Original Article By Paul Brody At Coindesk.com

DeFi may allow banks to offer a wide range of services fast and efficiently, but in the end, these organizations will focus on their traditional, core strengths.

If you want a sneak peek at how DeFi is likely to transform the banking industry, the history of the telecom industry in the U.S. may turn out to be a good guide.

In 1983, the “Bell System” was a national monopoly on telecommunications in the United States. This included voice and data, local and long-distance, and even network equipment. Truly, there were few companies that had more power, prestige or history than AT&T in 1983.

On Jan. 1, 1984, this monopoly ended. The Bell System, as it was known, was broken apart into its component businesses, igniting one of history’s biggest industry reconfigurations, the final results of which are really only now just playing out.

At first, only small parts of these businesses were exposed to substantial competition – mostly the long-distance business. Over time, however, new technologies such as wireless and Voice Over Internet Protocol (VoIP) started to upend the entire business.

Just like telecom before, the finance industry is transforming. Fintech services, challenger banks and now blockchain and crypto are all hammering at the industry’s long-standing traditional deposit, lending, payments and securities operations.

Telecom network operators responded to the increased competition in the industry with two major strategies. The first was to reconsolidate the industry through mergers and acquisitions. The original 10 long-distance and regional operators from 1984 are down to four players through consolidation.

The second strategy was vertical integration with the media and entertainment industry. As competition intensified, the biggest fear that many industry leaders had was they would become “dumb pipes.” Telcos looked upon the “over the top” (OTT) providers with envy. OTT startups and media companies depended on data networks to deliver their content and services, but the telcos earned no margin on that.

The fight between telcos and the OTT companies became so intense that wireless operators refused to sell early smartphones that included Wi-Fi, and they attempted to block third-party navigation and maps services so they could sell their own for an additional monthly fee. The effort was futile as aggressive new entrants offered phones with Wi-Fi and data plans without restrictions.

More importantly, over time, many telecom network operators discovered something critical to their strategy: that they simply were not good at developing and maintaining software apps or media and entertainment services. They also came to appreciate what a powerful barrier to entry their large physical infrastructure represented.

While it may not be “cutting edge” or earn a lot of respect on Wall Street, knowing the ins and outs of San Francisco zoning rules and being able to get a new cell tower installed is highly specialized knowledge that limits competition. Making and launching apps costs millions of dollars. Making and running networks cost billions.

The result, today, is after hundreds of billions of dollars of mergers and acquisitions, and equally large write-offs and divestitures, telecom network operators are (mostly) back to running telecom networks.

A similar pattern?

The same pattern might be about to play out in the banking and finance world. Decentralized Finance (DeFi) looks a lot like a set of OTT applications. Just like smartphone apps and content, DeFi services can be launched into the market quickly and at low costs. DeFi services are not burdened by legacy compliance costs or legacy technology systems. The result: DeFi services are often better, faster and cheaper than available legacy banking options.

And, just like OTT services, there’s a catch: You can’t use an app without a phone, and you can’t use DeFi without a bank or centralized exchange account. Every user must be able to convert their fiat into (and later out of) tokens. Those fiat on and off-ramps are also much more complex to maintain and operate because these are centralized entities subject to regulatory control and compliance. Keeping those records and processes up to date and integrated with the rest of the financial system is costly and complex.

In the coming years, the world’s banks will face a series of competitive dilemmas similar to the ones that telecom network operators faced in the last 30 years. On the one hand, they can earn significant new market share by offering their customers access to the crypto and DeFi ecosystem, but that market share may not be nearly as profitable as it was in the past. Instead of getting loans and financial services in-house, new customers will be able to comparison shop across the whole DeFi ecosystem.

Some banks are also going to try to launch their own competing DeFi services. From stablecoins to secured lending, banks will need to identify where they have a substantive competitive advantage. A pure algorithm-based offering may be a hard sell and about as successful as a telecom operator trying stand-up comedy.

The crypto world’s best developers may not find it easy to fit in the biggest banks. Integrating on-chain and off-chain services, however, will present opportunities for differentiation. Loans secured with more stable off-chain assets like homes can be bigger and cheaper and lower risk than purely on-chain offerings. The closer banks get to their competitive strengths, the more likely they are to be successful.

Peter Drucker famously said that culture eats strategy for breakfast. A financially conservative, regulatory-focused culture is going to find the hyperactive innovation and decentralization-first ethos of the DeFi ecosystem hard to sustain internally. The most visionary banks may be the ones that decide to double down on the strengths of their culture and the businesses that align with that rather than trying to become something entirely different.

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