Core Providers Play Key Role in Banks’ Crypto Ambitions

The rise of cryptocurrencies has been meteoric. What was once seen as an aberration, in the form of Bitcoin, has now grown to become the investment vehicle of choice for many consumers. A recent report by the University of Cambridge has found that there are an estimated 101 million unique crypto-asset users as of the third quarter of 2020, compared with an estimated 35 million users at the end of 2018, showing a staggering 189% increase. These users are now demanding more financial services specifically for their crypto assets, as they seek greater flexibility in how they save, spend and trade with their digital currencies. With figures like this, it was only a matter of time before mainstream banks took notice and, indeed, many are beginning to react accordingly. 

Cryptocurrencies have been viewed as a growing threat to many in the banking sector, with an ever-increasing number of consumers opting to move their money outside of the bank in order to invest it in other areas. However, as with many trends in the financial services sector, what can be viewed as a threat may also be a potentially fruitful opportunity. With banks now seeking to explore offering crypto services, many are turning to third parties for support in navigating this new landscape; it is here that core banking providers are playing a crucial role in shaping the roadmap of banks’ crypto agenda.

Crypto’s Watershed Moment

Hundreds of millions of consumers throughout Europe, the US and Asia now hold cryptocurrencies, and central banks have had to take note; indeed, most central banks are now forming strategies for some form of a central bank digital currency (e.g. the ECB’s e-euro project). For many, this signals that cryptocurrencies have hit a tipping point, where they will no longer be viewed as an aberration or niche product, but will become central to how many consumers choose to manage their finances. 

Modern Systems Essential

Given that we are dealing with digital currencies, the ability to compete in this sector is largely influenced by the tech stack a bank has in place. Banks will need to enable fully digital processes, such as digital risk scoring, credit rating, real-time bank rates, etc., which will be a cause for concern for those still operating on legacy systems, as these are not equipped to handle such complexities. Digital transformation has been a hot topic in banking for many years now, yet despite considerable investment, many are still struggling to make significant progress – a topic which we have spoken about at length. However, with the rise of fully digital currencies, it is no longer becoming adequate to simply maintain and build upon ageing systems, and banks are now turning to next-generation platform providers, such as Tuum, with increasing frequency for assistance in exploring crypto prospects, either as a greenfield project or via transformation of their core banking capabilities. 

Initial Explorations

We are already seeing some significant forays into crypto by banks. On the investment side, there is the recent launch of ETFs which follow the crypto market; whilst these aren’t necessarily a purely crypto-based offering, it is still a noteworthy illustration of where the market is heading. More notable are some recent partnerships between banks and fintechs, such as the one between crypto exchange Bitstamp and Estonian banking and financial services company LHV, which sees the bank rolling out cryptocurrency trading to its customers by utilising Bitstamp’s capabilities to provide an easy-to-use trading solution to their customers.

From a consumer perspective, there is a lot of demand for the development of a “buy-hold-sell” capacity for cryptocurrencies to be offered by banks, whereby a consumer will be able to take, for example, €100 from their savings account, put this into bitcoin, hold and see it, and then trade back out into fiat currency. Use cases of this kind are more limited, given that many larger banks simply do not have the risk appetite to venture into something as volatile as cryptocurrencies, but, for how much longer can this be the case? 

We are seeing an increase in calls for government regulation and oversight of cryptocurrencies, which may give banks the push they need to explore this sector once more concrete guardrails have been defined. A recent survey by New York cryptocurrency services company NYDIG found that 81% of cryptocurrency holders in the US would transfer their digital assets to their bank if it offered secure crypto storage. Given the increased trajectory of crypto, it won’t be long before this market is simply too big to ignore.

How Tuum Can Help

As a platform, Tuum is ideally developed to explore new use cases in crypto; modern, not batch-based, and modular by design, all of which ensure a frictionless banking experience for customers. We lay the foundation for improved performance, as well as streamlining the process for launching new digital asset value propositions. Additionally, our extensive experience in the banking sector means we are well placed to advise on navigating and adhering to regulations as and when they arise. As an example, we have recently begun working with a company who will provide access to multi-currency accounts to cryptocurrency businesses (exchanges & brokerages) and institutional investors, enabled by Tuum’s banking core module. Consequently, our product roadmap is now influenced by the long term objectives of this client, with features such as the inclusion of a ‘BTC’ balance within Tuum, allowing customers to see their BTC/fiat balances, in the works.

The Winding Path Forward For Crypto

As a market, crypto is still in its infancy, and the possibilities for new use cases are almost endless. One thing is clear; with completely digital currencies comes an increased urgency for improved digital capabilities. The crypto trend is not something that can be easily explored with a legacy system. Incumbent banks have a lot less leeway than their challenger counterparts who have the agility and flexibility to explore new use cases with ease; as such, to thrive in this new market, a modern core banking system is paramount. Beyond technological requirements, banks must always be mindful of the regulatory landscape, which is extremely volatile at present. Governments are waking up to the realities of crypto with varying results: in China, the government has taken a hostile stance, whilst in the USA regulators seem a lot more open to nurturing the growth of cryptocurrencies in a controlled environment. Beyond some early adopters, a lot of banks are simply waiting to calculate their risk before making a move.

How far off are we from seeing consumers coming to banks for crypto services? It’s difficult to say, but given the pace of change it may only be a matter of years. As with many current trends in the financial services sector, what can be viewed today as a peripheral concern can tomorrow become a central opportunity – the time to start positioning oneself is now.