Over the past decade, the world has seen how the fintech revolution has transformed business and individual transactions. The banking industry was no exception, as it had to cope with the evolving market needs.
As the global market reduces cash transactions, credit cards, debit cards, and digital wallets take over. However, a new popular trend is driving another transformation: the cryptocurrency market’s sustained expansion.
Since the inception of Bitcoin (BTC), many other forms have emerged and circulated globally. They have become alternatives for bonds, stocks, and forex. Criticisms are still evident among its doubters. But it has already captured the world’s imagination, attracting more crypto believers.
Now, cryptocurrency has penetrated the banking industry. Many large banks have acknowledged its advantages, but others have remained skeptical.
With that, it is anticipated to be integral in transforming bank transactions, particularly online banking. Hence, this article will cover the potential changes the crypto market can bring to online banking.
An Overview of Crypto in Banking
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Although many people have acknowledged the potential of crypto in transforming the financial system, the banking industry’s adoption is still slow.
Understandably, many small and mid-sized banks remain apprehensive about investing heavily in cryptocurrencies. The crypto market has a limited regulatory framework and is notorious for its volatile nature. Also, the events involving two large crypto exchange giants, FTX and Binance, increased skepticism.
Ironically, the banking apprehension is more evident in developed than emerging economies. In fact, many of them are eager to explore blockchain technology.
Additionally, the Silicon Valley Bank collapse and the banking crisis in 1Q23 fueled fears among banks.
Meanwhile, the collapse of the Silvergate Bank sent creases among numerous financial institutions. The notion that these two popular banks engaged in crypto added scrutiny and concern.
Despite all these things, there has been an increasing acceptance of crypto to help hedge risks and diversify investment portfolios. Several financial institutions have started adding crypto-related solutions and services. This phenomenon has been observed in the US, the EU, Singapore, and Nigeria.
The Role of the Crypto Market in Shaping the Future of Online Banking
Over the past decade, we have seen more people across the globe turning to online banking. It has become a convenient alternative to online banking. It reduced cash and traditional banking transactions, supported by the rise of e-wallets.
With crypto taking over the capital market, large banks in the US have become keen on including it in their services. These are some ways that cryptocurrencies may impact the banking industry.
Increased debit/credit card and digital wallet transactions
Cashless transactions in many emerging and developed economies have increased substantially in recent years. Indeed, the fintech revolution paved the way for the expansion of debit cards, credit cards, and e-wallets.
This phenomenon was supported by the emergence of many online stores as e-commerce peaked. Its importance was even more highlighted during the pandemic as health protocol minimized physical or face-to-face personal and business transactions.
For instance, cash transactions in the US comprised 51% of the total number in 2010. In 2020, it was estimated to have dropped to 22%. The downtrend was even sharper in European countries, such as Sweden (56% down to 9%) and the Netherlands (52% to 14%). The decrease was most visible in emerging economies like Malaysia (93% to 72%) and China (99% to 41%).
Another study showed a similar pattern in the US. The number of people using cash in all purchases decreased from 24% in 2015 to 18% in 2018 and 14% in 2022.
Meanwhile, those not using cash in any purchase rose from 24% in 2015 to 29% in 2018 and 41% in 2022. As such, both studies confirmed the impact of the fintech revolution, which continues to peak today.
With the rise of cryptocurrencies in digital wallets and large banks, we may expect more people to forego cash transactions and instead use cryptocurrencies as payments. We know that fintech giant Paypal ( PYPL) now offers crypto services to individuals and merchants. It allows crypto users to make transactions at a relatively lower cost. As of 1Q23, PYPL had crypto and related asset holdings of $943M, which was 56% higher than $604M in 4Q22.
Likewise, many large banks, such as HSBC and J.P. Morgan, have already adopted blockchain technology. This increased banking capabilities can raise crypto penetration in banks and, in turn, lead to crypto payments in online banking transactions. We note its efficiency in cross-border transactions, making it a good alternative to cash for urgent transfers.
SMBs allowing crypto in online banking transactions
Small and medium-sized businesses (SMBs) comprise 99% of the total number of businesses in the US. Their population of 33M contributes to over 40% of the US GDP and about 50% of the total spending in tech spending. This makes SMBs a potential target if banks adopt cryptocurrencies as part of their solutions and services.
