Are banks being pushed to extinction by the emergence of cryptocurrencies and decentralized finance? Will the emergence of blockchain lead to the end of local banks? Is there room for both to coexist in the future?
“In 10 years, there will be no banks, I’m afraid,” asserted Andrey Sharov of Russia’s Sberbank in a 2016 interview. Rather than an all-or-none outcome, the financial landscape in decades to come will more likely see services migrated to the blockchain with banks focusing on relationships with their customers.
There is a future where both can co-exist, even though these banking disruptions will result in an unfamiliar landscape. For example, as of February 2022:
- Warren Buffet invested $1 billion dollars in Nubank,, a digital financial service provider.
- Central banks are creating central bank-controlled digital currency (CBDC) versions of their physical fiat currencies. 9 have been released, another 31 are in beta — view a map of their progress.
- Adoption by hundreds of financial institutions in over 55 countries of blockchain-based technologies like Ripple to move funds across borders almost instantly (versus several days for the legacy SWIFT service).
- Following interest in digital currencies (as noted by the Congressional Research Service) Kraken has received a bank charter to provide custodial cryptocurrency services, followed by the U.S. Bank.
Let’s look at examples where crypto can help support existing services and also innovate on processes and efficiency.
Checking and Savings Accounts
Currently each banking institution maintains checking and savings account data within the bank’s own distributed databases. There’s no practical reason why the financial transactions can’t migrate to a public or private blockchain (while the bank protects each customer’s personally identifying information – the individual account holders name, address, tax IDs).
Wealth-building With Cryptocurrencies
Abra Earn allows customers to earn interest on their cryptocurrency holdings, paid weekly. Rates depend upon the currency. Currently supported are Bitcoin (BTC), Bitcoin Cash (BCH), Cardano (ADA), Ethereum (ETH), Litecoin (LTC), Paxos (USDP), Stellar Lumens (XLM), Tether (USDT), TrueUSD (TUSD), and USD Coin (USDC).
Banking the Unbanked
The unbanked, underbanked, or “credit invisible” are those who do not have bank or credit card accounts and don’t use any banking services at all, including checking and saving accounts and debit cards. The underbanked are those who’ve used alternative financing options during the previous years, including paycheck cashing services, money orders, and rent-to-own services. The “credit invisible” have no credit history at any of the three national credit bureaus (Experian, TransUnion, or Equifax).
Stablecoins, a type of cryptocurrency tied to the value of fiat currency like the U.S. Dollar, allow the unbanked to have financial services without banks. Abra supports a variety of stablecoins; check the app for stablecoins like USDC.
Debit and Credit Cards
Just as checking and savings accounts will find a shared existence between the blockchain and the bank, it’s likely that the responsibility for debit and credit cards will fall the same way. The financial transactions will most likely live in the blockchain and the responsibilities, competitive perks, and prestige of certain debit and credit cards will continue to rest with the bank.
Remittances — those monies sent home by workers laboring in foreign lands — are on track to reach $597 billion through 2021, according to the International Monetary Fund (IMF). While traditional national banks don’t provide a robust remittance infrastructure, providers like Western Union are both expensive and slow.
Blockchain-based remittances of cryptocurrencies and stablecoins have rendered much of this business obsolete almost overnight, with transactions instead being inexpensive and instant.
Loans (Personal, Home, Vehicle, Business)
Evaluating the credit-worthiness of loan applicants is already algorithmically driven, with very little being done in person by bank staff. The vast majority of loans are given for objects with a known value, and applicants have a known income stream. The modern loan approval process requires a vanishingly small amount of local knowledge.
The future of loan banking will be split between the blockchain containing general transaction information, the customer’s personally identifying information safeguarded by the bank, lending decisions derived from bank-specific algorithms, and loan servicing done in bank via a centralized accounting system.
Abra Borrow offers another view of loans in the cryptographic space: a user’s cryptocurrency is used as collateral without additional paperwork. Interest rates begin at 0% APR in certain circumstances.
Decisions about insurance coverage and rates are, like loans, famously data-driven. Actuarial tables take the guesswork out of whether insurance will be offered and at what cost. Again, local knowledge rarely influences the process.
Insurance is yet another well-defined algorithmic process which will become more competitive with more sources of input data. As other types of financial transactions migrate to the blockchain, the actuarial tables will become more accurate, leading to more customized insurance requests.
Merchant and Treasury Services
Banks commonly handle both merchant services (credit card processing, reconciliation and reporting, check collection) and treasury services (payroll services, deposit services).
The shape of the services won’t change in the near future, but the blockchain will be a tool for writing and reading financial information. Competition for these services will become fierce, as smaller, more nimble companies find it easier to set up and offer targeted services.
One of the bedrocks to modern banking is fund remittances — moving money between banks (perhaps between countries) as checks are cleared between banks, monies are loaned, and existing loans are serviced. Credit cards transactions are settled in a similar fashion. It’s doubtful that these fundamental needs will change but the record-keeping for these transfers will migrate onto the blockchain as the central banks take advantage of the economy of scale in distributed accounting.
Wealth Management and Retirement Planning Advice
It’s not a coincidence that the one aspect of modern banking that looks to expand over the next few years is the one that relies the most on human judgment. Understanding a customer’s emotional tolerance for risk and aspirational goals for retirement will allow banks to offer more tailored offerings for those needing financial advice.
Niches in providing financial planning will grow further apart as banks and their competitors find their institutional voices. Some will become more algorithmically driven, like Fidelity Investments, and others will champion human personalization, as Charles Schwab does.
It’s clear that the emergence of cryptocurrencies, decentralized finance, and the blockchain won’t not result in the death of the banking sector. The trend of replacing human value judgements with computer algorithms will accelerate as more financial information is pushed into the public blockchain. Banks, it seems likely, will continue to offer service outlets, but in a more crowded space with hungry competitors who have access to more and more online financial information.
In its logical conclusion, it’s easy to see banks as shells around central decision-making headquarters, and — thanks to the every-expanding capabilities of mobile banking apps — where local banks do little more than place cash into ATMs.
The generation now coming of age doesn’t recognize banking (or the vital neighborhood role of the bank manager) as portrayed in the movie It’s a Wonderful Life, and a few generations from now may not even understand the phrase “local bank”. All may become apps hanging from the blockchain.
Watch our video series: introductions to cryptocurrencies, Money Talks, and more!
Abra supports 117 cryptocurrencies and counting.