Unlocking Potential: Modern Revenue Streams for Banks

?? Happy New Year from all of us here at Blockmate! ??

In 2024, we're going to be exploring the intersection of the digital asset space with modern institutions and technology. For the first of our deep dives this year, we're going to be exploring potential new revenue streams for banks, how they can introduce crypto services, and everything you need to know about MiCA. Let's get started!

In the landscape of modern banking, traditional brick-and-mortar institutions are undergoing a metamorphosis into something much more innovative and exciting. From the rise of neo-banks and AI-powered customer support to the emergence of invisible banking, customer perceptions of finance and banking are experiencing a profound shift.??

The challenge for banks lies in adapting and diversifying their sources of income to stay competitive. This newsletter takes a comprehensive journey through four key strategies banks can implement to generate new income and position themselves as pioneers in the ever-evolving world of finance.?

4 potential revenue streams for modern banks???

Embedded finance?

Embedded finance or Banking-as-a-Service (BaaS) is the financial sector's solution to the rising demands of customers in the digital era. The BaaS market, valued at $66.8 billion in 2022, is anticipated to witness a remarkable surge, projected to reach an impressive $622.9 billion by 2032.??

Embedded finance, often referred to as Banking-as-a-Service, signifies the integration of financial services and infrastructure into non-financial products and services. This comprehensive approach spans a wide array of services, such as Buy Now, Pay Later (BNPL), in-game purchases, Tesla insurance, payments in ride-sharing apps, and Apple Pay. Non-financial entities can incorporate banking services and features into their offerings, crafting a seamless customer experience.?

Banks play a pivotal role by providing the necessary infrastructure through Application Programming Interfaces (APIs), enabling companies to seamlessly integrate these services into their apps, websites, or platforms. This flexibility allows third-party businesses to deliver a tailored and unique experience to their customers.

Through strategic partnerships with banks, these businesses can offer a range of branded financial products and services to their customers, including credit cards, insurance products, loans, and embedded payments.?

For banks, embracing embedded finance unlocks many advantages:?

• New Revenue Streams: The integration of embedded finance introduces diverse income sources, including service fees, API subscription fees, and commissions.?
• Acquisition: At a fraction of the typical costs, banks gain access to a significantly larger customer base through embedded finance, fostering customer acquisition with heightened efficiency.?
• Cost-Effectiveness: Leveraging existing infrastructure and IT capabilities, banks can seamlessly adapt these services to a BaaS model, making it a cost-effective transition to third-party usage.?
• Forward-Looking Vision: With the embedded finance market's value predicted to surge, the BaaS model positions banks to proactively adapt to the evolving financial landscape, meeting the surging demand for frictionless customer journeys.?

Embedded finance extends the reach of financial services beyond traditional banking channels, establishing mutually beneficial partnerships between banks and non-financial entities. This collaboration not only enables banks to generate additional income but also facilitates the expansion of their customer base by delivering financial services in innovative and non-traditional settings.?

Crypto Services?

Following a notable decline in 2021, the digital asset market is poised to hit $80 billion in 2024, with projections foreseeing a substantial increase to $102 billion by 2027. The demand for crypto services from banks is on the rise as customers seek reliable platforms for storing and managing their crypto assets.?

Mastercard research underscores this trend, revealing that 65% of customers express interest in their banks offering crypto services. Additionally, Visa reports that 35% of surveyed crypto owners plan to switch to a bank providing crypto products within the next 12 months.?

Despite associated risks, it's evident that there is a niche for crypto products within the offerings of banks and other financial institutions. For the crypto-native or crypto-curious customer, the bank serves as a bridge between traditional financial services and the cryptocurrency ecosystem, facilitating a seamless and—most importantly—secure experience.?

With the introduction of the MiCA (Markets in Crypto-Assets) regulation in the EU, companies providing crypto services must obtain licenses from national authorities and adhere to stringent security measures and anti-money laundering compliance. While this might initially appear as a barrier for banks hesitant to enter the digital asset space, collaboration with crypto-native fintech organizations presents a viable avenue for overcoming these challenges safely.?

Banks can extend a range of services and products within the realm of crypto, including:?

• Onboarding: Ensuring compliance with regulatory requirements, such as KYC, CFT, and AML checks.?
• Asset Management and Custody Solutions: Catering to institutional clients and high-net-worth individuals, banks may offer cryptocurrency custody services to safeguard and manage digital assets. Additionally, they can assist customers in managing their entire financial portfolio, encompassing both fiat and crypto.?
• Trading Services: Enabling customers to buy, sell, and trade cryptocurrencies directly through their bank accounts. This service may feature a user-friendly interface, real-time market data, and competitive exchange rates.?

