Home Banking How Unbundling and Decentralization Are Reshaping Banking and Financial Services

How Unbundling and Decentralization Are Reshaping Banking and Financial Services

by internationalbanker

By Brian P. Brooks, Acting Comptroller of the Currency





In his 2019 article for International Banker, Comptroller of the Currency Joseph Otting observed that banks in the United States have risen like phoenixes from the Great Recession.1 At the end of 2019, those banks held capital and liquidity near historic highs in quantity and quality. Assets were performing well at or above long-term norms. The economy was growing, and unemployment was 3.5 percent at the end of February 2020.2

Even after the response to the COVID-19 pandemic stalled global economies, US banks remain sound overall and continue as sources of strength for their communities. The federal government recognizes that banks are part of the nation’s essential infrastructure,3 and thus far, the system has been a salve to soothe the nation’s economic stress. The national pandemic-relief strategy has leaned on banks to deliver aid and stimulus. US banks quickly distributed nearly half a trillion dollars in a few weeks to help small businesses stay afloat and employ as many people as possible. Banks established assistance plans for their customers, offered forbearance, forgave fees, and provided grants and microloans.4

With more than a decade of economic expansion, robust capital and liquidity, strong asset quality and regulatory advantages, observers would expect the financial performance of traditional banks to be equally strong. It is not. The returns on indices of banks of all sizes—community, midsize and large banks—have been negative at one and three years and virtually flat at five years [see Figure 1].5 Meanwhile, the returns on companies focused on individual aspects of banking—payments, payroll, capital markets and core technologies, information services—have been up big at three and five years by 50, 80 and up to 160 percent [also, see Figure 1]. The question remains: Why?

Figure 1

Part of the answer is that near-zero interest rates for an extended period have compressed spreads and narrowed net-interest margins, making the traditional bank business of lending high and borrowing low less profitable.6Another factor is that upstarts focus on growth and operate free from the burden of legacy infrastructure costs. While important, something much more fundamental is reshaping the banking and financial industries: the tandem force of unbundling and decentralization.

Unbundling: the shift from department stores to boutiques

Over the last 50 years, banks have evolved to become the department stores of financial services.

Department stores flourished for almost 150 years, since John Wanamaker brought the concept to Philadelphia from Paris in 1876.7 Department stores solved inefficient transportation and logistics and delivered convenience, exotic goods and better prices. Most importantly, they saved time. The concept made Sears, J.C. Penney and Macy’s household names.

Then the whole world changed after the first online purchase of a pizza from Pizza Hut in 1994.8 Nearly overnight, the Internet let consumers buy products from around the globe at home. At the same time, consumers increased expectations for tailored, bespoke experiences during in-person shopping.9 More consumers have turned to boutiques and specialty stores because technology has made it easier and independent stores have made it more enjoyable to shop at the source rather than the department store. Big box stores and discount stores still have their place, but where are Sears and J.C. Penney today?10

The same evolution is occurring in banking.

Under the principle of convergence and accommodating changes in US law in the 1980s and ‘90s, banks expanded the products and services offered under one roof.11 It worked for a while, but just as competitors and consumer preferences eroded the dominance of department stores, fortress banks began to fade. Today, banking services are coming unbundled because consumers have more power and control over their money, barriers to change are disappearing, and technology has made the globe a small world after all.

Fintech (financial technology) companies are a significant part of this evolution [see figure 2]. By focusing on distinct problems within banking, fintech companies are providing value that incumbents cannot and are targeting consumers who might otherwise be ignored by mainstream financial companies. As a result, consumers are making choices about their money based on quality, convenience and even social ethics. They are actually “shopping” for financial services in ways that their parents could not.

Figure 2

Evidence for this change abounds. Prior to the 2008 financial crisis, banks conducted most of the consumer lending and virtually all of the payment activity in the United States. But by 2018, banks’ share of personal loans fell to 28 percent, while fintech’s share rose to 38 percent.12 Fintech unicorns such as Square, PayPal and Stripe have similarly captured a large and growing segment of the payments business that national banks previously dominated. Consumers are voting with their feet and investors with their money, making the change to unbundled business models inevitable.

The evolution shows promise for improving the reach and quality of financial services by creating more choice for consumers to assemble a portfolio of products and services that meets their lifestyles, which they can adjust as their lives change. As regulators, part of our role is to encourage innovation and foster a regulatory framework that embraces these changes, not resists them.

