Cryptocurrency effect on banks
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In contrast, traditional currencies have a limited supply chain. The availability of fiat currencies can change anytime depending on the fiscal policies of governments that issue them. For instance, you cannot claim to have more than 50 million Bitcoin. Therefore, the finite nature of cryptocurrencies will increase demand, thus driving up value. It is expected that over time, it will become increasingly difficult to mine crypto-cash until the upper limit is attained.
The finite supply of cryptocurrencies makes them inherently deflationary. Ease of Use As technology improves, users expect financial transactions to be faster, free, and easier. One of the changes that cryptocurrencies will undoubtedly bring to the banking industry is convenience.
The clanky nature of the fiat currency system means you have to do a lot to keep track of your transactions and bank balances. Cryptocurrencies offer users a credible store of value without subjecting them to the inconvenience of walking around with cash or credit cards, which are prone to theft, loss, and similar incidents.
Blockchain technology provides the option of storing your currency in electronic wallets, which are safeguarded using secure passwords. Cryptocurrencies Appear to Be a Safer and Fairer Investment Option The traditional banking system is skewed and is designed to act to favor those who have money and sound financial knowledge.
This is why we still have people who prefer storing hard cash at home rather than banking it. Due to inflation and similar fiscal phenomena, fiat currencies always seem to lose their value every year. With cryptocurrencies, your money stays secure since banks or government agencies cannot devalue it. Once cryptocurrencies attain widespread acceptance in the financial markets, they will help people with minimal financial knowledge to make sound investments without worrying about devaluation.
Similarly, such individuals will be in control of their finances without involving intermediaries. It is pretty clear that cryptocurrencies are changing the banking industry because they have new and exciting benefits to users compared to the fiat currency system. In as much as blockchain technology is still in its experimental stage, it is exciting to think about how it will revolutionize the banking system in the near future.
Businesses across different industries are also decentralizing their processes to save costs and attain profitability. This is the essence of blockchain technology. Therefore, inevitably, traditional banks will also follow suit and decentralize their operations in the face of cutthroat competition from cryptocurrencies.
A enterprise software startup veteran, who has always been fascinated by what drives workers to work. In current value networks, clients have very much been tied to their banks. The cost of changing a banking relationship is relatively high, and this has made it quite easy for banks to generate revenue. The changes facing value networks will significantly reduce exit costs for clients, while the cost models of banks will become more transparent.
Clients will be able to switch easily between financial services providers and select the best fit for their needs. The following figure visualizes this change to value networks. But as alternative blockchain-based services emerge, clients will start to use these alternatives, thereby they will reduce their dependency on banks.
Banks value network transformation This results in a revenue decline of the banks. But how big is this impact and what will be the timeline of this impact? This analysis looks on: How are banks generating revenues at the moment? How will Blockchain-based business models will disintermediate banking revenues?
What will be the timeline of this transformation? How do banks generate revenue? Let us evaluate the key components of banking revenue based on the Swiss unit of Credit Suisse. This division encompasses retail banking for clients domiciled in Switzerland , private banking wealth management , and commercial banking one-third of companies in Switzerland maintain a banking relationship with Credit Suisse.
The revenue figures are publicly available in the investor section of the Credit Suisse website. Here are the revenues for the first quarter of The key components of banking revenue are as follows: Net interest income Transaction revenues Net Interest Income This refers to the revenue from money lending. However, we can assume that approximately 97 percent of electronic money in Switzerland is created by commercial banks during the lending process; the other 3 percent is created by the Swiss Central Bank.
These guidelines are defined by the regulator and are binding for the banks. Thus, although banks create money in the lending process, this money creation is not free for the banks. There are costs associated with lending money which are determined by banking regulations and capital markets.
Now let us return to net interest income: It comprises the difference between the price of money which the clients pay and the cost of lending. This is the category in which banks generate most of their revenues assuming client risks are properly assessed. If the economy is booming, there is more money creation and more revenue in this category. In the event of an economic slump, the reverse is true.
Recurring commissions and fees These concern the revenues raised from custodial accounts, banking packages as well as portfolio management fees. As the exit costs for clients are relatively high, clients are locked in, thereby providing a stable stream of revenue for banks with relatively low maintenance costs. Transaction revenues Transaction revenues refer to payment fees, fees for buying and selling shares, mutual funds, and ETFs.
Essentially, these fees are connected with either the business or investment activity of bank clients. Banks Revenue disintermediation through blockchain business models Net interest income will be substituted by smart contracts. In this scenario, clients would not need a bank. Lending would be conducted using automated lending facilities.
However, some lending is performed based on advice, and this advice-based revenue will remain available to banks. Nonetheless, this would only account for a small part of net interest income. We estimate a conservative level of around percent revenue disintermediation in this respect.
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