Fragmenting digital finance
Island hopping: innovation is splintering money, so who can put the pieces back together?
We have more wallets, QR schemes, blockchains and tokenized assets than ever before. Yet the world’s most reliable ways to move value across borders are still decades‑old card schemes and correspondent banking networks. The problem is not a lack of innovation; it is that the innovation is splintering into incompatible islands.
Until that changes, new rails will keep pressuring traditional finance at the margins without fully displacing it at the core, leaving legacy players free to plug’n’play with fintechs without eroding their margins. There’s nothing wrong with legacy payment processors and banks continuing to prosper, but fintech’s promise of competition is being diluted by fragmentation.
On public blockchains, the basic economics of decentralized consensus actively push toward fragmentation. The Bank of International Settlements recently noted that validators charge higher “coordination rents” to chains that are more decentralized and secure, resulting in congestion and gas fees. Spikes in fees on Ethereum – the fave of financial institutions – leads other users to migrate to less-trusted venues such as Solana or Tron. This has competitive merits within the context of blockchains, but it splinters activity and liquidity across dozens of settlement layers and layer-2 chains. This inhibits the ability of stablecoins to serve as fungible tokens without expensive and risky bridges.
Neobanks are growing fast, with the majority of consumers globally now maintaining relationships with two or more providers, according to Standard Chartered. But this isn’t a case of new global banks that compete with the likes of StanChart. At a regional level, this proliferation is fragmenting account balances, creates redundant KYC, and leaves users with a haphazard set of experiences and apps.
There are terrific examples of regionalism: the rise of mobile money wallets in Africa, and efforts in Southeast Asia such as Project Nexus to knit together QR-code based accounts. A recent report by the International Monetary Fund looks at Thailand and finds QR payments are beginning to substitute for traditional banking and card payments, which is bringing financial access to many SMEs.
But African wallets don’t integrate with card schemes and traditional bank accounts at the regional level – a problem for many SMEs. In Asia, QR operability for wallets is entangled in bilateral, national standards, with local regulation and currency regimes throwing sand in the gears. The IMF says Southeast Asia needs to beef up oversight and reporting to enhance trust and security of digital payments across QR-based systems.
Corporates and treasurers face similar issues. Real-time schemes, virtual accounts, digital wallets, tokenized deposits, and embedded rails are all great. They are designed to expand liquidity. But they are mostly built in silos, across varying cut-off times, costs, FX exposures, and regulations. More liquidity, maybe – but sheared off in different places.
TradFi’s endurance
Add it up, and this explains why TradFi is able to retain its dominance in cross-border finance: global acceptance, fungibility of money, dispute rights, and fraud and compliance frameworks trump new tech and digital-first business models. That’s true even when the new systems are cheaper: in fact, lower costs for new rails don’t reflect the way TradFi bundles complexity within its services. That complexity doesn’t disappear by adopting blockchain, wallets, or neobanking.
Would-be fintech disrupters have developed three playbooks to address this problem.
First is orchestration. This has been around for a long time. Many fintechs have emerged over the past decade to help treasurers and SMEs juggle multiple rails: Adyen, Stripe, GrabPay, and Payoneer for merchants, Wise, Revolut, Airwallex and Nium for SME and retail. PPRO, Rapyd, Remitly, TerraPay, and Thunes orchestrate local methods for emerging markets. In the US, Plaid provides interoperable layers for data and account-to-account payments, as TrueLayer does in Europe.
In crypto, Circle orchestrates across chains and into banks for stablecoins. Canton Network synchronizes tokenized assets and workflows across permissioned DLTs favored by financial instituitons; Partior does this for fiat FX settlement in tokenized form.
But large banks have a natural advantage. Many banks have adopted ISO 20022 standards around transaction messaging to make correspondence networks capable of handling digital rails. They have huge teams doing API connectivity. And they know how to bundle and charge for multiple payment methods.
Orchestration at scale requires the kind of internal investment, integration with other client systems, and data standards and digital identities. Banks aren’t necessarily better at these things, but they know how to proceed in a compliant manner (which is why they prefer to deal onchain just among themselves, hence the growing usage of Canton). The object is to mask the complexity for the most valuable corporate clients.
A second approach is top-down, relying upon an institutional anchor such as central banks. Their concern is the singleness of money, which has relied on central banks to backstop market and payment systems. This creates a shared anchor. Without it, private monies and networks tend to fragment, as stablecoins do today.
The emerging solutions include multi-CBDC platforms, such as mBridge, or other regulated frameworks for stablecoins and tokenized deposits. While mBridge is live, it remains limited mainly to RMB-related transactions, despite its multilateral backing. There remain questions about interoperability at scale, governance, and control.
The third play is to develop federated wallet networks. The leading example is Ant Group’s Alipay+. In mainland China, Alipay has built an integrated ecosystem of payments, savings, credit, investments, and insurance around a vast user base. Abroad, Ant has partnered its way into compatible infrastructure.
Through equity stakes, its tech powers local wallets, such as GCash in the Philippines or KakaoPay in Korea. Alipay+ allows these wallets to be mutually interoperable at point of sale across more than 100 markets. Ant handles routing, FX, and settlement for millions of SMEs, building a global network that avoids card schemes altogether. Alipay+ follows its users within their existing financial apps rather than trying to get them to onboard a new one. While Alipay+’s coverage is not as global as a leading bank’s, or a Visa/Mastercard’s, it looks like an emerging competitor at scale for retail and small B2B flows.
Ant Group has never focused on large-scale capital flows or corporate treasury, however, so it’s unlikely this approach would work at that level – we’re back with our hodgepodge of fintechs, digital assets, banks, and cards.
Singleness of experience
To sum up, the best solutions to fragmentation are building networks around existing user flows without trying to rewrite local regulations; bank-driven multi-rail orchestration on the back of APIs, ISO 20022, and real-time connectivity; and institutional trust anchors for digital settlement, notably in permissioned DLTs.
There are more solutions being tested. Might tokenized assets become embedded in mainstream treasury operations? How much potential remains for corporates to exploit the data structures of ISO 20022 messaging? Can national identity and privacy conditions be extended into cross-border flows?
What has long been understood is that market forces alone don’t lead to convergence to a single winning rail. That was also true with correspondent banking. Market forces and regulatory agendas continue to drive the proliferation of chains, wallets, and domestic schemes, with harmonization possible but complete integration unlikely.
Fragmentation is the feature, not the bug, in cross-border finance. Fintechs and blockchains have emerged as new ways to manage or hide this complexity, via federation, orchestration, or atop regulatory anchors. Systems that preserve the singleness of money – which is to say, a single user experience across underlying rails – are more likely to succeed than rickety reliance on bridges and other new versions of middleware “spaghetti bowls”.
The singleness of money is often presented as an obsession of central bankers, which can be ignored by tech startups, but this is a mistake. It’s a competitive necessity. As the world seeks alternatives to US dollar transactions, the costs of fragmentation are going to rise. Who’s going to solve this problem?
Existing commercial banks and payment schemes continue to serve as backbones, and will not disappear, because they remain best placed to do so. Despite the threat from platforms – fintechs, wallets, and crypto providers – to consume the value-add, legacy businesses that solve for the intensity of fragmentation can avoid becoming dumb pipes.
Where fintechs have excelled is in a singleness of experience: taking a consumer or SME corridor and integrating travel, remittances, and e-commerce with credit, rewards, and investments; by embedding financial services within broader activities.
This is the challenge for tokenization and digital assets. Within DeFi native experience, the models are proven, but connecting these to the real world of business and income streams requires an ability to manage fragmentation that has yet to be demonstrated.