Still-life of currency after Goya

“There ain’t a winner in the game / Who don’t go home with all”
(Garcia/Hunter, “Jack Straw,” 1971.)

Raise your hand if you’re sick of the “fintech innovators vs. incumbent banks” conversation.

I’ve been following this debate for a while now, and I’ve come to the conclusion that the framing is entirely wrong and the terms involved have become mostly meaningless.


“Financial technology” once had the straightforward connotation of “a technology firm that sells to financial services firms,” that is, vendors of anything from trading systems to core banking solutions. A wide-ranging definition, but one offering a useful distinction between banks and their service providers.

In recent times, “fintech” has come to signify a company exhibiting a characteristic mixture of interface, pose and pragmatism, with:

  • a technology that straddles some small portion of the financial system;
  • a strident marketing push as an anti-bank alternative; and
  • a business development team funding the enterprise by making deals with those very same banks.


“I’m doing something new, so I’m an innovator,” says the fintech startup. “My competition? They’re incumbents.”

“We’re established, regulated and safe,” the banks retort. “They’re new, unregulated and unsafe.”

To paraphrase George Carlin’s riff: Bankers are idiots, fintechs are maniacs.

In a recent white paper (Exhibit A), The Clearing House suggests that payments-related fintech companies should be called “Alternative Payment Providers,” or APPs, and regulated similarly to banks based on the activities they conduct.

In a response to the white paper (Exhibit B), Karen Webster, CEO of Market Platform Dynamics, points out that companies like hers require banks to effect the payments. They’re not providers of a full-stack payment service, but rather enablers of services provided by banks.

Fair enough, APPs is a misnomer. So let’s go with Alternative Payment Enablers, or APEs.

Also in her response, Webster labels the entire spectrum of APEs as “innovators.”

Whoa, there. As if any bank saddled with “incumbency” is incapable of being an “innovator.” As if innovation wasn’t a prime mover of the global financial crisis. As if the global financial crisis didn’t divert the time, money and attention of bank executives toward regulation instead of innovation, at the very moment that mobile technology had its breakthrough into the public consciousness.

In some parallel universe in which the housing crisis was averted, the banks built extensive mobile services on their own, or with the assistance of large financial technology companies, aided by a relatively benign regulatory environment.

The overused “innovators vs. incumbents” frame was popularized in various theories on strategic management that I need not recap here. These theories may be useful on a micro scale, such as evaluating the effect of a new product on the marketplace for alternatives or substitutes for that product. However, the frame is misleading when applied on a macro scale. In other words, you can’t group together an entirely dissimilar set of companies as “innovators” on the mere basis that somehow, in some way, they all touch the financial network and yet are not banks.


Quiz: What’s a bank?

  1. An entity in the primary business of providing banking products and services.
  2. An entity that supplies capital, manages financial assets, or both.
  3. An entity that creates credit by expanding its balance sheet.
  4. An entity regulated by banking regulators.
  5. All of the above.
  6. None of the above.

Answer Key:
(a): You’re a traditionalist. This is the common understanding of what a “bank” is.
(b): You’re a futurist. Did you know that bank deposits stopped directly funding capital market lending a long time ago? That’s why the fascinating and important money-market view of banking takes full account of the role of “shadow banks” in providing money-market funding of capital market lending. In this respect, banking regulations are way behind and it’s hard to say if they’re capable of catching up. For more on these ideas, sign up for Perry Mehrling’s Money and Banking lectures on Coursera or read his book. Or wait for me to finish writing up my notes from the course, in which I liken the entire reserve banking system to a LEGO universe contained within a patriarchal household in a neighborhood consisting of similar households.
(c): You’re a literalist. Yes, creating credit represents the atomic operation performed by banks, but it’s not helpful to define an organization in a manner that applies so generally to any business that offers payment terms.
(d): You’re a realist. It’s a bank because the government says it’s a bank. This is the correct answer.
(e): You’re waffling. Try again.
(f): You’re an iconoclast. Let’s hear your definition.


We all know how it ends. Protected by an impenetrable regulatory moat, the largest brands in retail banking buy, rent, or steal the best ideas from the APEs. An essential part of the system gets designated as critical infrastructure and everyone falls in line. Some APEs do very well (see Exhibit C), and the retail banking brands grow stronger by assimilating them.

We all know how it ends. Strengthened by year after year of unassailable market dominance, the largest digital companies gain the political clout to eject the banking industry from its defensive fortifications. The barbarians storm the ramparts, evict the old regime, and occupy with renewed vigilance the commanding heights of the global economy.

