a16z: The financial services industry with a market size of 25 trillion US dollars will embrace the trend of open source movement
Open source will give birth to the most dramatic changes in the history of the financial services industry. This industry with a market size of $25 trillion will follow this evolution and transfer power from corporate executives to developers. This situation will not only occur in fintech companies, but also in established financial companies with hundreds of years of history.
Until recently, financial services were still known for being difficult and expensive to build. Existing companies and start-ups are struggling to deal with ubiquitous regulatory hands, outdated and rigid core systems, complex payment structures, compliance barriers, fraud and other issues.
But imagine a different picture: Financial services are built with building blocks like Lego bricks. These building blocks can be flexibly assembled to support hundreds of different use cases. In addition, each of these Lego bricks is the result of continuous collaboration between the brightest minds in the world, constantly iterating and improving. This is the huge potential of including open source in financial services.
Open source allows many people no matter where they are to continue to contribute to the code, and it becomes better and better over time, and it is free for everyone to use.
From the “Main Framework” to “Banking as a Service”
Due to various structural challenges that have existed for a long time, the core banking system has always been monolithic, running “locally” on the bank’s internally customized and expensive data centers. Nowadays, the banking system is becoming the module layer of the cloud, and various components such as deposit accounts, credit card issuance, and compliance can be provided in an “as-a-service” form. The banking industry “as a service” makes it much easier to build and add financial services than in the past. As a result, any company (not just a bank) can now provide financial services: for example, the American ride-hailing company Lyft can provide drivers with bank accounts; ServiceTitan can provide loans to its contractors.
The power of future evolution
Although software “as a service” has made great strides in rebuilding existing financial products, the supply of users and demands and developers will all promote the further modernization of bank infrastructure.
User needs: Financial services were monopolized by banks in the past, but now any company has the ability to join the financial technology field. As consumers and businesses become more ambitious about financial technology products, they also need to have more customizability in the financial infrastructure in order to develop creative solutions for their customers.
Although fintech has traditionally operated locally by default-most banks are driven by country-specific regulations, infrastructure, and consumer payment preferences, many multinational companies are now adding financial services. For example, music streaming service provider Shopify operates in many countries/regions and must work with many different local providers to handle payments, loans, bank accounts, etc. As more and more multinational companies seek to increase financial services, they will need to build universal banking applications. Open source can help solve these dilemmas related to multinational operations.
In addition, there are still 3 billion people in the world completely excluded from the financial ecosystem. Around the world, more and more talented entrepreneurs understand the needs of these unbanked and under-banked communities and are exploring innovative solutions. Open source libraries that are immediately accessible will undoubtedly speed up this process.
Developer supply: There are currently thousands of developers looking for out-of-the-box solutions to solve frustrating and recurring problems. More than 40% of bank codes are written in COBOL, a 60-year-old programming language. Although most fintech companies rely on more modern infrastructure, it is almost impossible to avoid interaction with this traditional technology. Coding and writing something boring once is a pain, but developers find that they are forced to build the same infrastructure time and time again. Whenever developers build something over and over, they will find a way to automate it. Even better, they will open source it, so others in the community can help improve it. Thousands of developers are currently working on solving challenging infrastructure problems and are preparing to open source their work.
Although the banking industry “as a service” will continue to solve many problems, there are still many demands and supplies that will promote the further development of our banking infrastructure. Driven by the open source movement, we are on the cusp of the latest evolution of infrastructure.
Open source evolution
What if these “as-a-service” layers were further divided into the most basic primitives? In fintech, a primitive (meaning it is not developed or derived from anything else) may be a basic ledger, or a reference library for sending specific types of payments. These primitives will be open source: they will benefit from the continued cooperation of the brightest minds around the world. They are combinable, which means that they can be combined and assembled at will to meet any specific user needs.
The wide supply of open source primitives will inspire new use cases that we have never imagined. For example, we will be able to combine the world of cryptocurrency and fiat currency without friction, and users can dynamically consume, save or lend fiat currency and cryptocurrency.
Or, people have been talking about how software should help us make better financial decisions for a long time. Imagine a bank account that can help us make spending and saving decisions, making our financial lives fully automated. Composable open source primitives will give birth to thousands of such experiments; it is difficult to predict which project may become the next $1 billion fintech unicorn.
More specifically, open source can achieve the transformation of the financial industry through four key ways.
Promote the development of standards and improve reliability
There are standards in payments, but they are too old and very tediously constructed. For example, last year, US$55 trillion was transferred through the ACH (a format created in 1970) standard, and 1.3 billion transactions were reported to the U.S. Credit Bureau via Metro2 files (a format created in 1997) every month . The open source library can not only save developers the trouble of building such standards from scratch, but also create modern reference points.
Payment has thousands of edge use cases that even large teams cannot fully satisfy. Many open source contributors run payments through open source libraries and fix edge use cases in the process, making modern open source libraries more and more powerful. For example, the open source company Moov.io uses open source primitives as a starting point, allowing developers to easily embed functionality into their software to send, store, and receive customer funds.