Decentralization: universal, instant finance

The second force reshaping banking involves decentralization. This change is tectonic in scale. Powered by distributed ledger technology (DLT), the blockchain is to the financial system what the Internet was to libraries.

Decentralization is disintermediating financial services and can:

  • eliminate the middlemen;
  • execute instantaneous loans without the bank approval or paperwork;
  • earn real interest on assets;
  • issue stock directly without brokers and lawyers exacting rent from the transactions.13

Imagine banking services enabled by the technology itself rather than requiring a third party to “execute” instructions to pay a check, debit one account and credit another. Such technology puts the control in the hands of those conducting the transactions, with the potential for greater access to the unbanked.

Decentralization has tangible benefits for consumers, too, and may be an effective weapon against inequality. Real-time payments enabled by decentralization can make overdraft fees disappear because instead of delays in payments, monies move between customer and vendor at light speed. The need for payday lending declines because the delay between receiving and cashing paychecks disappears. Minority and underserved consumers who consume these services most often stand to benefit.

It also can make banking processes more efficient and dramatically cheaper. For instance, right now, some companies originate mortgages entirely on the blockchain, which can reduce costs by one or two percentage points on every loan. Reducing origination costs decreases the amount of cash necessary to close, and that puts homeownership in reach of more people because down payments and closing costs are the biggest obstacles preventing minorities and low- and moderate-income people from owning their own homes.

That is at least the promise of distributed ledgers and cryptocurrencies behind decentralization. It’s a promise that is not too far off in the future.

Cryptocurrencies are already mainstream in many countries, and about 60 million Americans already own some form of cryptocurrency. More than a third of large institutional investors hold crypto-assets. And the total market cap of crypto is approaching $350 billion. Large custody banks—State Street, Goldman Sachs, JPMorgan Chase—hold billions in deposits backing crypto-assets. Banks are exploring their own blockchains to power back-office operations. Visa and JPMorgan Chase are experimenting with stablecoins.14

All of this activity is occurring with a dearth of regulatory clarity. Some federal and international guidance pertaining to anti-money laundering exists, but generally, crypto-activity in the United States is regulated by the states—which means that companies that are not banks engaged in providing cryptocurrency and financial services powered by distributed ledger technology must navigate a maze of 50 licensing and regulatory regimes.

There are still regulatory concerns that must be resolved. Know your customer (KYC) and other customer due-diligence requirements need to be considered. Compliance with restrictive international exchange laws needs to be taken into account. Simple disclosures and transparency issues must be satisfied for customers of decentralized products and services. These, fortunately, are challenges of implementation and not of creation.

The OCC’s response to unbundling and decentralization

These two forces—unbundling and decentralization—cannot be ignored. The Office of the Comptroller of the Currency (OCC) is working to make sure that the US banking system is ready for this evolution and that as many people benefit from these changes as possible.

One initiative to support the evolution is providing the option for companies engaged in all aspects of banking to apply for national charters so they can operate on a nationwide scale subject to one comprehensive regulatory framework in the same way incumbent banks operate. It also means supporting bank business models that focus on certain aspects of banking. Allowing for narrow business models does not mean lighter regulations for these companies. It means these activities would face the same rigorous supervision as similar activities conducted by incumbent banks. The uniform application of supervision makes the playing field more level, not less.

That sounds revolutionary only because memories are short. The idea that only deposits define a “bank” is novel by historical standards. The earliest chartered bank of Genoa, Italy, in 1407 did not take deposits. The famous Wisselbank of Amsterdam, Netherlands, chartered in 1609, did not take deposits and made no loans during its first century of operation. The modern banking system in the United States, founded in 1863, was first and foremost a means to support payments, finance and commerce to unify a nation. Fast forward to the 20th century, credit-card banks funded themselves primarily through securitization, not deposits, and uninsured trust banks facilitated billions in payments and managed trillions in custodial assets.

Arguing that institutions must take deposits to be banks also fails the logic test when considering banking as an activity rather than a building. Payments, for instance, are a universally recognized banking activity. Yet, over the last decade, much of that activity has migrated to shadow banks. The nature of that activity has not changed. What makes “those” companies focused on that aspect of banking less of a bank than those focused on deposits?

Moreover, the migration of banking activity to shadow banks erodes the comprehensive risk picture that regulators once enjoyed. Ten years ago, OCC examiners could have confidently answered questions regarding the systemic picture of payments and mortgage servicing; today, they have a fragmented view. The same is true with crypto.

