Cryptocurrency is gaining favour with established banks
While, overall, the report concludes that the establishment has opted to service the sector in limited quantities, recent developments from the and the suggest that more mainstream integration may not be far away.
“We are looking at the question of, should we create a Bank of England digital currency,” commented Andrew Bailey, Governor of the Bank of England. “[...] It does have huge implications on the nature of payments and society.”
Similarly, Federal Reserve Board Governor Lael Brainard stated that, owing to COVID-19-related disruption and the reminder that strong payment infrastructure is a necessity, “the Federal Reserve is active in conducting research and experimentation related to distributed ledger technologies and the potential use cases for digital currencies.”
Considering the best approach
One of Elsewhen’s primary observations is that no bank is currently focusing on every aspect of crypto equally. The answer appears to lie in specialisation; careful concentration on particular business segments will ultimately be more rewarding.
Also, despite some material differences, the report indicates that crypto banking doesn’t differ significantly from traditional retail banking, at least in terms of best-practices: customer-centricity, digital onboarding processes, automated KYC (know your customer) and CDD (customer due-diligence), etc.
This means that organisations can operate in a familiar way while simultaneously offering opportunities to segments historically underserved by retail banks - the report cites SMBs (small-medium businesses) as a prime example:
“SME owners traditionally struggle from a lack of time and knowledge, so the increasingly advisory role banks, crypto or otherwise, are having could prove pertinent here.”
Overcoming the opposition
“Crypto companies find themselves in a particularly inhospitable banking environment, in part because of the regulatory hurdles retail banks themselves face in adopting new technology, but also due to the understandable fear and suspicion those banks feel about the cryptocurrency phenomenon in general,” states Elsewhen.
This, perhaps, isn’t so surprising: the decentralised nature of cryptocurrency mitigates the processing and transaction admin of fiat currencies and reduces dependency on banks and governments to guarantee the money’s value.
However, now that the public’s interest has been piqued and consumers are finding value in the utilisation of crypto, it is not difficult to imagine that the banking establishment will start calculating how best to approach the issue.
Now that major entities like the Bank of England and the Federal Reserve are exploring the possibilities in the post-COVID-19 world, it may be that crypto is finally gaining broad favour.
Zafin: Banking is now in the era of the tech ecosystem
The development of tech ecosystems is placing the future of post-COVID banking in jeopardy. At a time when Big Tech can replicate the functions of traditional financial institutions, what can banks do to retain a grip on the market?
John Smith, EVP Ecosystem at Zafin, has a few ideas. A SaaS cloud-native product and pricing platform for financial institutions, Zafin is preparing the next generation of banks to cope with this precise challenge.
Smith is responsible for the strategic and tactical management of the company’s ecosystem, including the creation of new business models to support growth and differentiation. We asked him four questions:
Q. Have the events of the pandemic caused an irreversible shift in the digitalisation of banks? If so, is COVID the sole cause or are there other factors?
It’s a great question and one that I am asked a lot. Without a doubt, the COVID-19 pandemic has driven a significant shift in the acceleration of digital. In fact, I’ve seen some estimates show there to have been as much as four to six years of digital adoption growth since the initial lockdown started.
While the pandemic may be the primary reason for this growth, two other drivers include fintech disruption and the high costs of operating a traditional retail bank. Both of these factors have caught the attention of banking executives as they set their minds on accelerating digital transformation with a focus on high return, low risk.
Q. Some commentators believe banks must learn from Big Tech in order to survive. Do you agree? Please expand.
I agree completely; we’re living in the era of the ‘ecosystem’. All the seismic shifts we’re seeing in technology, be it aggregation, embedded finance, DeFi or hyper-personalisation are all enabled by the foundation of an ecosystem.
When financial institutions work with a strategic partner like Zafin, which has made the strategic investments in a best-in-class ecosystem, they’re able to capitalise on opportunities more quickly and safely, and will be better positioned for growth now and at the other side of the pandemic.
Q. What are currently the obstacles to adopting Open Banking? Is it more likely to 'take off' in some regions rather than others?
I would argue that Open Banking has been in the US for some time and will only continue to grow there. By definition, Open Banking is about the secure sharing of financial information that customers are aware of and have authorised. Under that definition, we’re seeing aspects of this well underway even though its full potential remains to be seen.
Third-Party Providers are a natural outcome of Open Banking, whereby they can create propositions beyond what a bank normally does to enable banking functions such as payments, borrowing, saving and so on. Once again, some of these are already present through industry-led initiatives, whereas regions such as the EU have taken the pathway of regulation such as PSD2.
The industry-led initiatives we’ve seen in the US have also had the added advantage of guard-rails that regulatory bodies like FFIEC and CFPB provide. There are also other technology-led initiatives such as API definitions that are set out through the FS-ISAC.
I would argue the future of Open Banking in North America will be through the natural evolution of the guidelines and API definitions that have been published, as well as the natural progression of industry initiatives.
Q. Are there any other bank tech trends you'd like to discuss?
Coreless banking. Zafin has been pioneering some of the work around externalising functions out of the legacy core to drive a more ‘fintech nimble’ bank, while not having to deliver a ‘heart and lungs’ core bank replacement.
Real life examples of this include moving some of the core functions of a banking system, such as product and pricing to a platform like Zafin. Origination, onboarding, KYC, risk, and compliance are all other examples of externalising banking functions for added agility.