Unintended Victims of Fintech's Quest for Scale: How Web3 Offers a Lifeline
The consumer fintech revolution of the past decade has been monumental, impacting everything from consumer banking to payday lending. Providing access to services via smartphones provisioned at scale via the cloud, changed how many consumers accessed their day-to-day financial services.
Bank branches have been shut on mass, in response to the many fintechs banks that launched without physical branches. In fact, the only thing physical about many of them is the debit card they issue should you opt-in.
It was the internet that provided the reach at the heart of the consumer fintech revolution. In the previous decade, we'd seen the retail industry decimated by Amazon, where retailers realised how much larger a market they could reach by setting up shop online to service a far wider potential customer base than they could ever hope to reach with physical stores.
Monzo, Revolut, Starling and others were some of the fintech darlings that sent tremors throughout the banking industry. By building banks from the ground up, unconstrained by legacy plumbing and technical debt that had been accumulated over the decades prior, they would change the face of banking forever, or so they thought.
What they ended up doing was give many of the incumbents an overdue kick into the 21st century, forcing them to start taking topics such as user experience and customer service far more seriously than they had been prior.
These changes have progressed us to such a point where the majority of our banking is app-based, and in-person relationships are by the bye for the most part.
The problem with scale
This is fine when everything works, but the problem with these app-based banking models is that they're optimised for scale and automation, which means they fail people who don't fit into some predefined customer criteria.
When you combine this approach with heavy-handed regulation that exists for financial services, you have a very real problem with people becoming unbanked.
I was reminded of this recently with the setup of a holding company account, where a large number of banks simply stated that they did not cater for such companies.
Those that did would often allow you to sign up for their services, but once you started providing information about the source of funds to satisfy AML legislation, they would typically decide it was too much hassle for them and simply close the account.
One of my staff previously too had issues with their bank where their account was frozen by a leading bank for a few months and during this time they could not access their funds, or be provided with the reason as to why their account had been frozen in the first place.
There's been countless other horror stories I've heard about people, especially in the crypto and web3 communities where long-standing accounts have been closed with little in the way of explanation.
To compound matters, with today's digital banking landscape, generally, the only recourse people have is via online chat, which may or may not have a real human at the other end of it.
In recent weeks, the former head of the UK's Independence Party (UKIP) Nigel Farrage has in fact taken it upon himself to try and give a voice to the unbanked, after he himself had his account closed (and subsequently reopened) with Coutts Bank.
He hasn't been promoting crypto as a possible solution, but he does seem set on championing this cause.
KYC, AML and other legislation exist for good reasons. But fintechs have attempted to automate as much of the provisioning of these services as possible. This means when things don't work it is the end customer that suffers, not the bank. If only one in every thousand of your customers doesn't fit into your nicely streamlined platform, why should you care?
There is no real incentive to cater for these outliers, and this is the problem with many of our modern fintech platforms. They're optimised for scale and automation, not the needs of your non-average customer.
The only way I could see this changing was via some sort of government-mandated legislation that guarantees businesses and individuals access to a full range of banking services. But unfortunately, banking is not a true public service which makes this problematic.
So the days of relationship banking are long gone for all but the most wealthy, and it’s unlikely to change.
Fintech's problem is cryptos opportunity, and we're now in a fortunate position whereby anyone with an internet connection can choose to hold crypto assets natively, without fear of access to them being blocked.
Onboarding to crypto exchanges does require KYC and AML checks. However, they don't tend to be as cumbersome as those required for banking. I presume this is due to the nascent nature of the industry, but it's likely to only get worse in time.
Fortunately, people do have the option of being fully bankless, whereby all of their crypto assets are stored in self-custodial wallets. This does come with its drawbacks, but it’s also incredibly liberating for people who've experienced challenges with our banking sector.
Unfortunately, we are unlikely to stay this way forever. GDPR ruined the internet browsing experience in Europe, with cookie popups on every website. Who knows what legislation could be enacted to protect web3 users.
SBF's Final Hurrah
Just before he was exposed as a fraud, SBF had the audacity to suggest some approaches to legislating decentralised applications that were enforced at the website layer. I hate to say it, but if native web3 DApps end up being regulated as financial applications, it's likely to happen here or at the protocol layer.
Neither option bodes well for native web3 apps.
It may be that regulators remain focused on the rails that onboard users to web3 — exchanges. However, it will likely be dictated by how the majority of users interact with DApps.
Base's ability to onboard new users
In these respects seeing how Coinbase's Base network evolves will be interesting. It's feasible that their network becomes a rail for onboarding a number of users to DApps and DeFi protocols.
This is in part because of Coinbase's market-leading position (behind Binance), but also their ability to control the Base network to a degree. Whilst it has been launched as an Ethereum Layer 2 network using Optimism's OP Stack, Coinbase will be able to yield significant influence on the DApps that the users interact with via their platform, which has the potential to be a very significant number of users.
Coinbase will not only have responsibilities to provide a safe experience to its users it is onboarding to Base, but also regulatory responsibilities.
This is where Coinbase's actions with policing Base will be interesting to observe. Will they try to continue to promote many of the decentralised and permissionless freedoms associated with Ethereum, or will they have to bow to regulator pressures and be willing to de-bank users?
Coinbase has always tried to take the higher ground towards promoting decentralisation. Coinbase wallet is non-custodial, and Base is a layer 2 network as opposed to a permissioned Ethereum network like Binance Smart Chain.
I'm sure Brian Armstrong would like Base to be truly permissionless, but as the regulatory landscape evolves it has the potential to force Coinbase's hand in the matter.
With the permissionless nature of Bitcoin, Ethereum and other cryptocurrencies, it's likely that there will now always be crypto rails available for those whom the existing banking industry appears not willing to cater to.
In these respects, crypto and web3 has already succeeded where fintech fails.
There are still numerous barriers for a significant majority of those people in using these digital currencies. Without greater certainty on what regulation looks like for crypto and DeFi, there is still risk users could be cut off via protocols and DApps bending to the will of governments.
However, at the current time, crypto is an inclusive ecosystem and this should be celebrated.