Virtual (Software Only) Consortia

Current banking databases are disparate and therefore require reconciliation between each other, something which doesn’t happen in the realtime manner we have become accustomed to with the advent of the web. The network connections between these databases, the ‘rails’, are separate and run by 3rd parties and many of the rails that banking systems operate on are actually standardised networks operated by middle men, created as a consortia operations by the banks themselves.

It’s the existence of these consortia that has prevented banking systems from evolving, because there was no incentive for a single bank to create a better system outside of the consortia. They would be in control of a non-interoperable standard that nobody used. All transactions happen between multiple parties, that is their nature, so some form of synchronized system and innovation which is simultaneously adopted by multiple parties is required.

To replace legacy systems with Internet era ones, there are other models than that of multiple entities tied together by mutually owned consortia: (a) the winner-takes-all platform monopoly model that works in many industries and created Googles, Facebooks and Ubers and (b) the utility one, where the entire banking service, not just the rails becomes a utility much like roads.

(a) will not happen because regulatory requirements mean that even if there are global Financial Service brands, these sit on different local systems that are tied to local jurisdictions. There are certain Internet platforms that stubbornly remain regional, one of these is real estate listings, another is banking. There will be no Facebook of banking.

(b) could happen, where there is no Facebook of banking but both enterprise and consumer Internet platforms from social media to SaaS based accounting own corporate and retail customers. i.e. there will be no Facebook of banking but Facebook etc. could own the banks’ customers. Precisely because this would be an undesirable outcome for the banks, it will naturally drive movement towards a new version of the consortium model.

This updated model can be done much more efficiently with blockchains, which could replace 3rd party consortium entities with software alone. By removing a middle man from doing this, the constraint (that the consortium cannot threaten the banks) that ringfences the consortia from not encroaching outside of their designated territories disappears and would allow blockchain based systems software to fulfil their potential to innovate and do more than existing cooperatives like SWIFT can.

As a side note, the Napster or Bitcoin style model of truly decentralized systems with no entity in overall control of any portion will probably not happen in Financial Services unless there is a fundamental shift in how societies work, triggered by them.

Who knows, maybe this could happen, but not in the short term. The reasons for this are that decentralized systems can’t be governed by anyone, so they end up being either compromised or outlawed and secondly, they decentralize revenue. It’s difficult (not impossible) to imagine a decentralized Facebook usurping them because Facebook centralizes revenue and therefore may be able to compete more effectively. Both of these reasons are why the last wave of decentralization faded.

In summary, the ‘multiple entities tied together by software only consortia’ model will be where banking innovation for back end processes and infrastructure happens, and blockchain technology will certainly be the initial focus.