Whenever a disruptive technology appears, there is concern that it could threaten or even destroy what came before it. Bitcoin, a form of digital or cryptocurrency, has been available for a few years now and is slowly catching on, along with hundreds of other Internet currencies. While misunderstood at first, more businesses and consumers around the world are starting to see the potential of digital currency. It can provide greater security, anonymity, and flexibility compared to the conventional centralized financial system that appeared to be irreplaceable.
Now, those other financial institutions are starting to worry that they may not be so irreplaceable as they once thought. Some banks say cryptocurrency like Bitcoin could destroy them. Meanwhile, others are taking out patents on the blockchain technology behind the digital currency. Still others are saying there is considerable opportunity for everyone. This article looks at both sides of the “coin.”
Cryptocurrency as a Threat
Some banks have publicly admitted they see Bitcoin and other digital currencies as a threat, like French bank BNP Paribas. There is a fear that they will be made redundant and that consumers and businesses will prefer a system that supersedes having to deal with currency exchange based on global location.
Others may prefer the anonymity to keep their financial transactions untraceable, which a bank cannot help them do. Still others like those in developing countries now have a way to get involved in the global business environment where traditional financial institutions may have blocked them from participating. Whatever the case, financial institutions are now starting to pay attention and publicly acknowledging the competition that cryptocurrency is creating.
A UK report on digital disruptions from the British Banking Association also concludes that cryptocurrency is an industry threat, especially if financial institutions continue to ignore the changes in consumer and business behavior when it comes to money transfers. For example, the report stated, “Bitcoin users can handle many of their daily payment needs themselves, without the need for interaction with banks, and avoiding the need to incur bank fees.” When combined with the fact that more people are storing money in accounts like PayPal, banks are fin tech losing more revenue.
KPMG’s report, entitled, “The Changing World of Money,” also labeled digital currency as a threat to banks. They noted that Bitcoin and others are more adept at responding to issues. Some of these include industry, environmental, and audience changes. As such, the report explained that banks’ “legacy systems, data management, increased costs of regulatory controls and the increasing focus on remediation” slow their response speed. In contrast, digital currency transactions can happen in just a couple of minutes.
Opportunities from Emerging Digital Currencies
Other financial institutions are intrigued by the technology behind cryptocurrency known as blockchain, and online ledger of transactions that has now been explored for numerous other financial and non-financial applications.
One of the areas of opportunity within the financial industry relates to securities trading.
An American Banker article that looked at the threat and opportunities afforded by Bitcoin and digital currencies noted some potential areas banks should be considering that would help them. As the article noted, “The roles banks could play include processing payments, providing escrow services, facilitating international cash transactions, helping customers exchange their money for Bitcoins, and even making loans in the currency.
After financial crises like the one that hit in 2008, no one wants to experience another one. Other issues like the preferences for mobile banking and concern over fraud are also impacting traditional financial institutions. From those issues have appeared numerous fintech innovations that are revolutionizing how businesses and people bank and exchange money.
It would seem that there is nothing wrong with some healthy competition that pushes an archaic financial institution framework into the modern age, convincing them to innovate or be replaced. However, with banks like Bank of America looking at how they can use something blockchain illustrates how financial institutions can work through their panic about being replaced and leverage and adapt to this new technology to provide better solutions for their customers while preventing financial crises and crimes.
Therefore, the real threat here would be the lack of proactive exploration by traditional financial institutions to revolutionize their business models. At the same time, for digital currency to gain widespread acceptance through mass adoption, it has to earn a level of legitimacy that can be enhanced by the approval of financial institutions. In this way, it would seem that both could use the help of the other and develop a win-win-win for each other and their customers.