More interestingly, the unfavorable impact of inflation was most evident in SMBs. The elevated price levels made them vulnerable to cost pressures. To cope with higher operating costs, they relied heavily on credit cards. So, credit card payments became the third-largest expense of SMBs. While it may raise recession fears, it may also open opportunities for crypto to increase its banking coverage.
With PYPL, small merchants and individuals could make crypto transactions at a low price. The increased efficiency of cross-border transactions made them more open to crypto payments. Also, stablecoins like USDC became more attractive amid the macroeconomic and crypto market volatility.
These stablecoins helped mitigate risks associated with inflation and negative market sentiments in the past two years. This is supported by Coinbase, given its service that converts stablecoins to fiat money for free offboarding services.
Moreover, Blackrock, the world’s largest asset manager, is pushing for tokenization, expecting a private asset boom to $290T. The claim is supported by Boston Consulting Group, estimating illiquid asset tokenization of $16T by 2030.
The SMB sector is the focus of potential tokenization as direct investors, venture companies, growth segments, real assets, and secondaries may bring it to digital platforms. These can increase transparency for underwriting, price discovery, and funding small businesses.
Hence, SMBs may have better liquidity and valuation, making them more attractive to investors and businesses in venture capital.
Higher crypto adoption rate
Many large-scale banks, such as Goldman Sachs, BNP Paribas, Standard Chartered, Ally Bank, and Bank of America, have already included cryptocurrencies and blockchain technology in their systems.
With that, central banks may create their own digital assets and coin reserves.
More interestingly, cryptocurrencies may become legal tenders in many countries. After accepting Bitcoin (BTC) as its legal tender, El Salvador has already taken the lead. If this materializes, cross-border transactions may become instantaneous at a lower cost.
Banks may also issue digital securities supported by digital ledger technology (DLT) and smart contracts. DLT is already popular in the European Union, and the European Investment Bank is now using it to issue digital bonds.
Given all these, many clients can enroll or open a bank account with cryptocurrencies. Currently, the most notable crypto capability of digital wallets and online banking is crypto buy and sell at a lower cost than in many crypto exchanges.
Banks including blockchain technology in business models
The fintech revolution remains at its peak as it transforms traditional banking business models. This move is prompting banks to find ways to cope with evolving market demands and tighter competition. Online banking and digital wallet partnerships are some steps the banking industry has already taken.
With increased exposure to digital currencies, banks may adopt blockchain technology for a more efficient and cheaper delivery of solutions and services. Asset tokenization, particularly illiquid ones, in SMBs and clients is a potential solution. Blockchain-based banking transactions may also take over in the succeeding years. These may be achieved by leveraging AI to improve client experience, banking models, and fraud and spam detection.
Blockchain technology integration with banks
With blockchain technology, the crypto market can trace transactions while maintaining individual anonymity. It is a digital ledger storing crypto transaction data in blocks chained together.
Likewise, banks can leverage blockchain technology for more efficient and transparent transactions. They can combine their existing systems with blockchain technology to speed up payments, improve identity verification processes, and lower banking fees. Even better, they can lower fraud and scam incidents.
Currently, banks still face challenges in making timely and simple banking settlements and clearance and cross-border money transfers. However, with blockchain technology, these transactions may become faster and simpler. Since cryptocurrencies are digital assets, clients may enjoy banking transactions with their mobile phones.
Additionally, banks can use smart contracts to automate business processes. Aside from reducing paperwork, these can lower the trust needed between two transacting individuals or businesses.
Thanks to their computer-programmed codes, it is easier for banks to track and compile transactions. So, a bank can become a third party for loans, such as mortgages, credit letters, personal loans, and commercial loans.
Lastly, blockchain technology can improve auditing, bookkeeping, and compliance accuracies. Its capacity as a ledger will allow banks to check decentralized recorded transactions simply by inputting transaction data into this technology.
Skeptics are still apprehensive about the crypto market, comparing it to the Tulip Mania in the 7th century. Yet, its expansion continues despite the market bubble burst in 2017-2018 and macroeconomic volatility in 2022.
It continues to enter the mainstream market as it becomes more popular and deeply tied to e-wallet providers and banks. Hence, cryptocurrencies may help banks improve their financial systems across the globe.
