— November 21, 2018
Cryptocurrency has the potential to completely change how our economy functions—and it’s already doing it. Many countries have either allowed or fully embraced cryptocurrencies like Bitcoin, the market cap for multiple cryptocurrencies has exceeded $ 1 billion, and public regard for cryptocurrencies is at an all-time high (and climbing higher).
That means the core institutions of our economy (i.e., banks) will need to evolve if they’re going to thrive, or even survive, when crypto begins to take over.
Why Cryptocurrency Is a Threat and Ways Banks Must Transform to Thrive in an Era of Cryptocurrency
On the surface, crypto may not seem like a threat to banks and other financial institutions, but it poses the potential for disruption in several key ways:
One of banks’ primary responsibilities is to store your money and keep it safe. When almost all currency was tangible and printed, this made perfect sense; you could resist thievery and ensure a decent interest rate return by keeping your money in a bank. But in a world where most currency is digital, recorded in a public ledger to ensure transaction legitimacy, and kept secure with cryptographic hashes, this function may no longer be as important.
Banks also have historically had a monopoly on most forms of financial transaction. You couldn’t use a debit card or write a check without a checking account, nor could you open a credit card or commit a wire transfer. In a crypto-focused world, all these transactions can be handled by individual users (or networks of them) thanks to the decentralization inherent in the system.
If you’ve used a bank, you’ve probably been forced to pay excessive fees, such as overdraft fees, for the luxury of using the system. Whether it’s a monthly rate or a penalty for using the system incorrectly, in one way or another, you’ll pay to keep your money safe. In a world where users can handle their own storage and transactions, transaction fees can be ridiculously low, and fees would be non-existent.
Banks also have a monopoly on conversion between international currencies, and they charge a premium for the service. If you want to exchange U.S. dollars for Japanese Yen, for example, you’ll need to pay a couple percentage points, or a few dollars (whichever is higher) for the privilege. If customers could use a single, agnostic digital currency for all their purchasing needs, this requirement would all but disappear.
Convenience and accessibility
ATMs are available in most heavily populated areas, but banks can still be an inconvenience. Cryptocurrency can be accessed at almost any time, and nearly all transactions can take place without the assistance of a human teller.
Since the 2008 financial crisis (and in some circles, from some time before), banks have had a public trust problem working against them. Consumers see banks and the people who run them as inherently greedy, broken, or in some cases, deceitful. Using crypto serves as a viable alternative that doesn’t require putting your full trust in any one person or any one institution.
Banks’ Key Advantages
That said, banks aren’t completely out of the running now that crypto is emerging as a semi-viable alternative for these products. In fact, banks still hold these key strengths:
Borrowing and financing
If you need to borrow money, you might be able to find a private investor or lender to provide the funds via Bitcoin, but it’s much more reliable and straightforward to contact a bank. The mortgage industry, and lines of credit for businesses, will still need to depend on banks for the foreseeable future, even if cryptocurrency develops.
Underwriting and decision making
Some banks specialize in underwriting, and helping businesses make important decisions (such as following through with a merger or acquisition). Because these functions exist outside the core processes of currency storage and exchange, they can’t easily be replaced in a crypto-centric economy.
Banks also play a very important role in maintaining economic stability. They keep currency liquid, keep prices relatively stable, and in some cases, have the power to increase consumer confidence and consumer spending by making money easier to borrow. Currently, cryptocurrency prices are much more volatile, though with enough time and enough adoption, this hurdle could be overcome.
Legacy systems and slow progression
Many consumers are reluctant to adopt crypto in any form, either because they don’t understand it, or because they don’t want to change the system they’re already used to. This gives banks a key advantage—more time they can use to adapt slowly, and more consumer confidence, even in the face of a massive threat.
How Banks Could Evolve
If banks want to survive, they need to keep hold of their distinct advantages, and make up for their inherent weaknesses with the following potential transformations:
Monitoring, understanding, and acceptance.
First and foremost, banks need to take cryptocurrency more seriously. This is a viable threat to an entire industry, in some ways more than others, and it deserves high-level attention. At best, banks can watch for crypto developments and try to learn from the changes it brings to evolve their own infrastructure. At worst, they’ll know what they’re up against, and may be able to compensate for their new weaknesses.
The addition of blockchain products.
If banks have the time and resources, they should focus on hiring more blockchain developers, and investing in new blockchain-centric products. Some banks are already doing this, looking for a way to streamline consumer transactions, or in some cases, launch a cryptocurrency on their own. This falls into the “if you can’t beat ‘em, join ‘em” category, but is still a useful way to guard against the crypto threat.
Drastic reductions in fees and exchange rates.
Even consumers who are divided about the long-term stability or reliability of cryptocurrency will be attracted to the lack of egregious fees in the digital currency system. If banks want to remain as a viable alternative, they’ll need to revisit their fee structures, eliminating or drastically reducing the fees they charge for basic services. This will, no doubt, happen gradually.
Specialization and downsizing.
Banks may also find themselves unable to compete with crypto in all areas, so instead of launching a massive overhaul to their core services, they could shift to start specializing in areas that can’t easily be replaced by a crypto-based transaction system. For example, they could serve business clients exclusively with underwriting and analysis, or prioritize their borrowing and lending products. They could even start shutting down areas of the business that are no longer relevant or profitable.
More personalized products and guidance.
Cryptocurrency offers consumers the ability to handle their own money management and financial transactions, but not all consumers will be ready for those responsibilities. Banks could also shift to address these customers specifically, offering personalized selections of products to build a financially stable life, or offering one-on-one guidance to customers as a value-added service. Some customers would be more than willing to pay extra fees or a monthly rate in exchange for ongoing financial advice, and/or asset management.
Banks may never go completely obsolete, even in the wake of exceptional cryptocurrency adoption worldwide, but they will take a massive economic hit if they don’t start to transform soon. With pressure from consumers, regulators, and economists already beginning to converge, it’s only a matter of time before we start to see these changes manifesting in our most important financial institutions.