No, Blockchain Doesn’t Threaten Wall Street

ThatOtherGuy's picture
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TLDR: It's not about technology, it's about brand value and how people inherently attribute trust

I recommend reading the source post here w/ pictures & better formatting:
Oh boy, I've been hesitant to talk about blockchain partly because taking a view on them can make you controversial. However, I did have an incredibly meta job on Wall Street: researching Wall Street bank stocks (Goldman Sachs, JPMorgan, Morgan Stanley, etc.) which gave me an interesting perspective on what blockchain's use cases could actually disrupt.

I've also done my own research on blockchain since March 2017. Don't worry, I'm not going to even get technical in this post anyways but...

There's a few (oversimplified) key questions to answer for the purposes of this post:

  1. Wait! What do you think blockchain is? It's a fancy new technology that has the power to make every user in the system trust each other.
  2. How can it threaten the big banks? It can eliminate the need for middlemen, ie you don't need brokers for your transactions (and Wall Street is basically one giant broker)
  3. Do you think blockchain can potentially eliminate the need for big banks? Definitely! But I seriously doubt it will happen

I often hear a lot of talk about how Wall Street fears the power of blockchain and have an existential crisis at their hands. I don't think so because at the end of the day, we still allocate trust to Wall Street even in areas where we shouldn't/don't need to.

2 examples I'll go further on:

  • Mutual funds (stock pickers that manage your savings)
  • Mergers & acquisitions (buying and selling of companies)

And then a takeaways at the end

Mutual funds...AKA where your 401k is probably in
You probably don't know it but chances are one of your investment/retirement funds is being managed by a mutual fund. Let's be clear: the mutual funds I'm criticizing are stock-picking funds that are meant to beat the S&P500 (popular gauge for the overall stock market) over a long time period like 5-10 years. If these mutual funds could only exist when they do their job correctly, at least 90% of funds should be dead. Data has been collected about this, and time and time again the studies always show that most funds underperform their index.
Despite the fact this could be figured out with a quick Google search, we still place trust in the idea of "professionals" managing money for us instead of trusting statistics. So what exactly is that fund management fee paying for? Marketing and trust. At the end of the day, we don't actually care about the science behind things if we can allocate the work and trust to a professional.

Mergers and acquisitions (M&A)
To understand what M&A is, think of a real estate broker except he deals with companies, not houses. Amazon buying Whole Foods is an example of M&A done by Bank of America, JPMorgan, and Goldman Sachs together. In reality, most banks don't have much functional differentiation in executing M&A deals. Even some small banks have the capacity to competently handle a huge deal.

What really closes M&A deals is connections and brand name. Buying a company and having it validated by a big Wall Street bank sells the image that the transaction is legit. There is brand value in having a professional sign off on a deal, even if their presence is unnecessary.

The examples above are really meant to show that even though there are numerous cases where we don't need Wall Street involved, we still bring them in because consumers and big corporates attribute trust not just based on function, but also the feeling they're in good hands.

So let's say ICOs become actively adopted as the go-to way to raise money. Companies are still going to need an ICO advisor to help determine the right price, investor relations, etc. AKA stuff banks are brought on for IPOs already. That being said, I wouldn't be surprised to see Wall Street create ICO Advisor teams if funding sizes get big enough. Banks also BENEFIT from additional regulations being placed on top blockchain which is in the midst of happening. More regulation -> more qualifications needed -> more confusion -> more fees and advisory gigs for banks.

Still, Blockchain WILL Change Banking
The functional advantages blockchain provides could certainly reduce workloads around maintaining financial records, which is a huge cost save. Still, Wall Street isn't paid for function; they're paid for branding and advice people trust. We're already seeing the industry move towards more reliance on advisory/relationship-driven revenue streams like wealth management and M&A.

Believe it or not, big banks are actually becoming more like technology companies than they are financial firms. While the bankers and research analysts get all the press, a big majority of headcount at banks is really in back-end technology, a cost-center that they have been trying to shrink. In reality, this secular trend is a threat to small banks that don't have big enough scale benefits from technology investments. Basically, go big or go home.

What can actually threaten banks then?
I absolutely could be wrong about all of this, and blockchain may very well revolutionize how we attribute trust in professionals vs science/data. Still, history shows that to not likely be the case and given how entrenched finance and payments are now with government regulations, what was once a burden (regulations) is now becoming a competitive moat for banks! However, if I had to name an industry most ripe for competing against Wall Street, it's the big technology companies.

As I mentioned, banks today are essentially financial technology companies and consumers already trust the big tech firms with ridiculous amounts of our data and behavior history. In terms of being able to translate trust from one category to another, technology firms have the narrowest gap to close. Heck, Amazon is already contemplating building out a checking account-like product for its customers.

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Apr 11, 2018