How did banks fall so far behind?

Whether you think the idea of non-state money is a good idea or not, it’s hard to deny that certain aspects of crypto represent large advancements in payment technology. But if crypto has opened the door for how money can be used as an application layer in the future, how did traditional banking end up so far behind in the first place?

We may not always realize it, but banking is a slow, lumbering industry. It takes days to wire payments from bank to bank, and even then, it takes longer before the payments are truly settled. There are fintech companies that make digital payments easier, like Venmo or Paypal, but those just hide all the slow banking settlement that takes place behind the scenes. With Bitcoin, I can send a payment across the world near-instantly with no friction and no delayed settlement on the back end. Is Bitcoin that advanced, or has banking and modern money just been asleep at the wheel? If so, why?

Here is an idea – it’s hard to start a bank. In fact, it’s nearly impossible and requires an enormous number of resources and capital. This is why the number of new bank licenses issued each year is steadily dwindling and small banks are continuously being swallowed up by larger banks, leading to an industry dominated by a few big players.

The reason it’s difficult to start a new bank because the industry is one of the most highly regulated in the country (and world). Now, those regulations protect people like you and me from bad bank actors, but it’s worthwhile to consider what this means.

What if I, Sean, had an idea for a new, better bank? A bank that is innovative, more efficient, and better for consumers than traditional banks. How would I go about starting that bank? Well – I can’t! There’s pretty much nothing I can do about it. It’s essentially impossible for me to try and start a better bank, the way I could make a new food delivery company or social media app or whatever.

Since creating a new bank is  basically unachievable for an individual, I cannot see if my innovative idea works – and that’s why modern banks have fallen so far behind first fintech companies and now crypto. There is no room for attempts at innovation within banks because the barrier to entry is so impossibly high. That hinders progress, and that is why traditional banking feels like a relic – slow and outdated.

When it becomes impossible to play within the rules, to do something like start a new, better bank, people start to look outside the existing framework entirely. That is partly what has happened with crypto. There’s no room to change how the current structure works, so people innovate entirely outside of it, and what they often end up doing is create something far better.

So yes, banking has fallen far behind. And now banks are trying to play catch-up now because perhaps they are feeling threatened for the first time. But the problems with traditional banking are still the same. Progress comes from innovation, and as long as banks are forced to operate within an extremely limited framework, they will always be playing from behind.

By the way – the same kind of issue is at play in healthcare too. What if I had an idea for a better, more efficient healthcare company or insurance idea? Too bad, I don’t get to try it because the rules are so tight. No innovation allowed. When progress has to be made with a vote instead of from innovative people creating something new, the legacy system has already lost. My guess is that the way healthcare meaningfully improves comes from outside the system – maybe some sort of advanced wearable and self-diagnostic tech?

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