With digital becoming the norm in the financial world, traditional banks are under threat from newer challengers and neobanks, having to rapidly innovate in order to keep up.
However, according to Petr Kozyakov, CEO at the global payment network Mercuryo, neobanks are the least of traditional banks’ worries, with cryptocurrencies and their reluctance to adopt digital assets more of a concern.
With 12 years of background in the payments industry, here he shares some of the reasons why traditional banks are still neglecting cryptocurrencies, and how they need to adapt to survive.
While institutional investors are adopting cryptocurrencies and investing heavily in Bitcoin, traditional banks remain hesitant to adopt digital assets. Even those financial institutions that are somewhat friendly towards crypto can still turn down digital asset transactions. According to a recent survey by RUSI and ACAMS, 63 per cent of financial institutions see cryptocurrency as a risk, which is an even higher rate than among governments (56 per cent). Here are some of the reasons why traditional banks are still neglecting cryptocurrencies:
Reason 1: Lack of Professional Staff
There are several factors behind this phenomenon, with one of the most prominent issues banks face is related to staffing.
In general, it’s safe to say that traditional financial institutions lack professionals who understand how to work with digital assets.
Large banks employ tens of thousands of people, but they don’t possess the necessary knowledge about crypto. As a result, they struggle to choose the right methods to process and integrate cryptocurrency transactions into their existing networks while staying compliant with local regulations.
Reason 2: Compliance Departments Still Believe Crypto Is Mainly Used to Facilitate Cybercrime
The second problem is related to compliance departments that are rather conservative at traditional banks.
Since their priority is to keep the bank as safe as possible, they remain distrustful of cryptocurrencies while refusing to understand what digital assets are for.
Instead of seeing the bigger picture – that individuals and organisations are using crypto to store value, purchase products, and transfer money across borders more efficiently –, they still associate Bitcoin with illicit transactions, drug trafficking, terrorism, and money laundering.
Ironically, according to the Chainalysis 2021 Crypto Crime Report, only 0.34% of all cryptocurrency activity was considered illicit in 2020. At the same time, the UN estimates that between 2% and 5% of the global GDP is connected to money laundering in a year (which primarily involves fiat currency).
It’s easier to ban something than to understand how it works and develop viable methods to integrate it into existing business processes. That’s why it is crucial for crypto companies to maintain a good relationship with banks – to keep answering all their questions while explaining anything unclear.
Reason 3: Banks Only Took an Interest in Crypto Now
The third issue that hinders banks’ crypto adoption is the fact that they have only become interested in digital assets now.
Since major banks are huge institutions with a lot of inertia, it will take quite some time for them to decide whether to adopt crypto and launch their digital asset solutions.
Banks Will Adopt Crypto But it Will Take Time
Despite their hostility towards cryptocurrencies, banks will definitely go forward to adopt digital assets so their customers can buy, sell, hold, and transact with them.
The question here is how long will it take for financial institutions to integrate crypto into their solutions. Will it be quick, or will it take 5-10 years?
For the process of adopting digital assets to be efficient, banks need trailblazers that will integrate digital assets in a way that they can be used by the average client. As mentioned earlier, right now, banks completely lack professionals who understand how financial institutions can adopt crypto.
For that reason, there will definitely be high demand for companies that can offer effective solutions for banks to integrate cryptocurrency operations into their ecosystems. These service providers spare financial institutions the trouble of dealing with compliance, monitoring, and legal issues while handling the processes’ technical side.
By now, it has become clear that those who can provide banks with such a solution will experience high demand for their products.
The Newcomers Threaten the Banking Industry
When we are talking about cryptocurrency adoption, it’s also important to mention neobanks, a new generation of financial institutions that offer innovative banking services to customers with an emphasis on convenience and cost-efficiency. Nowadays, neobanks are significantly lagging behind traditional banks in terms of customer base size and the number of processed transactions.
That said, neobanks’ distinguishing feature is their unique ability to attract new users easily and at cheaper costs than traditional financial institutions. For this very reason, neobanks will become a thorn in the side of conventional banks in the medium and long term.
When it comes to how the future will unfold, an interesting scenario will commence, in which neobanks will gradually kill off inefficient financial institutions offering high costs yet poor customer support for their clients. Major banks sensing the impending threat of neobanks can take multiple paths to compete with this new generation of financial providers.
The first one is to create internal neobanks within their own ecosystem as side projects. For example, both Barclays and HSBC have increasingly moved more of their services online, launching mobile banking solutions similar to what fintech providers offer.
At the same time, traditional banks could also buy up neobank players with promising products, integrating their solutions into the corporate ecosystem.
Banks Need to Innovate to Survive
Banks face two serious threats: neobanks and the rise of cryptocurrencies. And, unless they dedicate much of their resources to innovate, they will likely lose some of their market share to financial providers offering more efficient solutions at better prices.
Neobanks are among such providers that will gradually chip off bits of the banking market to become integral players within the industry.
While traditional financial institutions won’t just go away as more conservative people will continue to stick with providers with a long history, the younger generation who are more tech-savvy and crypto-oriented will lean towards the innovative options neobanks offer.
For these reasons, in 3-5 years, I believe neobanks will have significantly more clients than now, potentially taking up between 20% and 40% of the market.