‘Friction’, NeoBanks, and the Internet of Money

The rapid expansion of investor interest in recent years in cryptocurrencies and blockchain infrastructure has led some industry observers to coin the term ‘Internet of Money’, as these technologies mature and gain widespread acceptance in financial markets. The term symbolizes the convergence of various fintech protocols and products, which are now combining to eliminate the friction that is associated with so much of the traditional banking and financial services sector. 

Profiting from ‘Friction’
For many years, the global financial industry has used electronic funds transfers for national and international loans and settlements. However, although automated inter-bank transactions actually complete in just seconds, the final settlements still often take days to be reflected in the customers’ accounts. 

The supposed ‘friction’ involved with moving money around is a symptom of the industry’s stranglehold on access to automated systems like SWIFT and ACH. This monopoly on the worldwide transfer network – in many ways akin to the US railroad infrastructure of old – has enabled the latter-day ‘robber barons’ of global finance to profit mightily for decades at the expense of their clients. The efficiency gains of electronic transfer networks were kept hidden behind the archaic clothing of paper checks, wire transfers, and giro payments. 

In addition to charging inordinate fees and commissions, the participating institutions make money from using the funds allegedly ‘in transit’ among its clients. These profits enabled the continuance of extensive networks of local bank branches and other brick-and-mortar facilities. But the Covid-19 pandemic has helped expose the inefficiencies of this system. Despite being forced to close many of their customer-facing offices, many of the major institutions have reported significantly increased earnings over the past several quarters.  

Neobanks, Convergence, and the Internet of Money
In this context, the rise of ‘neobanks’, which operate without any traditional retail branch networks, has placed them ahead of traditional institutional behemoths in adapting to new business opportunities. They embody the ‘Internet of Money’ and have the flexibility to integrate access to new asset classes like cryptocurrencies with standard fiat currency savings and investment products. This approach has a particular appeal for younger generations of financial services customers, who have little need for cash transactions and see even less reason for writing paper checks. 

Yet there is still a need to provide certain seamless interfaces into the existing infrastructure, which has driven convergence between different business operations in various ways. For example, cryptocurrency exchange Kraken has received a banking license from the state of Wyoming, which enables it to take advantage of the state’s innovative approach to regulation of digital assets custody and management. When it opens, Kraken’s new crypto bank will facilitate customer-directed lending of digital assets, and enable account holders to make purchases using crypto debit cards, as well as pay bills and receive salaries in cryptocurrency. 

Convergence at Uphold
Earlier this year, in a similar expansion of its services, digital money platform Uphold announced the acquisition of debit and credit card issuer Optimus Cards UK. This merger will enable it to launch multi-asset card services across Europe, which will complement Uphold’s existing crypto-enabled debit card offerings in the United States. 

Optimus, which serves institutional customers in the banking and credit union sectors, offers a sophisticated platform that supports Apple Pay and Google Pay,, as well as contactless and virtual cards, and international fund transfer services. This business integration provides Uphold with expanded access to Optimus’s extensive financial agency operations, which already support several major crypto and fintech ecosystems.

Then, a couple of months later, Uphold completed another significant move towards convergence, with its acquisition of licensed New York-based broker-dealer JNK Securities,  which makes it one of the first cryptocurrency firms that is approved to offer equities to retail investors in the United States. The company plans to provide access to fractional equity trading later this year and to pioneer seamless trading between cryptocurrencies, US stocks, precious metals, carbon credits, FX products and other assets, all through a single interface.

In addition, the JNK acquisition also gives Uphold an effective vehicle to market its successful cryptocurrency investment fund, Digital Asset Alpha (DAA). The fund focuses on taking non-directional bets on cryptocurrencies, which capture arbitrage and yield opportunities in derivatives and DeFi. It is anticipated that institutional access to DAA will be of particular interest to US hedge funds, which are JNK Securities’ traditional client base. 

The Future of Finance
“Bitcoin to Tesla stock in one seamless user experience will soon become a reality for our U.S. customers,” explained JP Thieriot, Uphold’s CEO. “As the Internet of Money begins to take shape, this convergence will ultimately deliver a sort of democratization to investing, bringing first-time access, convenience and cost efficiency to a financial market that remains largely structured around historical happenstance and, in many ways, is no longer suited to modern technological capabilities and customer interests.” 

As we contemplate the evolution of a new Internet of Money, it feels like these patterns of convergence should be of great concern to all traditional financial institutions. Any of those flailing behemoths that persist in regarding this accelerating process with any degree of trepidation will soon find themselves drifting rudderless in a sea of neobanks and other innovators. 

We’re still in the early stages of this technological revolution, and as it grows, it will create numerous new business opportunities.  Old-school financial firms would do well to remember that it took Netflix about ten years to drive Blockbuster and Hollywood Video out of business, and about the same length of time for Amazon to eliminate B Daltons and Borders. 

Bibliography:
Team, Editorial. “Uphold to Acquire US broker-dealer JNK Securities.” Finextra Research, Finextra, 1 Apr. 2021, www.finextra.com/pressarticle

Hurst, Samantha. “Digital Investment Platform Uphold Set to Launch Crypto-Enabled Debit/Credit Cards Across Europe Following Optimus Cards UK ACQUISITION.” Crowdfund Insider, 3 Feb. 2021, www.crowdfundinsider.com

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