Digital assets challenge traditional banking

By Berivan Demir, Director of Products and Banking Relations at Clear Junction

After two years of explosive success for fintechs, the pace of innovation has yet to slow. Fintech startups raised $32.4 billion globally in Q1 2022which is up 27% year-over-year and is largely driven by venture capitalist investments in cryptocurrency, raising over $7 billion in funding in the first quarter alone.

The rise of digital assets, such as bitcoin and ethereum, could mark the next stage of financial evolution. These digital assets have generated substantial market interest (although the cryptocurrency market is currently experiencing something of a slump). Native players in the digital asset landscape have benefited from enormous value creation, while in the traditional enterprise space, companies have taken technologies developed and tested in the digital asset market and adapted them for payments. and settlement, record keeping, securitization and trading.

As adoption accelerates – and digital assets become more mainstream – the room for growth in profitability and market share for financial institutions in crypto has arguably never been greater – but where does this growth opportunity come from?

Over the past two years, bank customers have changed their expectations and demands of what they receive from their financial service providers. Transparency, speed and channel options; there are plenty of advances to be made by banking services to meet consumer expectations. Traditional banking institutions may serve the majority of customers today, but they suffer from a lack of agility. Technological advancements are held back by thick swaths of red tape, as any new service banks explore must be scrutinized from a compliance perspective.

Top Digital Banking Trends to Navigate

Especially in finance, it is difficult to find the balance between exploring nascent technology and complying with intense regulations. Early adopters of a technology often reap the greatest benefits, as it gives them a unique competitive advantage in the market before others take advantage. However, new technologies have steep learning curves and are time-consuming and resource-intensive for any business, no matter how nimble. Thus, understanding and predicting the most influential emerging trends becomes an extremely important strategy for financial services trying to carve out a place in a competitive market.

The first major digital banking trend to follow is the rise of digital payments. The pandemic has forced rapid changes across the world to keep the economy going. A recent Capgemini report revealed that by 2025, instant payments and e-money payments will account for more than 25% of global non-cash transactions, up from 14.5% in 2020. The speed, ease and reliability of digital transactions are advantages the average person is unlikely to give up and will continue to disrupt traditional payment channels like cash.

At the same time, as digital banking continues to grow, so does the amount of data that institutions can leverage. There are now countless number of terminals involved in digital payment processing, each with its unique data reported. Open banking, while not yet widely appreciated by the average person, allows banks and financial services institutions to unlock the potential of swathes of data generated by each user.

Open banking is a practice in which traditional banks share their users’ data with third parties, such as fintechs, for them to analyze and use. Some benefits of sharing user data openly like this include the ability for customers to identify the best financial services available to them, such as a credit card with a lower interest rate or helping lenders to get a more accurate picture of a consumer’s finances.

How to Create a Personalized Banking Experience

Open banking is an important key to use in meeting changing consumer demand. One of the key digital banking trends for financial services to consider is the demand for more individualized information about their money. The creation of personal customer information gleaned from data shared with open banking partners is a now compelling opportunity for financial institutions.

If a customer has purchased a flight and a rental car, chances are they are also looking for a hotel. Banks that can offer the most attractive hotel to that customer based on their personalized information have a huge advantage in retaining customers. Spending patterns, purchases of specific items, and even geographic spending patterns are just a few of the myriad of financial data generated by digital transactions that could be taken into consideration. Partnering with fintechs that specialize in this data analysis and profiling can allow traditional banks to keep pace with disruptive challenger banks that are also trying to tap into this niche.

Where will the money be held in the future?

Digital banking services such as touch to pay and mobile banking are not new, but the potential of digital banking is still far from realized. Physical cash is unlikely to disappear anytime soon – not in the next decade or two, but the benefits of data generated by digital transactions will likely become too great to ignore.

The concept of a country creating a central bank digital currency (CBDC) is being explored by almost every major economy in the world. CBDCs are digital assets, similar to cryptocurrency, issued by a central bank, which are intrinsically tied to the value of that country’s fiat currency. Countries like the UK, US, India, and China are already exploring the possibility of transferring fully digital currencies through a CBDC.

The way to go. The role of fintech in the evolution of digital payments.

It is clear that digital assets are going mainstream and will shape the evolution of financial services in the years to come. The ability to combine the technical properties of digital assets and the autonomous application of business logic between participants and adversaries with the trust, reach and track record of leading financial institutions is significant.

Traditional banking institutions suffer from a lack of agility, but by partnering with disruptive fintech, they can respond to rapidly changing market demands. The explosion of the financial market has opened the doors for banking providers to transform the services they offer into safer, faster and more personalized solutions, but they need help to realize them.

Fintechs can partner with banks to help them explore emerging technologies such as digital assets, the rise of digital payments, open banking and digital banking. Consumer demands for increased speed and personalization are driving the financial market to react quickly, yet accurately, to ensure it stays ahead of its disruptive competitors.