Banks are the whip and buggy of the technology era.
We can video chat in real time with anyone on earth. Self-driving cars escort passengers across town. Satellites 300 km above the earth can pinpoint our location to within a few metres.
Yet it still takes three days to send money from, say, Chicago to Mexico City.
That’s because the global financial system relies on decades-old technology.
Blockchain and cryptocurrencies are changing that. And they threaten not just the old way of doing things… but entire business models.
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Financial institutions that rely on antiquated ways of doing things are going to have to adapt… or become obsolete.
Banks haven’t accepted the crypto revolution – yet
The most obvious financial system for disruption is international money transfers. The World Bank estimates US$689 billion will flow across borders in 2018, as migrants and immigrants send money home (what’s known as “remittances”).
Fees on those money transfers range anywhere from 5 percent to 9 percent (or even higher for small-sum transfers). Those fees generate financial institutions well over US$30 billion in revenues per year.
Cryptos are designed to transfer money with low costs, nearly instant transactions across borders, and increased security, reliability and flexibility.
But banks have resisted innovations like this. It’s hard to blame them. They’re sitting on a US$30 billion cash cow. That’s probably part of the reason why many banks have expressed scepticism (even hatred) towards cryptos.
For example, Jamie Dimon, the CEO of JPMorgan Chase, has called bitcoin “stupid” and a “fraud”, among other things.
But not everyone’s blind to crypto’s potential. Even the International Monetary Fund (IMF), the very definition of a slow-moving financial bureaucracy, is thinking about how cryptocurrency can interact with central banks. It recently said that central banks may one day issue their own cryptocurrencies.
“Above all, we must keep an open mind about crypto assets and financial technology more broadly, not only because of the risks they pose, but also because of their potential to improve our lives,” IMF Managing Director Christine Lagarde said.
Crypto is already changing the banking world
Whether or not banks want it, crypto is already changing the banking world.
For example, in early October, an international money transfer platform that’s as much as 70 percent cheaper than existing solutions launched consumer testing. On this platform, it doesn’t take days to move money across international borders… it takes seconds. And it’s powered by crypto.
The platform also frees up large chunks of capital for banks. No longer will they have to fully prefund accounts in local currencies, leaving it there in anticipation of future transfers.
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Now, local currencies can be converted into crypto, instantly sent around the world and converted back to whatever local currency the recipient desires. That gives banks access to cash they’d once left sitting in foreign bank accounts.
Another company is moving money between Mexico and the European Union. It currently takes 2-3 days to send US$1,000 across the Atlantic, and costs between US$40 to US$75. With crypto and blockchain technologies, that same transaction can be completed in two minutes at a cost of US$0.02.
It’s a huge step forward with staggering implications.
If you look at overall global money flows, more than US$155 trillion crosses international borders every year. And cross-border payments generate some US$300 billion in revenue for banks, according to management consulting company McKinsey & Company.
The revolution is coming
It’s a matter of time before crypto and blockchain technologies prove they can save banks and consumers huge sums of money and time. As more banks come on board, we’ll see even more benefits.
Faster transfers will lead to accelerated money velocity – the pace at which money changes hands. That, in turn, will speed up international business, boost productivity and ultimately accelerate innovation.
In this new environment, the earliest adopters will see the biggest profits – while driving down costs for consumers. Slower-moving banks will be forced to adapt or lose their customers. (After all, a customer doesn’t care about the technology behind a bank. He just wants services to be reliable, fast, cheap and easy to use. If a bank can’t keep up, the customer will go elsewhere.)
Revolutions don’t always start with a bang. Some start small, gathering strength and speed until they’re so big that anyone committed to the old way of doing things is swept aside.
Crypto is small now, but I’m certain it will revolutionise the way we bank. And it’ll happen far faster than anyone suspects.
Editor and Lead Analyst, Crypto Capital
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