In recent months, the OCC has taken two steps to help US banks engage responsibly in crypto. The first action in July clarified banks’ authority to provide custody services for customers’ crypto-assets.15 For more than 100 years, banks have been the safest place for customers to secure their valued assets: cash, jewelry, art. Crypto-assets and the tokens that enable them are no different. Then in September 2020, the OCC clarified banks’ authority to engage in certain activities related to stablecoins.16 Specifically, the OCC concluded that regulated entities may hold funds on deposit as reserves for stablecoins that are held by third parties in cryptocurrency wallets (hosted wallets) and are backed on a one-to-one basis by a single fiat currency.

These actions have helped to ensure that the banking system of the United States can adapt to the changes arising from unbundling and decentralization. As with all new activities, banks and regulators must understand and appropriately manage the risks associated with these activities and conduct them in a safe, sound and fair manner. We can either adjust our regulatory perspective and allow the activity to occur safely and fairly within the banking system, or it will take place elsewhere. Understanding and managing those risks will allow banking to continue evolving and meeting the needs of the consumers, businesses, communities they were meant to serve.


1 Joseph Otting. “The Return from the Brink and the Rise of Banks in the United States.” International Banker. November 26, 2019 (https://internationalbanker.com/banking/the-return-from-the-brink-and-the-rise-of-banks-in-the-united-states/).

2 Bureau of Labor Statistics. March 11, 2020.

3“Financial Services Sector.” Cybersecurity and Infrastructure Security Agency. Retrieved October 1, 2020 (https://www.cisa.gov/financial-services-sector).

4 See other examples of banks’ efforts from the Consumer Bankers Association (https://www.consumerbankers.com/cba-media-center/media-releases/banks-working-customers-during-covid-19-pandemic) and the American Bankers Association.

5 Observation made by comparing publicly reported bank indices to unbundled sectors reported in Raymond James Fintech Insight. July 2020 (https://www.raymondjames.com/-/media/rj/dotcom/files/corporations-and-institutions/investment-banking/industry-insight/fin_tech_monthly.pdf).

6 “Net Interest Margin for all U.S. Banks.” FRED Economic Data. Federal Reserve Bank of St. Louis. Retrieved October 2, 2020 (https://fred.stlouisfed.org/series/USNIM).

7 “John Wanamaker: Department Stores.” Who Made America? PBS. Retrieved October 2, 2020 (https://www.pbs.org/wgbh/theymadeamerica/whomade/wanamaker_hi.html).

8Jay Hoffman. “The First Thing That Ever Sold Online Was Pizza.” The History of the Web. July 30, 2018 (https://thehistoryoftheweb.com/postscript/pizzanet/).

9 Ashley Alderson. “Five Reasons The Boutique Model Is Revolutionizing The Future Of Retail.” Forbes. November 20, 2018 (https://www.forbes.com/sites/forbesleadershipcollective/2018/11/20/you-thought-this-industry-was-dead-but-its-booming-heres-why/#567d7bbf246c).

10 Sears declared bankruptcy in October 2018. J.C. Penney declared bankruptcy in May 2020. See “Sears, the store that changed America, declares bankruptcy.” CNN. October 15, 2018 (https://www.cnn.com/2018/10/15/business/sears-bankruptcy/index.html). And “J.C. Penney, 118-Year-Old Department Store, Files for Bankruptcy.” New York Times. May 15, 2020 (https://www.nytimes.com/2020/05/15/business/jc-penney-bankruptcy-coronavirus.html).

11 See The Depository Institutions Deregulation and Monetary Control Act of 1980, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 and the Gramm-Leach-Bliley Act of 1999.

12 Kate Rooney. “Fintechs help boost US personal loan surge to a record $138 billion.” CNBC. February 21, 2019 (https://www.cnbc.com/2019/02/21/personal-loans-surge-to-a-record-138-billion-in-us-as-fintechs-lead-new-lending-charge.html).

13 Daniel Won. “The Definitive Guide to DeFi.” Exodus Blog. December 22, 2019 (https://www.exodus.io/blog/what-is-defi/).

14 Cryptocurrency is backed by an asset such as a fiat currency and is designed to have a stable value.

15 Interpretive Letter #1170. OCC. July 22, 2020 (https://occ.gov/topics/charters-and-licensing/interpretations-and-actions/2020/int1170.pdf).

16 Interpretive Letter #1172. OCC. September 21, 2020 (https://occ.gov/topics/charters-and-licensing/interpretations-and-actions/2020/int1172.pdf).


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