We all know how it ends. Something terrible happens, or, if you believe the world is already terrible, something terribly exciting happens. The economy’s in a shambles. The machinery of government freezes up. Currencies lose their value. Borders lose their meaning. The only remaining vestige of economic activity occurs through a hard-to-explain, hard-to-understand digital currency kept alive by a cabal of geographically-dispersed volunteers. Is there a better word than “cabal” to describe an effort that, cloaked in populism, subverts the established order by eliminating the need to ask for permission from outsiders? (See Exhibit D). Is there a better word than “cabal” to denote an anti-democratic, technological supremacist Byte Power movement? (See Exhibit E.) No, and so a cabal it is. And the most important aspect of this digital currency? It’s anti-fragile. The worse things get, the stronger it becomes.

Check your metaphors. (See Exhibit F.) Fintechs vs. banks? No, it’s reactionaries vs. revolutionaries.

We don’t know how it ends.

* * *
Exhibit A: The “equal-protection” argument
“Banks and APPs [Alternative Payment Providers] engaging in functionally similar activities should be subject to similar regulatory regimes.”
– The Clearing House, “Ensuring Consistent Consumer Protection for Data Security: Major Banks vs. Alternative Payment Providers,” August 2015.

Exhibit B: The “let-innovation-flourish” argument
“TCH is taking on the cause celebre of the poor, downtrodden incumbent banks by more or less implying that we are one step away from total financial system ruin, thanks to the actions of innovators (aka “Alternative Payment Providers” or APPs).
“To enable payments of any kind, innovators have to work with and through regulated banks and play by their rules.
“[I]nnovators don’t touch the money that their mobile payments innovations enable.”
– Karen Webster (@karenmpd), CEO, Market Platform Dynamics

Exhibit C: The “we’re-all-on-the-same-side” argument
“The payments industry has a unique and commendable approach to the disruptive innovation that is sweeping our sector. […W]e are embracing disruptive innovation by partnering with technology companies to deliver innovative financial products and services to consumers and merchants.”
– Jason Oxman (@joxman), CEO of ETA (Electronic Transactions Association)

Exhibit D: The “you’re-all-irrelevant” argument
“We have worked on Bitcoin scaling for years while safeguarding the network’s core features of decentralization, security, and permissionless innovation. We’re committed to ensuring the largest possible number of users benefit from Bitcoin, without eroding these fundamental values.”
– “An Open Letter to the Bitcoin Community from the Developers,” Sept. 1, 2015.

Exhibit E: The “we-don’t-care-what-you-think” argument
“A better world won’t be won with votes, guns, bombs, or tanks. It will be won with encryption, 3D printing, meshnets, drones, and bitcoin.”
– Roger Ver (@rogerkver)

Exhibit F: This Thing is That Thing
“Many people in the U.S. think of guns as an addictive substance, Russians talk about democracy as a disease, and Iranians associate good things with sunshine in spite of living close to deserts.
“Suzanne [Wertheim] shared the results of the three years of work on the Corpus of Rich Metaphor.
“Suzanne’s team’s approach to metaphor processing was a successful combination of human annotation and machine learning methods. First, the team spent two years developing a system, using NLP and machine learning, that automatically identified and mapped metaphors. Then, that system was trained to automatically show meaningful cross-cultural differences. In order to do that, the team created a framework of source domains complete with short descriptions of source domains and corresponding roles and actions. For instance, the “disease” domain would have roles such as a person who is suffering from a disease (patient), a person who treats the disease (doctor), or a medicine that might help treat the disease (cure).
“An important implication of using descriptions of source domains was the ability to understand the relationship of the target domain to the source domain at a much more granular level. For example, in the phrase, ‘How to cure democracy of the cancer of incompetence that is killing it?’, mapping ‘democracy’ to a general ‘disease’ domain doesn’t tell the right story. Understanding ‘democracy’ as a ‘person suffering from a disease’ does.”
– Evgeniya Prozorova, “Linguistic anthropology meets NLP: Suzanne Wertheim on understanding culture through metaphors,” Idibon, Sept. 2, 2015.

Images, clockwise from top left:
Francisco Goya, El 2 de mayo de 1808 en Madrid (1814), Museo del Prado, Madrid; Ivan Schneider, Armature after Goya (2014), Currency after Goya (2014), Still-life of currency after Goya (2014).