Banks are facing more competition than ever before

The size of cross boarder payments is predicted to expand significantly over the next few years, especially between Business 2 Business (B2B) as more organisations transact internationally.

Cross boarder payments 2023-2030 market size

Historically, banks would have taken the ‘lion’s share’ of the global payments but these institutions are now facing pressure, not only from the plethora of FinTech firms offering new, cheaper and more efficient solutions, but also new methods of payments such as digital currencies; all challenging the banks like never before. Ex-Barclays’ boss, Antony Jenkins, has decried the banks as "museums of technology which have failed to properly embrace true digital transformation and are consequently shedding huge numbers of customers to nimbler tech-first rivals”. Based on a survey of 300 banking leaders and managers at banks in EU and Asia a recent report, ‘Global Banks and the Transformation Illusion Slowing their Progress’, shows that:

75% of the banks surveyed are attempting to accelerate their digital transformation this year

In Asia, change is afoot as Hong Kong attempts to appear more embracing of digital assets which, in theory, has seemed almost like a volte-face for the Chinese who had been cracking down on cryptos. Unfortunately for CNHC, the issuers of the Hong Kong $ stablecoin and HKD, the team were taken away in handcuffs. So, it seems Beijing is creating not a welcoming playing field for crypto but, instead, a highly controlled and strict compliance regime that allows its jurisdiction to prohibit and prevent, so potentially undermining digital Yuan dominance. The digital Yuan - also known as e-yuan, e-CNY, digital renminbi, or digital RMB issued by the Chinese government, has, to date, only been used by 20% of the 1.4billion Chinese citizens, although Chinese authorities claim that the People’s Bank of China (PBOC) digital currency is still at the pilot stage, having only been introduced to the coastal areas of China. As reported by the Foreign Policy Research Institute: “Users’ data will not be shared with government officials “unless stipulated otherwise in laws and regulations,” according to a PBOC White Paper. Article 28 of the Cybersecurity Law already allows the government to acquire data from any Chinese entity in the name of “national security,” so in reality, anonymity is actually conditional and ambiguous”.

So, it seems that with every week passing there is an announcement that another digital currency is being issued and that the banks are beginning to embrace change. The blockchain specialist R3 has announced it has been selected by the Bank of Italy and its ‘Innovation Hub for Project Leonidas’ involves eighteen Italian banks exploring the pros and cons of a wholesale CBDC. The Italians are no strangers to digital currencies as they have been running Spunta Banca, based on Distributed Ledger Technology (DLT), over the last three years which has processed over 600million transactions. Following the passing of recent legislation allowing digital currencies, Japan’s largest bank, Mitsubishi, is to launch a stablecoin not on one but four different blockchains (Ethereum, Cosmos, Avalanche and Polygon) and so enable payments to be transferred for free. If successful, this could prove a huge boost for stablecoins as circa one quadrillion yen is transferred by businesses within Japan per annum. And in Finland, Membrane Finance has launched EUROe - Europe’s first and only EU-regulated full-reserve stablecoin and payment network. Meanwhile, the publication Tokenizer has reported that: “ABN-AMRO, AXA IM, Banco Santander, Crédit Agricole CIB, Société Générale-FORGE and VISA, aim to promote new models for digitizing capital markets through distributed ledger technologies”. The two main objections these banks are trying to achieve with this project ‘CAST’ are:

It seems inevitable that digital currencies in the form of stablecoins and/or CBDC are on track although this leads to concerns regarding privacy - something that many other jurisdictions worry about. After all, will CBDC and/or stablecoins give governments the ability to have oversight of who is spending what, with whom, when and where? However, the introduction of a CBDC for retail purposes seems unlikely; why would you leave your cash in a retail bank when you could instead deposit your money with a central bank? Ultimately, if the depositors were to move money from retail banks then this could seriously undermine fractional banking. The main message is that traditional banks with their outdated IT infrastructure and systems are facing competition and the highly lucrative markets they have monopolised for years are now being targeted by newer, ‘nimbler’ banks, FinTech firms and new ways of making payments. The common thread for the competition is that they are digital and will increasingly be using technologies such as AI, big data, IoT, blockchain and machine learning as opposed to quill pens, ledgers, cheque books and faxes....

WebThis article first appeared in Digital Bytes (20th of June, 2023),
a weekly newsletter by Jonny Fry of Team Blockchain.