needs while creating a sense of control. Institutional trust has also allowed fintechs to access an abundance of venture capital (VC) funding. In 2021 alone, more than $210 billion was invested in the world of fintech, which was a 10-fold increase from what was invested in 2016. This has enabled fintechs to acquire the best talent and disruptive minds, boosting confidence to both institutions and investors. And consumer adoption of fintech companies and products has grown exponentially as a result, with more than 75 percent of consumers globally adopting some form of money transfer and/or payment service by 2019, according to Statista.
The development of the crypto world is diametrically opposed to this.
Given the absence of societal and institutional trust, the evolution of the crypto world has been remarkable in that it has been able to build trust through technology. The building blocks for this were created after the release of the Bitcoin Whitepaper, which introduced a peer-to-peer electronic cash system, operating without the need for any central authority or bank, using blockchain. Since its launch, Bitcoin has grown to become a significant store of value, with some (myself included) arguing that Bitcoin improves on the properties of gold, making it the ultimate store of value. Since Bitcoin was launched, the crypto world has introduced thousands of digital assets, each one designed to solve a specific problem within the financial sector and beyond. Like the fintech world, these crypto projects have focused on reducing the costs and friction that traditional banking had ignored. Well-publicized use cases that the crypto world has improved on include cross-border payments, trading, fundraising, and clearing and settlement.
In fact, in 2017 Pictet Asset Management believed that by 2022, the underlying technology of the crypto world could “reduce global banks’ infrastructure costs by $15 billion to $20 billion a year”. The success of the crypto world is even more impressive when we consider the lack of attention that has been given to UX. Early adopters of crypto will remember the interfaces of products like My Ether Wallet, exchanges like MT. Gox, and, more recently, losing exchanges like Cryptopia. The UX designs were terrible and the personalization was non-existent. Furthermore, due to the decentralized nature of the technology, the concept of customer service does not exist.
When things go wrong, there is no recourse for crypto users except to write an angry Tweet. Relying on the technology is literally the only choice users have. Despite the innovations that the crypto world has unlocked, it has developed under a constant cloud of uncertainty due to opposition from banks, regulators and society alike. Despite this, the crypto world has grown an industry that was worth more than $3 trillion by November 2021. With more than 300 million people using crypto today, the crypto world has evolved in such a way that it is impossible for the fintech world to ignore it anymore. And then we will begin to see their inevitable collision. By proving that people not only trust technology, but also that decentralized technology works, the dynamics of the crypto world will change significantly over the next decade. Not only will we see more institutions using the underlying technology, but we will see an exponential increase in the number of people using digital assets as a means of value exchange.
The seeds have already been sown, with the British government confirming its intention to “legislate certain stable coins, where they are used as means of payment”.
The Bank of England’s Fiscal Policy Committee also made clear this year that if crypto activity is of an economic equivalent to activity carried out by traditional financial services, the regulatory perimeter should be adjusted to ensure it is regulated in the same way. As the crypto world achieves regulatory certainty it would be reasonable to expect an exponential increase in societal and institutional trust in the products and services it offers. Indeed, there is reason to believe that the impact will be similar to how open banking and PSD2 supercharged the growth of the fintech world. It would also be reasonable to assume that regulatory certainty will unlock an increase in VC funding that was previously not allowed to invest or felt uncomfortable investing in unregulated activities.
Likewise, this increase in funding and legitimacy will also give the crypto world a greater ability to attract the best talent and disruptive minds. Fintechs should be aware that if history repeats itself in this way, their world may find itself viewed as legacy if it fails to adapt accordingly. And given that the crypto world is largely built on decentralized technology, it needs to be aware of how this may affect fintech’s ability to function. Over the next decade, the winners will be those who can adapt their business models to work seamlessly across networks, while staying true to the “why” that has won the trust of customers. They will also be aware that financial services will be more than giving customers frictionless ways to move and access money, it will be about giving customers a frictionless way to share and control their data. We have already seen the significant churn rates that mistrust can cause open banking journeys when customers feel they are not in control of their data assets.
Some organizations may lobby regulators in the hope that laws can relinquish control to customers, but in doing so we must be aware that such changes will undermine the reasons for “why” both worlds exist – and run counter to definitions of trust and open banking standards of customer excellence. Given that both worlds share the same “why”, they can only help each other build greater trust by colliding. This will ultimately unlock better products and services for society and only benefit the industry as a whole.
This article was published in The Fintech Magazine issue 25, pages 21-22
