Banks lag on corporate digital currency appetite

The opportunities offered by blockchain and digital currencies could not have come at a more challenging time for the world’s banks. Today’s banks are under threat from all sides – be that increasing regulation, a new wave of competitors, thin margins or the need to make major investments to update their technology.

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And that doesn’t capture a range of other challenges, including the switch to digital platforms, Open Banking or the fight to hire and retain talent.

“There is a significant gap between the help clients are looking for in developing approaches to blockchain and current bank offerings”

In this context, the world’s banks might be forgiven if, following the recent decline in value for “classic” cryptocurrencies such as Bitcoin, they are somewhat sceptical about the benefits of distributed ledger technologies (DLT), digital currencies and blockchain.

After all, certain business lines such as cross-border transactions remain broadly profitable for banks even if – as our new study, “The Great Switch: Major Corporates are Ready for Blockchain – but can Banks Deliver?” shows – corporate customers consider current arrangements to be slow, expensive and complicated to use.

The temptation is to run these existing services while competing for business in those services and investing in near-term priorities such as client web portals. Taking this option, however, misses a number of milestones over the next three to five years that will revolutionise banking as much as the switch from cash to electronic payments over the last 50 years.

These include more and better regulation surrounding digital currencies and blockchain – think the 2021 US OCC ruling that stablecoins are valid for banking transactions or the EU’s MiCA regulation due in 2023 – as well as moves by national central banks to introduce Central Bank Digital Currencies (CBDCs).

At present, some 90 per cent of the world’s central banks are some way along the path to creating a CBDC. According to the Atlantic Council, 11 countries have launched CBDCs, 14 more are piloting them and a further 73 countries are known to be actively researching or developing a CBDC.

The advent of CBDCs – which most major jurisdictions predict will happen by 2028 – will trigger huge adoption of blockchain technologies and banks must do more to prepare for this future. Especially when it comes to their client product and service portfolio.

The Reserve Bank of Australia has just formally announced a collaboration with the Digital Finance Cooperative Research Centre (DFCRC) on a research project to explore potential use cases and economic benefits of a CBDC in Australia. The project involves selected industry participants – including ANZ - demonstrating potential use cases for a CBDC using a limited-scale pilot CBDC that is a real digital claim on the Reserve Bank.

A “2001” moment

Putting the various challenges above to one side, it’s interesting to wonder why banks have not done more with blockchain and digital currencies. In many ways, we stand at a “2001 moment” with blockchain, digital currencies and DLT.

Those of a certain vintage will recall the hype surrounding the internet in the period between 1995-2000 and the vast swathes of investment placed in “dot com” companies boasting business plans – and technical capabilities – of varying quality.

After the 2001 “dot com” crash, various voices – including one senior executive at Microsoft, a British newspaper publisher and many music and film industry executives – confidently asserted that the hype around the internet had been unjustified and business could proceed as usual.

Fast forward 20 years and half of the top ten US companies by market capitalisation are internet-based companies or embed the internet in the core of their business, including the top three (Apple, Microsoft and Google).

The internet has transformed every aspect of our lives, from work to health, banking and leisure. The music, film and publishing industries are utterly changed, with many players too slow to see the future and react now gone forever.

Over the next 20 years, we expect blockchain and digital currencies to completely change the banking industry, introducing greater efficiency, faster settlement and vast improvements in transaction security with much richer transaction data and the capacity to bundle services.

We also expect competition in this space to intensify as new players scent the opportunity created by bank inertia. Banks are lagging – and the window is closing.

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Despite blockchain’s promise, our study suggests banks are lagging behind their customers’ needs when it comes to developing advisory and executional services in blockchain, digital currencies and DLT. There is a significant gap between the help clients are looking for in developing approaches to blockchain and current bank offerings

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On the positive side, this suggests ample opportunity for those banks able to define and market products and services in blockchain, digital currencies and DLT. However, the window for banks to act is closing as nimble, digital first competitors – including not just so-called “neobanks” but Non-Bank Financial Institutions (NBFIs) and others – develop blockchain solutions and market them to banks’ corporate clients.

Examples of where banks have lost out in the past to more dynamic internet competitors abound. The personal cross-border money transfer market, for instance, is set to be worth more than US$1.1 trillion by 2028 and is growing at a compound annual growth rate of  7 per cent.

However, banks are the most expensive players with fees just under twice that charged by the most expensive non-bank competitor and there are currently no banks among the top five global players in this market.

In these markets and others, banks are now struggling to catch up or have essentially lost the race to rivals. Looking ahead, banks should be wary of a similar situation arising in blockchain and CBDCs/stablecoins.

What do corporates want?

Corporates find value in blockchain and DLT solutions in a wide range of areas, though not necessarily in domestic payments. They are more interested in applications related to trade finance, cross-border payments and other areas which have long had intractable problems with high costs and slow settlement times.

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In The Great Switch: Major Corporates are Ready for Blockchain – but can Banks Deliver?, we set out the views of more than 850 senior treasury professionals working at major global corporations in nine key markets and regions of the world economy. We detail their needs and expectations when it comes to blockchain and digital currencies and how well – or poorly – they are currently being served by their banking partner. We set out a series of recommendations for banks and intermediaries to consider, together with some actions for regulators and governments. Overall, a clear picture emerges of under-served market demand which banks and intermediaries ignore at their peril.

Paul Dowling is Principal Analyst at East & Partners and Alex Rolfe is Managing Director at PCM

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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