What was deemed a novelty a short time ago has morphed into a significant innovation in the financial industry—and it is here to stay. As reported in Credit Union Innovation, one-quarter of CU members held cryptocurrency in the past 12 months, including 52 percent of millennial CU members and 47 percent of Generation Z members. This trend not only interests the younger generations, but it’s also spanning across all demographics and has even piqued the interest of boomers.
Cryptocurrency is a decentralized digital currency that uses blockchain technology to secure and record transactions. Although cryptocurrencies are a vehicle with great prospects, guidance and regulation regarding crypto are scarce, which has left many financial institutions leery of adoption. Security and volatility have also held banks and credit unions back when considering this space. But what if, instead of fearing the risks of this technology, we look ahead to its potential benefits?
There is a growing curiosity about crypto and the foundational blockchain technology it’s built on, and financial institutions must take notice if they haven’t already. Adopting cryptocurrencies and blockchain technology could positively drive financial institutions to a new era of improved efficiencies and innovation. American Bankers Association’s publication, “Understanding Cryptocurrency,” provides a solid overview for financial institutions as they navigate on-going and emerging trends.
Consider strategic use cases for cryptocurrency and blockchain technology instead of the “wait and see” thought process many financial institutions have taken while waiting for regulators to give the thumbs up. We are still in the early stages, and banks and credit unions should continue to learn all they can, including understanding consumer demand for cryptocurrency and other financial services that are built on blockchain technology.
With the introduction of blockchain technology, we also need to talk about Decentralized Finance (DeFi). Both crypto and DeFi use blockchain technology and blockchains can be implemented across a variety of use cases in the financial world, opening up new sectors of banking. These new opportunities will benefit the financial institution and the consumer by allowing faster, cheaper, more secure, and more inclusive transactions. Additionally, beyond payments, blockchain provides financial institutions with an opportunity to streamline their workflow and enhance any complex internal processes.
To assess the risk, it is essential to evaluate the need. First, financial institutions need to find out what their consumers want. What is the current interest, and can you grow the demand for crypto? Are your consumers educated in the nuances of crypto? Are they already participating in the crypto marketplace? Financial institutions can easily identify whether their consumers are leveraging crypto, which can then offer insight into how interested those consumers would be in using those services through their trusted financial institution.
As mentioned earlier, it’s more typical for the younger generations to leverage crypto as a normal financial service. However, demand is starting to penetrate the 40-plus age group. This target market has significantly more financial security, and they are actively looking for alternative investments. From an investment perspective, crypto is viewed similarly to stock and is considered a digital asset.
Indirect members are a significant opportunity. These consumers wish to engage in cryptocurrency and seek out financial institutions as a trusted environment because they feel more comfortable and protected. Offering cryptocurrency provides an additional opportunity to convert indirect members to active members. As indirect members begin using their financial institution’s cryptocurrency services to move funds from their savings or checking accounts into cryptocurrency, they also begin to self-serve their loans or check their balances. Therefore, they become more active with the financial institution’s services. Additionally, now that they have an ongoing relationship with a trusted service provider, the indirect member is more likely to seek out other products that the financial institution offers.
Crypto and blockchain have evolved. Still, financial institutions have time to differentiate themselves in this space and act as a source of knowledge and expertise. In addition, consumers have stated that the lack of trusted information is a key reason they don’t invest in or use cryptocurrencies.
According to The Financial Brand, a new Mastercard report stated, “Banks and credit unions still have the upper hand when it comes to consumer trust. More than half of people say they strongly trust traditional providers with their data in comparison to only 32 percent saying the same of fintechs.”
When a consumer’s financial well-being is at stake, trust in the brand and overall education of new offerings is needed on many levels to reduce hesitation. To actively participate in cryptocurrency, be prepared to confidently educate your consumers.
However, understanding the processes, benefits, and risks of crypto is critical, but first, the financial institution will need to educate itself on the many opportunities out there that consumers seek. Shift traditional thinking to show you are a proponent of decentralized finance and look at crypto not as a competitor but as a partner. The opportunity to educate consumers and develop strategies to grow their wealth is a significant benefit that far outweighs the time and resources needed to gain the expertise. A financial institution is a trusted source and can successfully guide and advise consumers with better results than a third-party cryptocurrency platform that does not have anyone’s best interests in mind.
Crypto assets were created as an alternative to the traditional banking infrastructure. As a result, crypto is not linked to a centralized government, bank, or agency. Instead of the consumer trusting a centralized intermediary in these transactions, the trust is placed in the blockchain code and the distributive nature of the blockchain. As decentralized finance progresses and cryptocurrency continues to gain momentum, financial institutions have an opportunity to impact and influence how these regulations will develop. If the banking industry wants to compete and profit in the world of decentralized finance and cryptocurrency, they need to lobby regulators and work together to create rules that work in their favor.
Although minimal guidance and regulation surrounding digital assets exist, financial institutions shouldn’t be leery of adopting cryptocurrency and blockchain technology. Yet, the benefits cannot be realized until the shift is made to see decentralized finance and cryptocurrency as an opportunity. Only then can processes be streamlined, and the banking industry can move to the next level of efficiency and innovation.
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Doug Lokrantz is a Project Manager with 20+ years experience in financial services. Doug’s experience in financial services is broad. During his tenure, he has held positions in strategic program/project management, product management/development, emerging payments, and innovation.
To schedule a time to speak with Doug or one of our other consultants about your financial institution’s cryptocurrency strategy, please call us at (844) 415-7962 or click here to book a call online.