The case for digital currency at banks
The biggest opportunity for banking is hiding in plain sight
There is increasing consensus among banking executives that blockchain is a technology worth spending time on.
Research points to tens of billions worth of cost savings from banks adopting blockchain for payment processing, clearing, settlement, automated compliance and other key banking functions.
Many banks today are exploring blockchain as a way to replace legacy banking infrastructure and reduce costs.
Blockchain-as-a-cost-saving-infrastructure is a promising area and worth getting excited about. Yet, these infrastructure improvements will take time. Most estimates predict cost savings for early adopters occurring in the 2020s.
Fortunately, there’s another blockchain strategy that banks can execute on, which doesn’t require waiting. One with billions of existing revenue and tens of millions of customers today.
Digital currency: The elephant in the bank
Blockchain is enjoying a renaissance in the eyes of banking executives and strategists. Yet, digital currencies, including bitcoin— the digital asset that sparked the blockchain interest we see today— hasn’t been met with the same open arms.
Instead, digital currency has been largely overlooked by the traditional banking community.
The following factors might partially explain why:
- The “Blockchain, not Bitcoin” narrative that claims the underlying technology is interesting, but not the digital assets that blockchain enables. We agree blockchain technology is very interesting, but disagree that digital currencies (including Bitcoin) aren’t useful. We explore some of the data to back this up later on.
- The historically volatile nature of the digital currency markets, which trigger negative sentiments from risk averse and conservative market participants (sometimes rightly so, sometimes not).
- Regulatory uncertainty around classification and legal treatment of digital currencies, combined with negative comments by some legacy banking leaders.
- Good old fashioned lack of understanding of what digital currencies are, what they are useful for, and why people are attracted to them.
These narratives caused some in the banking sector to form rushed judgments on digital currencies. They wrote off the emerging asset class and bought into the soothing narrative that all digital currency is a passing fad.
Yet, their customers did the exact opposite.
Millions of traditional banking customers experimented with and learned about digital currencies. They explored new technology platforms. They developed trust in new brands. For many, it was the chance to experience money and value transfer outside the traditional banking system for the first time.
It turns out that digital currency was having its renaissance as well.
Banks were just missing it.
The customer is usually right
You don’t have to look hard to see that digital currencies have undergone significant retail validation and acceptance. This is particularly true among Millennials and younger market segments. Some of the stats that stick out:
- Coinbase, one of the early companies to offer digital currency, has over 20 million active accounts. To put those numbers in perspective: that’s about the same as Fidelity and 2x Charles Schwab
- Binance, another popular digital currency exchange, reports having over 10 million users
- Digital currency providers are booking sizable revenues and profits. Coinbase reported over $1 billion of revenue in 2017. Binance reported expecting $1 billion in profit in 2018
- Ledger has sold over 1 million units (at $100 each, ~$100m revenue) of their popular Nano S hardware wallet — a device designed for individuals to hold digital currency themselves
- Poll: 36% of Millennials think they will buy bitcoin in next 5 years, versus just 2% that hold digital currency today
The data paints a clear picture:
Digital currencies are an emerging mainstream asset, with tens of millions of customers and support business models that generate billions of revenue.
The clearing regulatory picture
For banks able to realize that their customers want digital currencies, regulation tends to be the next barrier.
While not every regulatory question has been answered, there is clarity around the most logical digital currencies for banks to offer: bitcoin and ether. The Securities & Exchange Commission (SEC) has weighed in publicly on multiple occasions:
It’s a complicated area. Because, as you said, there are different types of cryptoassets. Let me try and divide them into two areas. A pure medium of exchange, the one that’s most often cited, is Bitcoin. As a replacement for currency, that has been determined by most people to not be a security.
John Clayton — SEC Chairman
“… based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions”
William Hinman — Director, SEC
There’s also precedent to consider. Multiple U.S. exchanges (Coinbase, Bittrex, Gemini, others) have offered digital currencies to U.S. consumers legally, without issue, going back as far as 2012 in some cases.
Sleeping giants
Missing tens of millions of customers and billions of revenue is unfortunate for banks. But what’s worse is that banks are actually the most logical providers of digital currency services.
Some of the competitive advantages banks have in digital currency are:
- People already trust banks to securely hold and manage their financial assets. New players need to establish this trust from scratch.
- Banks are already trusted holders of personal information for customers. New providers need to ask customers to share their personal data (again), confirm it is real and secure it.
- Banks already hold cash for their customers that can be converted easily into digital currency. A lot of it: $10.7 trillion in the United States. New providers have to ask customers to wire in funds (from their bank) and wait for the wire to clear.
- Banks can offer a unified financial experience by allowing users to have all their assets in one place. Banks have been diligently consolidating cash accounts, loans, equities and other assets into a unified financial experience. Digital currencies are just the next asset that customers want to have.
- Banks already have the licenses and compliance chops needed to offer digital currencies (e.g. money transmission licenses, U.S. Patriot Act, Bank Secrecy Act)
Many of these advantages result in a big improvement in user experience:
Demand from existing customers combined with a streamlined user experience will enable banks to not just compete in the digital asset market, but serve it well.
Fintechs filling the void
The current digital asset providers know about the competitive and user experience advantages that will be gained by combining digital currencies with banking.
That’s exactly why they are attempting to move upstream into banking services and perform the unification themselves.
Unifying digital currency with digital banking is the holy grail of the modern financial experience.
If banks don’t do it, fintech and digital asset companies will be happy to step in to fill the void.
Digital currencies have proven a key tool to attract Millennial banking customers, who view digital currency much more favorably than older generations.
Robinhood, the financial services company that boasts over 4 million users (median age of 26 — a literal Millennial company) offers a case study of what happens when the Millennial demand for digital currencies is satisfied. After adding digital currency to their offerings in early 2018, Robinhood saw more than 200,000 new customers sign up per day.
Capturing Millennials isn’t a “nice-to-have” for banks.
It’s a need-to-have.
Millennials represent the fastest growing segment of the banking market. By 2022 Millennials will be 45% of the workforce and are the largest generation in American history.
For both banks and fintech companies, the stakes are very simple: win the battle of Millennials or face extinction.
Fortunately for banks, it’s a winnable battle. They simply need to listen to their customers and make the required investments in new technology.
Customers want a modern, fully digital banking experience.
When banks start offering digital assets, they can give it to them.
About Modular
Modular’s mission is to bring digital assets to millions of new users through their trusted financial institutions.
Modular is a provider of secure, cloud-based digital asset solutions for the banking sector. Our technology enables banks to offer digital assets to their customers as part of a modern digital banking experience. We design every aspect of our technology and solutions with the highest standards for security, usability and compliance. For more information, go to: www.modularbanking.com
Follow Modular on Twitter @modularbanking
