“Tà pánta rheî kaì oudèn ménei.”
“Everything flows; nothing stands still.”
Attributed to Heraclitus, via Plato in his dialogue Cratylus.
Let’s move swiftly down memory lane as far as banking is concerned. The exercise will allow us to refresh our thinking and put into perspective the recent developments in financial services and fintech.
Banking began around 3000–2000 BCE in Mesopotamia. Temples and palaces acted as early financial institutions: they accepted deposits and issued loans. Contracts were documented on clay tablets. Concepts such as collateral, interest rates, and default rules were already understood. At its core, banking revolved around custody and credit.
The Roman Empire circa 200 BCE–400 CE established trust and legal enforceability with payment clearing, bills of exchange and professional bankers. Then came medieval Italy circa 12-15th century where proto-banking as infrastructure was invented with the likes of correspondent banking and double-entry bookkeeping.
Finally, the true start of modern banking occurred in 1694 with the founding of the Bank of England. For the first time a permanent public/private entity issued banknotes, managed government debt and eventually became the lender of last resort.
From then on, banking increasingly became systemic versus localized and underwent several major changes. I will name a few of the main pivots, especially the most recent ones:
- Fractional Reserve Banking (17-18th century) multiplied credit creation and turned banks into structural sources of risk.
- Central Banking & Monetary Policy (circa 19th century) established lender of last resort and interest rates as a policy tool.
- Limited Liability & Joint-Stock Banks (circa 19th century) allowed banks to scale and lend to industrial capitalism.
- Deposit Insurance (1930s) largely mitigated bank runs and helped cement public trust in banks.
- Shadow Banking (1970-2000s) ushered securitization, money market funds, repo markets and ultimately paved the way for credit creation outside of a bank’s purview.
- Post 2008 financial crisis regulation and capital discipline made banks safer and accelerated credit moving to the non-bank sector as well as allowing inroads from the fintech innovation movement.
- Fintech innovation (2010 onwards) is a tech-led pivot and includes, for simplification purposes, traditional fintech and the crypto movement. We are of course still navigating this pivot.
Let us now focus on what banks do. At the risk of oversimplifying banking, which is very complex, banks store money, move money, create credit, manage risk, and process information. Banks also perform other “non-core” activities such as asset management, market making, treasury, FX and derivatives.
Storing money (safekeeping, custody) used to be 100% owned by banks. This is not the case anymore. Whether via shadow banks (money market funds, hedge funds), neo-banks (Revolut, Nubank), neo-brokers (eToro, Coinbase), or DeFi (self-custody), banks’ hold on being the custodian of money is eroding. What are banks able to hold onto as of today? Deposit insurance, and a tight prudential supervision of their balance sheet, which helps them protect their current balance sheets and legacy customers. Banks can also serve as the “prime” custodian for new institutional entrants that have not yet secured a banking license. As a result of these trends, banks are at risk of losing, or may have already lost, part of the consumer relationship, even if their balance sheet still benefits from a regulatory moat.
Moving money is where banks have lost the most. Traditional fintech players are encroaching on payment services, whether in country or internationally, whether for the retail trade, SMEs or corporations. More recently, the explosion of stablecoin usage borne out of the digital asset innovation wave is further eroding banks’ position in the payment sphere. As a result, banks are being disintermediated, and although they still retain control over on/off ramps, they are increasingly positioned as utilities within the payments value chain.
Credit creation is now done more outside of banks than inside. Shadow banking started this trend, which is now accelerating with the advent of fintech giants but also DeFi credit markets and will further accelerate with the tokenization of money (money markets, short term credit funds). Banks are increasingly becoming funding pipes because of their balance sheet scale, but they are losing the underwriting and distribution interface. In doing so, they are ceding today’s marginal clients and use cases, which often become tomorrow’s mainstream, and this gradual disintermediation is compressing bank margins.
Managing risk (maturity and risk transformation) is about absorbing risk and providing safe liquidity. That function is now being re-architected in real time. Stablecoins, tokenized funds, on-chain cash management, and DeFi vaults with automated rebalancing and compounding are starting to replicate parts of what banks historically monopolized. Banks are keeping their explicit backstop role with deposit insurance and capital adequacy. The implication is structural: the balance sheet remains defensible, the product is not.
Information processing is another casualty. New intermediaries in storing money, moving money, managing risk, and/or credit creation are capturing data or creating new data layers. Banks do keep off chain income/identity data as well as ultimate legal enforcement. However, even that moat is being eroded by open banking and APIs. Data processing is fast becoming a software issue.
The same analysis can be applied to “non-core” products. Other intermediaries are making inroads, sometimes with new infrastructure and new rails.
This does not mean banks are going to disappear. This means banks are slowly being marginalized. New entrants are finally winning the top of the stack (distribution, interface, composability of financial products or services). New entrants are starting to make inroads in the middle of the stack where branded bank products are no longer the only game in town. The bottom of the stack (the balance sheet, compliance, access to a central bank, safe capital regulation) is where banks are still in control. This means the risk is for banks to become utility infrastructure, while new entrants win the hearts and minds of consumers, users, corporations, institutions.
To be fair, I am not stating anything new. I am just conveying that we are at a new banking pivot where years of shadow banking changes (1970-2000s) followed by a systemic seizure (2008 crisis) and now years of slow technology/societal changes are finally stressing traditional bank models. Time and time again, other pundits have declared banking dead in the past 20 years, only to be proven wrong. What I am alluding to is more subtle as well as even more important for banking. Marginalization leading to utility functions is subtle. At the same time, it will mark a monumental shift in the art of banking.
The recent battles between new entrants and incumbent banks in the US are a perfect example. On one side, new entrants pushing for bank licenses and/or pushing for new laws (e.g. interest-bearing stablecoins). On the other side, the incumbent banking sector lobbying (so far successfully) for a status quo that will preserve their regulatory moat.
When other financial services incumbents (i.e. asset managers, hedge funds) are pushing for the adoption of crypto-born innovation, regulatory privilege is not to be taken for granted, even in the medium term.
In conclusion, the question is not whether banks will survive, they will. The question is where they will sit in the stack, and who will own the customer, the product logic, and the data. The last decade quietly moved the interface away from banks; the next decade will move the balance sheet-adjacent profit pools, as stablecoins, tokenized cash management, and software-led credit keep expanding outside the traditional perimeter. Regulation will determine the speed, not the direction. Our conviction remains that the most durable value will accrue to the companies building the new distribution layer and the new financial operating system on top of regulated primitives, not to those defending legacy moats. This is the pivot we are underwriting, and it is why we remain both cautious on incumbents and structurally optimistic on the next generation of financial infrastructure.
