The banking landscape is undergoing a transformation that's reshaping how financial services are delivered. While most banking CEOs publicly dismiss crypto as a "speculative bubble," their engineering teams are secretly rebuilding trillion-dollar systems on blockchain.

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This week we’re going over how the $19.8 trillion traditional banking sector is being completely rebuilt, what that means moving forward, and how the evidence is in the infrastructure these banks are building behind the scenes.

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Banking's Three-Phase Evolution: Where We Are and What's Next

While mainstream conversation focuses on Bitcoin prices and crypto drama, a fundamental evolution is taking place in how banking itself functions. This three-phase progression helps make sense of where banking has been, where it is now, and where it's headed:

Banking 1.0: Traditional Banking's Legacy

Traditional banks continue to dominate the global financial landscape, with massive asset holdings distributed among a small number of institutions. The Chinese "Big Four" banks (ICBC, CCB, Agricultural Bank, and Bank of China) manage $19.8 trillion in combined assets. In the United States, just six banks control $13.7 trillion in assets, while in the UK, five banks hold 90% of all deposits.

This market concentration has created significant economic challenges. Traditional banks face enormous hurdles in modernizing their technology:

• 43% of banking systems still run on COBOL, a programming language from the 1960s

• The average COBOL programmer is now over 50 years old

• Core banking systems run on mainframe computers from the 1970s and 1980s

• Modernization costs hundreds of millions per bank and takes 2-3 years to implement

These legacy systems explain why traditional banks struggle with basic modernization. A cross-border payment through traditional banking channels typically takes 3-5 business days and costs between $25-35 per transaction, with additional currency conversion fees often reaching 3-4% of the transaction value.

The business model itself hasn't changed much either. Traditional banks generate profit through the interest rate spread between deposits and loans, while charging fees for services like account maintenance and transactions. This model faces structural limitations—banks operate with significant leverage, typically maintaining capital ratios of 8-12%, which means relatively small losses on assets can have amplified effects on bank equity.

Banking 2.0: The Neobank Revolution

Neobanks have transformed banking by delivering digital-first, user-friendly financial services. Unlike traditional banks, neobanks operate entirely through mobile apps and web platforms, eliminating physical branches and reducing overhead costs.

The market growth is impressive:

• The UK neobank sector expanded from 2.9M users in 2018 to 19.1M in 2023

• Monzo leads the UK market with 24% share, followed by Revolut at 19%

• Globally, Ant Financial serves 1.3 billion customers, while WeBank serves 399 million

Neobanks have introduced several key innovations:

• Digital-first platforms with 24/7 accessibility

• Real-time transactions instead of batch processing

• Personalized financial management tools

• Multi-currency accounts and low-cost international transfers

However, neobanks face significant limitations. Most partner with traditional banks for core banking operations and regulatory compliance, making them vulnerable to disruptions if partner banks struggle. Their business models also face profitability challenges due to high customer acquisition costs combined with low revenue per user.

The most successful neobanks have found their niche:

• Nubank dominates Latin American digital banking with 110 million customers

• Mercury focuses on business banking with 200,000 customers processing $4 billion in monthly payments

• Wise revolutionized international transfers with a matching system that avoids expensive wire fees

Despite their successes, neobanks still operate largely on traditional banking infrastructure—they've improved the user interface but haven't fundamentally changed the underlying rails.

Banking 3.0: The Web3 Frontier

The emergence of Web3 technologies represents the next phase in banking's evolution. Unlike the incremental changes of Banking 2.0, Banking 3.0 involves a complete redesign of financial infrastructure.

Key differences from traditional banks:

• No central authority controls a user's money

• Users hold their own encryption keys

• Transactions happen directly between parties

• Smart contracts automate financial agreements

The market data shows remarkable growth in this sector:

• Stablecoin market capitalization has reached $200 billion

• February 2024 stablecoin trading volume on centralized exchanges hit $1.09 trillion

• Tether (USDT) maintains a 24-hour volume of $51.14 billion

Web3 banking has introduced new financial products that operate without traditional intermediaries:

• Stablecoins provide blockchain efficiency with fiat currency stability

• Decentralized exchanges allow direct asset exchange without intermediaries

• Lending protocols enable borrowing and lending through smart contracts

• Custody services secure digital assets for institutions

However, Web3 banking faces significant challenges:

• Regulatory uncertainty across jurisdictions

• Smart contract security risks

• Technical barriers limiting mainstream access

• Market volatility and stability concerns

• Transaction latency compared to traditional payment networks

The Banking-as-a-Service Bridge Between Worlds

As these three banking generations coexist, a fascinating development has emerged: traditional regional banks have found a lucrative revenue stream by providing regulated banking infrastructure to neobanks and Web3 platforms.

Banks like The Bancorp Bank and Stride Bank earn substantial fee income by offering their banking licenses and regulatory compliance frameworks to digital challengers such as Chime. This model allows regional banks to monetize their regulatory status and existing infrastructure without competing for direct customer relationships.

The opportunity extends beyond the US market. European banks have developed similar partnership models, hosting neobanks during their growth phase before they pursue independent licenses. Major institutions like Barclays and Lloyds have diversified their revenue streams by providing banking infrastructure to Revolut in the UK.

These partnerships represent a strategic pivot for regional banks, allowing them to become "Banking-as-a-Service" (BaaS) providers and tap into the growing digital banking market while maintaining their traditional operations.

Market Implications and Strategic Considerations

The coexistence of these three banking generations has significant implications for financial institutions and fintech companies:

For Traditional Banks:

The path forward requires massive investment in infrastructure modernization. Success demands more than technology investment—banks must fundamentally reshape their organizational culture, moving from rigid hierarchies to agile, technology-driven operations. Staff retraining across all levels is essential while competing for scarce technology talent.

For Neobanks:

The challenge is balancing rapid growth with sustainable business models. Risk management becomes increasingly critical as neobanks scale, requiring robust compliance systems, customer data protection, and regulatory monitoring. Partnership strategies take center stage, with neobanks choosing between partnering with traditional banks, acquiring banking licenses, or focusing on specific market niches.

For Web3 Banking Platforms:

The opportunity lies in building bridges between traditional and decentralized finance while solving core technical challenges. Infrastructure development shows mixed progress—layer 2 scaling solutions increase transaction capacity substantially, but user experience remains complex. Institutional engagement is driving the development of regulated Web3 banking services.

What to Expect in the Next 24 Months

In the next 24 months, traditional banks will fast-track digital initiatives while venture funding for neobanks tightens, driving significant consolidation. Regional banks will increasingly pivot toward banking-as-a-service models, and we'll finally see meaningful regulatory clarity for stablecoins and digital assets.

Looking further ahead (2-5 years), the line between banks and technology companies will blur completely, real-time payments will become the global standard, and smart contracts will automate major portions of lending operations. Digital identity solutions will streamline compliance while banking services embed themselves seamlessly into non-financial applications.

Ultimately, banking itself will become invisible—integrated into daily activities with traditional banks providing the regulated infrastructure that powers everything behind the scenes.

Your company's success in this evolving landscape depends on strategic positioning. The winners will understand where their strengths align with different banking phases, identify cross-generational partnership opportunities, and develop technology roadmaps that acknowledge this multi-generational reality.