How Cryptocurrencies Are Challenging Big Banks and Why Those at the Top Are Right to Be Worried

For major banks across every corner of the globe, the threat faced by decentralised cryptocurrencies on their control of our financial systems has been bubbling away for some time.

The dominance of major banks in global finances is facing a new challenge with the rise of decentralized cryptocurrencies. While traditional banks operate within centralized systems, cryptocurrencies are built onto decentralized networks. This inherent nature of blockchain technology means that there is no single institution controlling how money is spent in a crypto economy. In theory, one person will be able to engage in a financial transaction with another person without needing a bank.

This shift is emerging as a serious threat to the control that banks have over transactions. But are there actually any monetary benefits for the consumer? Well, yes. High transaction fees have long been an unpopular reality for many customers, particularly for international and cross-border payments with transaction fees of up to 3% commonplace. Blockchain, however, allows people to send cryptocurrencies directly to each other without paying the transaction fees set by the banks.

Slow transaction processing times cause even more annoyance to consumers, with our current complex financial system elongating transaction times. Nowhere is this seen more than in the online casino industry, with many players waiting multiple days to withdraw their winnings. A payout should be as fast as possible, and this is where crypto once again offers an improvement for consumers. Crypto bypasses these overcomplicated systems providing near instant transactions.

It’s not just the loss of control that is challenging the big banks either, the emerging possibility of disintermediation in banking is raising the very real question of whether consumers will soon need banks at all. With decentralized platforms giving users the ability to control their own finances and innovative technologies alongside allowing long-established banking processes like lending, insurance and investment to become automated, the function of banks and other long-standing financial institutions could soon become obsolete.

Without adapting to the shifting realities of modern finance, big banks could soon find their customer base dwindling and with it their revenue streams. While traditional financial institutions may be reeling at the threat of disintermediation, it paints a positive picture for consumers who stand to benefit from a slicker financial system.

As globalization progresses, crypto’s unique ability to not just work for those in high-income countries but also for those in developing nations presents another key issue for big banks. Due to the risks and high costs involved in operating in some of the world’s poorest countries, many of the major banks have simply overlooked them. With a reported 1.4 billion people across the globe remaining unbanked, it is clear that the current banking system does not work on a global scale.

Utilising modern digital financial services which provide these populations access to the cryptocurrency ecosystem, the chance for a globally inclusive financial system can be realized. The wheels are already in motion with forward-thinking companies like BitPesa, a Nairobi-based crypto exchange that is utilising blockchain technology to transform the efficiency of payments across sub-Saharan Africa, already showing that crypto has a part to play in the globalisation of the economy.

The big banks have lost the trust of many people following the financial crises that have hit ordinary people in recent times, most notably the 2008 financial disaster which is widely accepted to be the fault of irresponsible practices in the banking and finance sector. Considering this, the inherent transparency offered by crypto, with payments tracked and verified in the public domain, has offered many disenchanted consumers an alternative to traditional financial institutions.

Further reinforced by the highly secure nature of encryption-backed cryptocurrencies which reduces the risk of fraud and theft compared to traditional accounts, significant portions of the population now see crypto as a safer way of spending money. With research suggesting that only half of New Zealanders now trust their banks, many of those working in leading banks are right to be nervous.

While it is true that many of the major global banks were initially sceptical, industry leaders are now accepting the need to adapt or risk getting left behind. In the US, investment giants Goldman Sachs and Morgan Stanley both now invest in Bitcoin assets while offering their clients crypto investment funds. Across the pond in Europe, many of Italy’s big banks are now using blockchain network, Spunta, for processing transactions while the three biggest banks in Japan have recently announced they will be adopting cryptocurrencies for cross-border payments.

The continued influence of crypto on the global financial landscape has without doubt highlighted a number of challenges for the big banks, with their place in the future of modern payments being called into question. As evolutionary biology shows, things must adapt or risk extinction – with traditional banks now starting to incorporate crypto into their financial toolbox, they will be hoping to be part of the future financial revolution and avoid being left behind.