Financial institutions face pressure and uncertainty due to systemic economic challenges. As bank executives fight against declining margins and competitive pressures, community and regional bankers must seek ways to retain customers, deepen relationships and attract new customers. New sources of revenue in untapped markets may help banks improve margins, ease competitive pressures, and succeed with existing and new customers.
Not business as usual
Digital asset services offer a unique means for banks to participate in a rapidly growing market and generate new sources of revenue. They also provide a new and innovative way to attract and engage customers.
Square became the first public company in the United States to allow its users to buy, sell and hold Bitcoin (BTC) via Cash App. During the full year 2020, Square’s Cash App underwent a significant increase in bitcoin revenue year-on-year. In 2020, the revenue generated by bitcoin stood at $4.57 billion, up by about 900% compared to 2019.
PayPal generated $5.7 billion in bitcoin transaction revenue, 12% growth from the third quarter of 2020.
Regional and community banks must consider alternative sources of revenue for meaningful growth and superior customer engagement. Entering the world of digital assets offers an exciting and immediate avenue into a wide range of long-term revenue opportunities.
Bitcoin buy-sell-hold, the immediate opportunity
With a digital asset offering relationship, banks can offer their end customers the ability to buy, sell or hold digital assets. An offering in digital assets can provide bank customers with some assurance their banking partner can help them participate in a new type of financial network.
Recent research from Cornerstone indicates banks have a significant opportunity to provide bitcoin access to their customers.
A variety of opportunities emerge for financial institutions that can act as trusted advisors and service providers for their customers. The following use cases offer a range of starting points.
Bitcoin use cases, components of a digital asset strategy
With a digital asset offering, bank customers can purchase digital assets through their trusted banking partner and fund their purchases from their bank accounts. A bank’s core technology partner should provide pre-built integration for conducting buy, sell or hold transactions between the banking ecosystem and the regulated bitcoin trading and custody partner.
In this type of arrangement, the partner (NYDIG) provides custody services and helps facilitate execution of the bitcoin transactions so the bank never has to hold or trade bitcoin, but the bank maintains their primary relationship with the customer. Revenue generated from these transactions help to grow fee income, a source of revenue currently under great pressure.
As Ciaran McMullan, CEO of Suncrest Bank, expressed in a recent article in S&P Global:
“For Suncrest, we see this as a way to be innovative and responsive to changing customer needs and the changing demographics in our customer base,” McMullan said. “In the long term, we see it as a good potential noninterest-income business line.”
Digital asset rewards
Reward programs generate customer loyalty and help build core deposits. But travel points and cash-back programs are getting stale. Banks that consider rewarding customer debit card activity can not only stand out within a crowded field, but they can also offer a relatively low-risk way for customers to explore the brave new world of digital assets.
Quontic Bank in New York offers such a program, paying a simple 1.5% back on purchases in the form of bitcoin rewards. Customers can keep the bitcoin as a store of wealth or redeem them for U.S. dollars with full redemption available monthly.
To jumpstart bitcoin education within their organization, Quontic gifted all employees bitcoin. This raised awareness and established a greater level of comfort for associates, who were better able to explain digital assets to customers and help ensure the rewards program’s success.
Blending conventional banking products and crypto instruments
Banks have traditionally used interest on checking and savings accounts to attract and retain customers. However, over the past decade, banks have found it increasingly difficult to provide competitive interest rates for customers. We believe there may be opportunities to create deeper client engagement by bundling conventional banking products with cryptocurrency instruments. One example is an interest-as-bitcoin program whereby the end customer elects the option to receive interest earned on a CD or savings account and have the interest credited toward their NYDIG custody account as bitcoin.
With a bitcoin interest program, banks can offer economically viable interest payments to customers, while the customer earns cryptocurrency in a frictionless fashion. An innovative customer attraction and retention strategy with differentiated interest payments is made possible with digital assets, opening the door to numerous opportunities bundling conventional banking products with cryptocurrency.
Supporting commercial customers
A bank’s commercial customers and high net worth clients will also likely have an interest in buying and selling digital assets via a digital front-end. Your bank’s commercial banker can leverage bitcoin to meet the needs of a small business or corporate customer seeking an additional hedge beyond traditional cash investments. In the face of inflation and potential devaluation of fiat money, bitcoin as a long-term store of value can be an attractive part of a treasury program.
Digital asset services can help secure commercial deposits from a treasury perspective and would fit well into business banking portals that many commercially focused banks currently provide.
Digital asset lending and loan platforms are only starting to emerge. A digital asset loan platform allows users to borrow fiat currency while leveraging cryptocurrency as the underlying collateral. Lending dollars against bitcoin could be an attractive new business line for banks.
What’s needed to start
To explore any of these use cases, bankers should take an open and transparent position with their regulators.
Contact FIS (FIS_Banking_Crypto_Interest@fisglobal.com) or NYDIG (email@example.com) for materials that will help you in those conversations, including a template draft notice your firm can provide to regulators.
Communicating with regulators and examiners indicates a prudent approach to exploring the digital asset market – something they are likely to appreciate – and will improve your understanding of how other financial institutions are asking and answering their questions about digital asset products