Are we facing a change?

The crypto industry is contesting the banking sector for market shares. Why Bitpanda will soon be bigger than Commerzbank, the current inflation is accelerating the establishment of crypto and why the banks’ M&A business will still grapple with DeFi protocols.

In the marketing departments of many banks, the term “innovation” is often used when a new product or service is brought onto the market. Strictly speaking, however, these are only in the rarest of cases real innovations. An online banking presence or a bank’s digitized savings account are not innovations, but merely an adaptation to the age of the internet.

In the last few decades it has been shown that it is particularly difficult for large banks, insurance companies and other financial service providers such as stock exchanges to question what already exists. The result: Corporations have to be able to buy in innovation from outside if they want to survive. As long as there is enough capital, creditworthiness and market power to buy in truly innovative companies or services, this survival strategy can work.

Crypto companies already too expensive for Europe?

Blockchain technology with its various token applications is a real innovation. Even if most banks still seem overwhelmed to face this technology, the first banks have started with crypto M&A or crypto investments. Most crypto start-up investments come primarily from Anglo-Saxon financial service providers. Leading in terms of number and height Investments in the crypto industry are: Standard Chartered, BNY Mellon, Citibank, UBS, BNP Paribas, Morgan Stanley, JP Morgan, Goldman Sachs, MUFG and ING.

The deep pockets of the predominantly successful banks allow them to buy into the new market. However, this time window closes more and more with each additional month. Numerous crypto companies have now reached a valuation of over a billion US dollars. Blockchain financial service providers who are larger in terms of turnover and market capitalization than traditional local financial service providers can be found more and more often. In the ailing European banking sector in particular, the question arises: Who is eating whom?

Bitpanda soon to be bigger than Commerzbank?

Some banks that smile at crypto currencies seem to have missed the fact that they are already smaller than some crypto service providers – or are on the verge of being overtaken. Let’s take Deutsche Bank as an example. The market value of the largest German private bank is just around 27 billion US dollars. This means that Deutsche Bank is only half the size of Coinbase with a market capitalization of around $ 54 billion. The second largest private bank in Germany, Commerzbank, is no longer a giant with around nine billion US dollars.

Just for comparison: the Austrian crypto broker Bitpanda has already confirmed a valuation of 4.1 billion US dollars in its most recent funding round. Given the current market growth, the company could have overtaken Commerzbank by 2022.

While some financial service providers spend provisions for legal disputes and expensive corporate restructuring measures, numerous crypto financial service providers collect 100 million US dollars and more per funding round in order to develop new products and expand their business. Examples of crypto funding on this scale include BlockFi, Celsius, Fireblocks, Bakkt, Circle, or Blockchain.com.

The big misunderstanding

Some bank managers may now object that the crypto service providers mentioned cannot be compared with banks. After all, a universal bank offers different services than a crypto broker like Bitpanda or Coinbase. There is, however, a major flaw in precisely this point of view.

Although crypto service providers may have started with a limited range, more and more banking services are being added to the product portfolio at high speed. The line between “trading booth” and bank is becoming increasingly blurred. Debit cards for supermarket shopping or credit offers have long been part of the product range of some crypto service providers. For example, customers of the crypto bank Nuri can receive interest on their deposits via the Celsius connection. The Swiss Seba Bank has also announced corresponding services for its customers.

Inflation accelerates the disruption process

In contrast to the usual zero or negative interest rates, the more attractive crypto offers traditional banks make the market controversial. Or to put it another way: In the crypto sector, there are significantly higher interest rates on deposits than in the traditional money market. A blockchain equivalent already exists for practically every traditional financial service. The current high inflation only intensifies the urge on the part of investors to open up new investment opportunities such as staking or lending.

With the increasing number of licenses in the crypto sector, there is less and less in the way of regulatory authorities to develop into new banks. The slow, expensive and outdated banking infrastructure is now declared a battle. Classic systems can also be traded on blockchain infrastructures through tokenization. From the stablecoin, which maps US dollars or gold, to the stock or security token, which map bonds on various securities, there are practically no limits. Everything that is available in the traditional financial sector is already, or at least in the near future, also offered by crypto service providers.

Do we still need banks?

Even in a world with decentralized financial services, there will still be banks and other traditional financial intermediaries. A world without these middlemen is totally unrealistic right now. But the inflated financial sector can very soon shrink massively due to new crypto offers. In Europe in particular, we are “overbanked” with traditional banking products: a certain adjustment in the banking sector would be too overdue.

As a result of technological change, the added value of the banks continues to decrease or is shifting more and more to the players who are actively shaping this change. Many banks that are already struggling today will therefore not survive this transformation process. Successful banks such as JP Morgan, on the other hand, have a good chance of functioning as a central service provider in a more decentralized financial sector and buying into it.

DeFi special case

While Coinbase or Bitpanda are normal companies themselves, the difficulty for the old economy becomes even greater when the competitors are based on decentralized protocols. In case of doubt, a Deutsche Börse can – as already happened with Crypto Finance AG – acquire a crypto company. However, it becomes more difficult if Deutsche Börse wants to adopt a protocol such as Uniswap or Pancake. In contrast to a central crypto exchange, a decentralized crypto exchange cannot be acquired in the classic sense from the notary via a purchase contract. The M&A department of a bank has to come up with new ways of securing market shares in the DeFi sector as well.

outlook

For the time being, it can be assumed that a hybrid financial market will develop that is based on a decentralized one in addition to the previous central offer. The B2B sector or the market segment of institutional investors should be seen as the turbo for this development process. So far, with a few exceptions, these have been largely reluctant.

If, in the future, not only private individuals but also larger asset management companies resort to staking and lending, for example, a completely different wind is likely to blow in a relatively short period of time. The previous market capitalization of crypto service providers and protocols should, in retrospect, turn out to be downright tiny.

The more the market-theoretical efficiency of decentralization prevails, the faster many traditional financial service providers will find themselves in the situation that they lack the money to “buy back into the game”. The once proud banks are likely to become “suppliers” to the crypto industry, who will shrink or allow themselves to be bought up.