The Digital Asset Revolution: The Benefits for Banks and Fintech

As we discussed in last week's newsletter, the potential of new revenue streams is beckoning financial institutions toward integrating digital assets into their service portfolios.?

The journey toward adopting these assets presents some complexities. Still, it offers a promising avenue for financial institutions to generate additional income, attract a new wave of customers, and maintain their competitiveness in the shifting financial landscape.?

We're going to explore the benefits that digital assets can offer banks and outline a strategic approach to safely incorporating these assets into their offerings.?

Integrating crypto services?

For banks tentatively approaching the realm of digital assets, a compelling narrative unfolds when examining the expansive statistics of the crypto market:?

• The crypto market size is expected to grow to $81 billion by 2030.???
• Cryptocurrency revenue is projected to reach $37.9 billion in 2023.?
• The cryptocurrency banking market was valued at $1.49 billion in 2021 and is expected to reach $2.52 billion by 2029.?
• The number of digital asset holders is expected to reach 994.30 million by 2027.?
• 55% of Americans aged 18-34 plan to buy cryptocurrency in the next five years.???
• Mastercard research has revealed that 65% of customers are interested in their bank offering crypto services.???
• According to Visa, 35% of crypto owners surveyed indicated that they are likely to switch to a bank that offers crypto products within the next 12 months.???
• The global tokenization market size was valued at $2.39 billion in 2022 and is projected to grow from $2.81 billion in 2023 to $9.82 billion by 2030???

Navigating crypto banking?

In the ongoing digital transformation in finance, banks must adapt to meet the shifting preferences of their customers. Crypto services, including custody, trading, tokenization, and remittances, are often common topics of discussion. In practice, their implementation is hindered by challenges such as risk, complexity, and capital requirements.??

A preliminary step could be adopting a passive overview, allowing customers to seamlessly connect their crypto wallets to their accounts, with automatic Anti-Money Laundering (AML) risk assessments conducted in real time. Collaborations with crypto-native fintech firms can provide banks with the necessary expertise and infrastructure.?

This first step opens up a wide range of possibilities and offers banks and fintechs a strategic edge in the following areas.?

Diversification of revenue streams?

By incorporating digital assets into a bank's services, new opportunities for generating income are created. This includes fees for transactions and custody, as well as commissions from trading digital assets. This is particularly appealing in an environment where traditional interest rates linger at historic lows.?

Attracting new demographics?

The cryptocurrency ecosystem has nurtured a passionate tech-savvy community. Banks that integrate digital assets can appeal to a diverse array of new customers.?

• Crypto-savvy customers: Seeking secure and regulated means to manage their digital assets, banks can tap into this substantial segment by offering tailored services.?
• Younger Generations: With Gen Z and Millennials constituting over 94% of crypto buyers, banks offering crypto services gain a competitive edge in attracting the next generation of earners. Given that 62% of Gen Z users don't even have traditional bank accounts, banks have an opportunity to bridge the gap and establish a connection with this demographic.

Incorporating digital assets: Charting the path ahead?

For financial companies considering crypto services, there are two primary routes:?

• In-House Development: While this allows banks complete control, it can also entail substantial costs through development, implementation, and regulatory compliance.?
• API Integration: Third-party APIs allow banks to seamlessly integrate digital asset services into their existing infrastructure. This path offers customizability, flexibility, and significant savings in terms of development and expenses.?

Collaboration with crypto-native fintech firms is usually the more cost-effective and streamlined solution for most banks. These specialized firms excel in providing robust, secure, and regulatory-compliant API solutions, enabling banks to concentrate on their core competencies while effectively expanding their service offerings.?

Navigating the regulatory landscape?

The integration of digital assets into banking services navigates a labyrinth of regulatory requirements. Financial institutions in the EU, for instance, are subject to distinct regulations compared to Crypto-Asset Service Providers (CASPs). However, adherence to certain standards and regulations is imperative.?

Partnerships with crypto-native fintech firms play a pivotal role in ensuring seamless integration while complying with regulations. This involved compliance with the MiCA (Markets in Crypto Assets) Act in the EU and fulfilling Anti-Money Laundering (AML) and Counter Financing of Terrorism (CFT) requirements.?

Embracing the digital revolution?

The benefits of integrating digital assets into banking services span beyond revenue diversification, attracting a new customer base, and securing a position at the forefront of financial innovation. It opens up a range of new services and income streams. For banks interested, the choice between in-house development and partnerships with fintech firms hinges on each bank's unique circumstances. However, the use of APIs from specialized firms is an easy and cost-effective starting point.??

As the financial landscape continues to evolve, the time is right for banks to embrace the digital revolution. The journey offers not only financial rewards but also can position banks as pioneers in shaping the trajectory of modern finance.?

How do you predict banks will adapt to the growing interest in crypto services??