The integration of crypto services brings a myriad of benefits for banks:?

• Diversified Revenue Streams: Cryptocurrency services introduce new income streams, including transaction fees, custody fees, and trading commissions.?
• Customer Attraction and Retention: Banks can appeal to a tech-savvy and younger customer base actively seeking integrated crypto services, thereby fostering increased customer loyalty.?
• Increased Investment Opportunities: Providing clients with access to the liquidity of the cryptocurrency market, expanding investment options within their portfolios.?
• Enhanced Security: Leveraging existing security infrastructure to offer a heightened level of security for cryptocurrency holdings.?
• Competitive Edge: Banks that seamlessly integrate cryptocurrency services position themselves as trailblazers in the ever-evolving financial landscape.?

Tokenization??

With a projected market value of $10.75 billion in 2030, the tokenization sector stands poised to revolutionize the management, trading, and perception of assets.??

Tokenization is the use of smart contracts and blockchain technology to represent ownership or rights to an asset. It converts the value or ownership of an asset into a digital token that can be recorded, transferred, and traded on a blockchain. Each token symbolizes a fraction or the entirety of the underlying asset, and the ownership and transfer of these tokens are facilitated through smart contracts.?

Banks can offer asset tokenization services by evaluating physical or financial assets and converting them into digital tokens on a blockchain. In this industry, banks can implement fees for the tokenization process, custody services, and the facilitation of token trading.??

It's important to note that, under the impending MiCA regulation set to come into full effect at the end of 2024, banks may need to maintain a specific level of equity to provide these services.?

The advantages of asset tokenization include:?

• Tokenization Fees: Banks can levy fees for the entire tokenization process, custody services, and secondary market transactions, providing a diversified revenue stream.?
• Enhanced Liquidity: Tokenization enhances the liquidity of traditionally illiquid assets, making them more accessible for investors seeking fluidity in their portfolios.?

• Market Expansion: By offering tokenized assets, banks attract new customers and investors eager to diversify their portfolios with innovative, digitized, and more accessible investment options.?
• Compliance and Trust: Banks, adhering to legal and regulatory standards, ensure that the tokenization process maintains transparency and security, fostering trust among investors.?
• Competitive Position: Banks engaging in asset tokenization position themselves as pioneers in this evolving landscape, establishing a competitive edge in the financial industry.?

Asset tokenization emerges as a significant revenue source for banks, presenting an avenue to participate actively in the burgeoning trend of digital ownership and the blockchain economy. This unique service not only allows banks to cater to evolving investor preferences but also positions them as leaders, attracting a broader range of investors interested in exploring alternative asset classes in the digital realm.?

AI-powered personal finance management???

AI-Powered Personal Financial Management (PFM) represents a cutting-edge approach for banks to deliver highly personalized financial advice, insights, and recommendations to their customers. Leveraging vast troves of customer data, banks can use AI algorithms—with explicit customer consent—to generate tailored recommendations based on the individual's unique financial situation and goals.?

AI algorithms delve into a customer's financial behavior, objectives, and risk tolerance, offering customized guidance for savings, investments, and debt management. This service can be monetized through diverse models, including subscription plans, service fees tied to assets under management, or premium features for specific account tiers.?

The benefits to banks include:?

• Enhanced Customer Engagement: AI-driven financial advice fosters sustained engagement with the bank's services, cultivating increased customer loyalty.?
• Increased Assets Under Management: Personalized investment recommendations attract a broader customer base to invest through the bank's platforms, resulting in a growth of assets under management.?
• Cost Savings: AI applications contribute to significant potential cost savings for banks, estimated at $447 billion in 2023, streamlining operational efficiency.?
• Additional Subscription Revenue: Banks can introduce subscription fees, offering customers premium access to AI-powered financial advice as an additional revenue stream.?
• Competitive Advantage: The provision of sophisticated AI-driven financial advice positions banks as leaders, setting them apart from competitors and fintech startups.?

Implementation of AI-powered personal finance management can take various forms, from in-app recommendations to the integration of AI-powered assistants. This strategic adoption allows banks to furnish individuals with a comprehensive overview of their finances and actionable insights, empowering them to make informed decisions and progress toward their financial goals.?

The future of banking

For the forward-thinking bank, the future is bright and full of possibilities. By embracing change and determining the best route for growth, banks can ensure sustainable success. Next week, we're going to take a closer look at how banks can safely and securely explore the world of digital assets. Stay tuned!

What do you see as the future of banking? Any emerging trends that you think could change the face of finance forever?