Innovation in Financial Services

An article in the WSJ introduces the topic: Which Banks Lead the Way in Innovation: Overall, the financial-services sector doesn’t score particularly well. But there are pockets of excellence.

According to the Drucker Institute, which studies innovation, banks such as Wells Fargo and JP Morgan Chase are the best of the best when it comes to innovation.

Now, I’m a huge fan of Drucker and don’t feel in a position to challenge their methodology of how they gauge innovation, but apparently one of the biggest drivers of the high scores at Wells and JPMC is their “rate of abandonment of patent applications.”

I understand that metric in a previous paradigm where IP was secured by legal rights, enforced by courts, protected by expensive lawyers.

What I find interesting, however, is that I don’t think this metric, particularly in financial services, is going to matter at all in the next wave of financial services innovation.

The next frontier, Mr. White expects, will be the metaverse. “That is a real vector of innovation,” he says, explaining that technology used to purchase tokens as part of a fantasy game today could well be the foundation for money in the bank tomorrow.

What I don’t think he fully grasps yet, or at least it’s not evident from his comment, is that the innovation that will take place in financial services in the metaverse, powered by decentralized technologies (of which blockchain is one) is going to be a business model innovation, one which the current FinServ companies are nowhere near ready to take on, because, for example, in that world, patents don’t matter at all.

What matters is a sense of community, reinforced by strong cryptoeconomic incentives.

But more than any of that, I don’t know about you, but when I think “innovation,” I don’t think about my bank.

When I think about my bank, I think about things like:

  • “markets are closed due to the weekend/holiday”
  • fill out this form and mail it in
  • $100 fees to wire money internationally
  • inability to move money instantly from one bank to another

If the Drucker Institute wants to get a sense of real financial services innovation, they should ask themselves “which finserv entity can transfer money internationally/globally in an instant?”

or perhaps

“which finserv entity enables 24/7 trading of assets, borrowing, and lending?”

The answer to that is going to be places like Uniswap, Compound, etc., not Wells Fargo, and “using blockchain” is not going to get them there. The DNA is totally different.

The Institute is fond of quoting Drucker (as they should be). Here’s one of the best:

“Planned, purposeful abandonment of the old and of the unrewarding is a prerequisite to successful pursuit of the new and highly promising,” Mr. Drucker wrote. Or, as he advised in even more pointed fashion: “When the horse is dead, dismount.”

What’s ironic is that the horse that is dead in this case is the entire foundation upon which these very banks are built. That’s where the dismount needs to happen.

And it will.

Perhaps some of these banks will dismount from Web1 Fintech and Web2 Fintech and get on the Web3 Fintech horse, but most of them won’t.

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