According to the aggregation theory every value chain consists of supply, distribution and consumers. The biggest value is captured by either dominating one of these fields or by integrating 2 fields to have a competitive edge. In the platform business of Web 2.0 including Facebook, Google, Amazon or Netflix, the shift of power went from companies that integrated supply and distribution to companies that integrated distribution with owning the customer base. This was led by the advent of near zero distribution costs and automation that allowed the aggregation of users at no costs. Additionally near zero transaction costs for revenue generation using self-service user interfaces made it possible to have zero transaction costs for revenue generation for Google and Facebook.
Network effects resulted in lower acquisition costs for bigger networks compared to smaller networks. Network effects usually derive from the fact that more users attract more suppliers which attract more users. As a whole this led to monopolies that are hard to crack.
From a theoretical point of view the success of plattforms came from modularizing the supply and integrating distribution at no cost with the customer base that grows trough network effects for low costs. While newspapers controlled editorial, advertisers and the printing press and the distribution through a network of local shops, this monopoly doesn't play out in the digital age. The Facebook news feed makes it invisible where editorials are coming from and let them compete with user generated content, in return for a share in ad revenue. Direct marketing on the platform is marginalized since Facebook itself can place ads much more targeted and unintrusive than the advertiser.
The banking industry has not been disrupted yet. Traditionally the customer has a bank and the bank functions as a proxy to sell products of third parties to the customer base. In so far each bank is an agency that controls its customer base. Growing the customer base incur costs trough implementation of anti money laundering regulations which is capital intensive and creates barriers for new market participants. Apart from that products are modularized, which means that every bank sells the same products. Let it be stocks, bonds or bundled products like futures or investment funds. Let it be loans and the trust that the money will be still in place tomorrow.
Stocks itself are issued by companies to collect capital and therefore they are the supplier of the product. Exchanges are means of distribution as well as brokers which represent the customer side. Since the traded stocks are the same in any case, the difference between trading via an exchange or using other market places is in many cases irrelevant for the customer. Other products are either derived of the underlying asset, e.g. options as a hedge, or classical banking products like a loan. While derived products usually have a maker and a taker side where the market place only functions as a way to bring supply and demand together, banking products require a license and are usually the domain of the party that owns the customer, e.g. the online broker.
The financial institutions function thereafter as a facilitator for the transaction. Companies that want to go public need someone that integrates with exchanges to get their offer listed. Brokers maintain the exclusive right to connect investors to exchanges. The transaction itself is closed between participants of that marketplace. The internet brought the suppliers closer to the consumers, circumventing exchanges by directly selling to customers of brokers, or by letting customers create there own derived securities which are listed on exchanges for them to buy.
Blockchains first attracted businesses that want to go public but do not want to carry out the considerable investment needed to list securities. This led to the ICO bubble of 2017 and will not stop any time soon. The differentiator is not that illegal activity now becomes easy to carry out against the interest of the majority of the investors. The key is that listing securities comes at marginal costs. Decentralized exchanges will add to this since they no longer require to pay listing fees as is the norm currently with popular cryptocurrency exchanges.
The second problem that blockchains are about to tackle is to marginize the cost of capital through issuing collaterized loans by the user to the user itself. To understand this I recommend the first episode of the SweetTalk podcast or studying the issuance of stable coins by the Dai project or BitShares. The concept is to lock up a security that already exists on the blockchain in a smart contract and by releasing a token of value that is backed by the locked collateral. The money issued didn't exist prior to the smart contract. Eventually users can issue loans to themselves and by that they can liquidate everything they own without incurring fees or interest. For example SALT lets users post cryptocurrency as a collateral for a loan in cryptocurrency. While the user can spend the loan on new items, he still poses the collateral but he can't sell it unless he pays back the loan. In case the collateral looses value too much to secure the loan, the contract will be margin called followed by a forced liquidation of the collateral. The inherent risk of a loan is limited trough transparency and therefore has not to be managed trough legal contracts. The only role for a financial institution in this model is to issue warrants for the real life assets of users that are needed to transform assets to fungible token on the blockchain.
From the view of finance this leads to largely reduced revenue streams due to reduced upselling opportunities. Transferring balances is virtually free, as is listing securities and issuing loans. The marketplace for financial transactions is open for everyone to participate and incurs only marginal transaction costs in form of network fees.
The future is bright.
