Major Banks Feel the Pressure
The virtual currency financial services market is still getting its legs beneath it. Volatility and security continue to be major concerns, but people are excited about the prospect of new crypto-based banking technologies. This growing market demand for digital banking products has exposed major financial institutions to a new wave of competitors.
In an annual report to the SEC on bank operations and business risk, Bank of America admitted that it has lost clients who “choose to conduct business with other market participants who engage in business or offer products in areas we deem speculative or risky, such as cryptocurrencies.” The bank’s unwillingness to embrace cryptocurrencies has also impacted clients’ willingness to do business with Bank of America and may negatively impact the bank’s earnings over time.
Goldman Sachs pointed to cybersecurity concerns as its main problem with cryptocurrencies, identifying distributed ledger technology as a growing field in finance, but one which “may be vulnerable to cyber attacks or have other inherent weaknesses.”
In short, the banks are concerned about their inability to meet growing consumer demand for blockchain-based financial services. Bank of America complained that adopting the popular new fintech “could require substantial expenditures.” Goldman Sachs was similarly negative, although it cited security concerns for its reluctance to support many digital currency services. These positions are pretty consistent with the sentiment across the market, as most major banks have been reluctant to come around to cryptocurrencies and related blockchain-based financial products and services.
Technological Disruption at its Very Best
In general, competition is good for the consumer and bad for the producer. It pushes down prices, commissions, and fees and encourages more generous incentives to attract new clients. At the same time, higher competition makes it harder to squeeze profit out of an increasingly crowded marketplace.
Competition often arises only after new technology is created. After all, AT&T couldn’t dominate the telecommunications market before the telephone was invented, and Amazon would never have been a threat to Walmart if the Internet didn’t exist. In this way, great technological innovation is all about economic disruption. Truly great technological breakthroughs are not valued because they’re on-trend, they’re valued because they create a new and better way of doing things.
Decentralized blockchain technology is just that – a new and better way of transacting digitally. They have the potential to completely change the way we use money in an increasingly online world, and unless the big banks can get with the program they might find themselves left out in the cold.
Attempting to Avoid the Inevitable
In the U.S., the banking industry has two major sectors: regional banks and thrifts that focus on one geographical area, and major national brands. The mega banks tend to offer services like international transactions and underwriting that aren’t always available at regional institutions, which mostly limit their business to deposits and lending. This is the way banking has been done in America for generations. Now, however, the digital currency revolution is looking to shake things up.
The new wave of fintech services is causing people to question the usefulness of brick-and-mortar institutions. Online-only banks like Ally and ING Direct offer a full suite of FDIC-insured banking services to a growing customer base. Capital One, one of America’s top-10 banks which boasts a robust online presence, is actually re-branding its branches into cafes. Rather than waiting in line to talk to a teller, instead you can enjoy a cappuccino with a “digital lifestyle coach” that can help you meet all of your banking needs.
The digital age is upon us, more breakthroughs in blockchain technology will inevitably bring a greater suite of online financial services to our doorstep. This spells trouble for the big banks, who have been less than enthusiastic to get with the times.
Although deregulation has increased competition among the established banking institutions to some degree, rock-bottom interest rates have bolstered profitability for several years. With the Fed hinting at several possible interest rate hikes over the coming year, the major U.S. banks may be seeing slimmer margins. As a result, the last thing they want is more competition.
However, banks reporting record profits in 2017, and tax reform is set to save the industry billions starting this year. Indeed, the mega banks have been riding high since bouncing back from the 2007 financial crisis, and surely they want to see the good times keep on rolling. But if this is the case, maybe a little competition is just what the doctor ordered.