Episode Six: Why Banks, Neobanks and Fintechs Must Integrate New Payments Tech and Crypto ASAP

As the world recovers from the effects of the pandemic, the benefits of DeFi have been made abundantly clear. It is unlikely traditional forms of finance and currency will be abandoned anytime soon, despite our move to a cashless society, but banks and enterprises must consider a digital route into DeFi in order to stay relevant in the future.

Ian Kerr is the Director of Business Development for Episode Six. Ian has over 30 years of experience in financial technology in a range of organizations starting with NCR and including IBM, payments, and banking solutions providers. Prior to joining Episode Six, Kerr was the CEO at Bolero, a Software as a Service platform for global trade where he led new initiatives in digitization, Supply Chain Finance, and logistics. Earlier in his career, Kerr was the COO at a payments gateway company and led payments focussed testing solutions division at Clear2Pay.

With his wealth of expertise, Kerr explains why crypto and DeFi isn’t just a fad or craze – but something that will remain for a long time, and if banks and companies do not tailor to it, they will suffer in the future: 

On the eve of the Money2020 conference this week, crypto-currencies and digital assets are set to dominate the discussion agenda.

The banking industry – neobanks and financial institutions alike – has an enormous opportunity to take advantage of the rise of digital assets. They also need to keep up with the massive shift in demand and evolving currency usage. In order to do so, they must adopt new fintech. This crypto race is a prime example of the choice for banks – traditional or alternative – to integrate fintech or face the consequences of their business models’ limitations.

Tectonic shift towards crypto

Despite the total cryptocurrency market cap plummeting over 50% from its $2.5trillion peak in mid-May, as traders took profits from the build-up to the Coinbase IPO, institutional money has still flowed into digital assets.

Just how much money has poured in? Try north of $17billion through June of this year alone, according to Bloomberg reports.

The broader market cap, of some 11,866 digital assets tracked by the industry, has now recovered 80% of its value since the top in Mid-May, or just over $2trillion.

Investors are attracted to digital assets both as a peer-to-peer (P2P) medium of exchange and as a store of value for a rapidly developing decentralized economy.

Broadly, the macro tailwind for this tectonic shift towards crypto is inflation and the rising digitization of payments, with an emphasis on mobile transactions.

Forging past fiat?

A recent Deloitte Blockchain Report that surveyed leaders from across the finance and tech industries found that 76% think that crypto would replace fiat in 5 to 10 years.

Attracting primary interest from investors are the two most capitalized cryptos, Bitcoin and Ethereum, along with so-called ‘stablecoins,’ which as their name suggests, are programmed to maintain a stable value.

Bitcoin and Ether comprise roughly 40% and 20% of the market, respectively. Ether runs on the Ethereum blockchain which provides the critical rails for the decentralized finance (DeFi) industry.

In the digital age, the key advantages offered by bitcoin are reduced transaction costs, fully transparent auditability and traceability of fund flows across blockchain ledgers, pseudonymous, and encryption-based payments to safeguard user privacy.

However, crypto faces challenges too. Unlike fiat, it’s not currently regulated by central authorities which hurts the perception of its credibility and impacts its volatility. This is primarily driven by the speculative nature of its trade. Therefore, while according to the Atlantic Council, 81 countries (representing over 90 percent of global GDP) are now exploring a crypto-based digital currency, not all are jumping on the bandwagon just yet.

Propelled by trillions in pandemic stimulus spending, the dollar has lost 4% of its value since last year.

In this transformative climate of dollar devaluation, everybody from VCs, hedge funds, family offices, wealth management firms, private equity shops, corporate treasuries, lenders – and – even central banks – are betting big on distributed ledger technology (DLT). But it’s not all or nothing – crypto and fiat must co-exist. Without international coordination and a standard, the financial system could face a significant currency exchange problem.

Building a bridge to crypto

New technologies enable these enterprises to take advantage and execute successful blockchain transformation projects and revamp their last-leg legacy systems on the path to crypto-integration.

In addition to established institutions, cloud-native neo-banks and other early-stage fintech platforms are obviously looking to implement DLT rails – assuming they haven’t already. But in order for these enterprises to execute a successful blockchain transformation project and revamp their last-leg legacy systems, they need to leverage new technology to help shepherd them along the complex path of crypto-integration.

The rise of crypto and DLT marks a convergence of new shared technology for traditional banks and neobanks — groups that have conventionally been viewed as competitors. But as banks modernize their tech stacks and challengers look to reach profitability and expand their offerings, choosing fintech integration will benefit both of them and ultimately enable the financial ecosystem to evolve for the better — but those that don’t adapt will fall behind. For example, new core ledger solutions help neobanks to focus on driving the digital cash (stablecoin) propositions, taking care of required transaction processing and reconciliation.

Looking to the future

As the pandemic continues to drive mobile and contactless payments, and physical currency increasingly loses its luster, crypto and DeFi are no longer trends. They have become digital gold in today’s transformative metaverse that used to be called the future. The future is here. Legacy lenders and fintech across the spectrum need to get with the program. But in order for any aspirant’s blockchain transformation initiative to succeed, they need the right decentralized transaction processing technologies to bridge the worlds of fiat and crypto.

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Source – Ian Kerr, Director of Business Development for Episode Six