From the United Kingdom to Brazil, many countries/regions are promoting the regulation of open banking, which requires banks to create and maintain APIs to enable consumers to allow third-party applications to access their banking data. Open and accessible banking data can help consumers improve their financial decisions. For example, budgeting applications require users a continuous flow of bank transactions-data is usually stored in the bank. With the customer’s permission, budget applications and any interested third parties should be able to use these data.
Developers at banks around the world are developing similar infrastructure (connections to traditional core systems, APIs for exposing data) to comply with these regulations on open banking. Various countries and banks continue to repeat this process-banks will benefit from using open source libraries as a starting point.
For example, Berlin-based Tesobe is the creator of the Open Banking Project, helping European banks comply with Payment Services Directive (PSD2), which is legislation to create a more integrated payment market in Europe. Tesobe’s open source library provides code to connect to traditional banking systems and provides a starting point for the required low-level APIs. These open source libraries will be constantly updated according to the latest regulatory changes, which greatly simplifies the important work of individual developers and policy teams. Tesobe makes it easier for companies to comply with open banking regulations.
If banks use a common set of open source projects to develop their APIs, and these projects are in contact with thousands of banks around the world, it will become much easier to get services and connections from our global financial system.
Fight global bank cybercrime
The amount of money laundered worldwide is as high as US$2 trillion each year, and it usually provides funds for drug trafficking and terrorist activities. In 2019, banks around the world spent a total of US$30 billion to combat money laundering; but their efforts have effectively prevented 3% of such crimes. In the same year, despite the software system constantly reminding the compliance team of potential problems, many banks still paid US$10 billion in fines for failing to comply with the anti-money laundering regulations of the US federal authorities. (95% of these warnings proved to be false alarms.) Obviously, this system has had little effect.
Each bank independently monitors hundreds of sanctions lists around the world, develops the identification logic of matching entities (for example, John Smith, law-abiding citizen John Smith and money launderer John Smith), and develops rule sets to flag suspicious transactions—all of these They were all carried out in isolation. In addition, when a bank did improve its detection and execution, it inadvertently transferred the problem to another bank: the money launderer knew that the weak link in the system was laundering money.
With the help of open source libraries, banks can contribute their hard-won algorithm intelligence to benefit the entire banking system. When a bank makes breakthroughs in solving specific pain points (such as physical matching), it will contribute to the collective benefit. We are beginning to see some progress in this direction, such as early projects that allowed smart searches across sanctions lists. Similarly, the open source software giant Red Hat has also open sourced rules for identifying risky transactions and improving entity matching.
Make it easier for customers to obtain services and reduce costs
Open source can also make proprietary software that was prohibitively expensive in the past more accessible.
There are 3 billion people in the world who do not have a bank account or do not have adequate banking services. Why don’t banks around the world provide services to low-income customers? One reason is that they make too much money. For example, banks in Latin America have the highest ROE (return on equity) in the world. However, another factor is the bank’s basic cost structure: if you need to pay a software fee of $20 a month to maintain an account, to provide services to low-balance account holders who will never use a profitable loan product for the bank. It is always a loss-making business for the bank.
The Mifos Initiative, the leader of the Mifos X platform, is now an Apache project, which is the core product of an open source bank. Developers can access its free open source library and benefit from the expertise of the global community to build cost-effective banking service applications for microfinance institutions, and to build QR code-based payments for micro-merchants. These new solutions focus on serving the bottom of the socioeconomic pyramid.
The impact of open source evolution
The open source movement will catalyze more financial services companies, and at the same time will promote existing companies to innovate faster.
In particular, it will affect the way developers build software in financial services. Developers in enterprises of all sizes are beginning to contribute to the collective interests of the industry through existing open source projects. More likely, since we are in the earliest stages of this change, developers will find themselves building an infrastructure, realizing how many other companies may need the same thing, and exploring how to turn their own tools into one New open source project-maybe create a new infrastructure enterprise.
Developers are not only creators and sellers of these financial primitives, they will also be buyers. With a strong open source library ecosystem, product management and development teams will no longer need the executive team to approve large budgets to purchase proprietary software. They will be able to test solutions to existing problems and new use cases for free (or at a very low cost).
The impact of this shift will go far beyond start-ups. As the open source movement breaks the barriers to independent product experimentation and innovation, existing financial institutions need to redouble their efforts in recruiting, retaining, and empowering engineering teams.
Consumers will be the biggest beneficiaries of this wave of financial open source movement. Open source financial primitives will provide building blocks to create financial services for new use cases at a lower cost, and provide services to audiences at all levels of the entire socio-economic field.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/a16z-the-financial-services-industry-with-a-market-size-of-25-trillion-us-dollars-will-embrace-the-trend-of-open-source-movement/
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