If given the choice between relying on a retail bank to handle all your financial transactions and completely abandoning the traditional banking sector in favor of cryptocurrency, which would you choose? If you are like most people, giving up traditional banking entirely is not something you are comfortable with. You would rather keep your checking and savings accounts and only use cryptocurrency when you want to do something like playing slots online.
Your thoughts are completely understandable. Cryptocurrency is, by and large, a misunderstood entity that is currently adopted only by a small minority of consumers. One wonders how national economies would change if cryptocurrency eventually replaced fiat. But that's a long way off, if it ever happens, so it is also another topic for a separate post.
This post aims to discuss the various ways in which retail and commercial banks actually invite cryptocurrency adoption. Banks are replete with systemic deficiencies that encourage people to find other ways to transact business without them. They could actually do themselves a favor by changing the way they do business. Will they? It's anyone's guess.
There is something known in the banking sector as the 'spread'. If this sounds vaguely like gambling to you, you're on the right track. The spread is one of the ways commercial and retail banks make their money. It is one of the ways that banks guarantee they are taking in more in interest payments than they are paying out.
Investopedia defines the spread as "the difference between the interest rate that a bank charges a borrower and the interest rate a bank pays a depositor." Because interest really determines most of a bank's profits, a typical spread has to be significant if the bank is to make the most of its lending. A spread that is too narrow is similar to a low margin in retail. If is too narrow, doing business is not worth it to the bank.
Let's just say a bank loans at 10% and pays interest to depositors at 2%. That is a swing of eight percentage points. For every $100 the bank lends, it gets repaid $110 every year. It pays out $102 per year for every $100 in deposits. Based solely on the spread, the bank's profit would be eight dollars per year for every $200 in business.
The other thing to remember here is that banks rely heavily on deposits to have money to loan. If no one deposited, a retail bank would have to borrow too much from a central bank in order to make loans for houses, cars, etc. It is in the bank's best interests to attract as many depositors as possible without paying out an arm and a leg in interest.
How does this encourage people to use cryptocurrency? By adding to the perception that they are only out to take your money. If you are being charged 10% on your mortgage but only earning 2% on your savings, don't you get the impression that the bank is being a bit unfair? If you can bypass the bank in some instances by using crypto, you will do so just to make yourself feel like you're getting even.
2. Interest payments
Next up are interest payments. By nature, interest payments are something that most of us just can't stand. Having to pay for the privilege of borrowing money goes against most of our sensibilities. For right or wrong, a lot of us feel as though interest rates are punitive.
In all fairness, banks have to charge interest to stay in business. They would go bankrupt without it. Still, that doesn't make a lot of people feel better about their banks. Some would rather completely bypass the banking sector by not keeping any money in a savings or checking account. That way they don't allow the bank to make money off their deposits while still charging what they believe are excessive interest rates on loans.
3. Fees and charges
The big kicker for a lot of people are the fees and charges banks assess above and beyond interest. Back in the 1980s and 90s, American banks were well known for charging monthly maintenance fees for both checking and savings accounts. This rubbed a lot of people the wrong way. Customers wondered why they should be paying maintenance fees while banks were already earning money from their deposits.
The maintenance fees and many banks faded away during the early 21st century. But that hasn't stopped banks from charging other fees. There are fees for money orders and certified checks. There are additional fees for using ATMs not part of a banks prime network. And of course, there are plenty of fees and charges if you are one of those customers who borrows.
Extra fees and charges are one of the biggest things that encourage people to use cryptocurrency to pay for things. Let's say you're looking to play slots at a new online gambling site you ran across. Make a deposit to your bank account or with a credit card and you might be looking at a significant transaction fee. Why? Because the gambling site is located overseas. There are international fees that go with making a deposit at that casino.
There is likely to be a cryptocurrency fee as well. But the fee for depositing bitcoins is almost guaranteed to be significantly less. You might even get lucky and find you can make a bitcoin deposit for free.
4. Slow transactions
Slow transactions are another thing that bother people about the traditional banking sector. Let's say you run a small business in Europe catering to customers in Asia and North America. Facilitating payments between you and your customers is possible via the traditional banking sector. Between electronic transfers and checks, you're able to pay your creditors and accept payments from your customers.
There is only one problem with this arrangement: international payments often take days to complete. Just a simple money transfer from London to New York can take anywhere between two and five business days. Of course, you could write a check and put it in the mail. But then you're looking at a week to 10 days at minimum.
One solution is to use the company credit card. But why pay interest on the debt that you could easily pay with cash if it were faster? And of course, accepting credit card payments yourself means additional payment processing fees.
Cryptocurrency solves all of those problems. Nearly all crypto transactions occur instantaneously. And even when they don't, 10 minutes is about the longest you'll wait for most payments to go through. It doesn't matter where your company is located in relation to your customers and vendors. You can all conduct business with crypto and do so faster than with the traditional banking sector system.
5. Customer inconvenience
Our fifth and final reason is actually more important to the cryptocurrency community than most people know. That reason is customer inconvenience. We no longer live in the 'good old days' when people were content to visit their local bank branches to do business. We live in a world that is much more fast-paced and convenience focused.
It was only about a decade ago that we began to see the emergence of the fully online bank. A fully online bank is one that has no brick-and-mortar branches. All business is conducted online via desktop PCs, laptops, and mobile devices. To say that fully online banks have caught on is to understate the obvious.
What is the appeal of online banking? Convenience. People can do their banking from wherever they are as long as they have an internet connection. That means they are not limited in their banking activities to straight 9-to-5 office hours. They can check their accounts in the middle of the night if they want to. They can apply for a new car loan while sitting at their desks eating lunch. They can apply for a mortgage without having to take several hours off from work to speak with a bank officer.
The fact is that the traditional banking sector was built long before the technology age. In many cases, it has failed to adapt. Cryptocurrency, on the other hand, was engineered through and for technology. It allows people to transact business 24 hours a day, seven days a week, every day of the year.
In the crypto world, there are no bank holidays. There are no hours in the day when crypto is closed. Tokens are constantly flowing across networks regardless of the day of the week and time of day.
Where it leaves us
So now you know at least five reasons banks are actually inviting people to use cryptocurrency. That only leaves us with the question of where we go from here. And unfortunately, there's no easy answer to that question. Crypto is nowhere ready to being a complete and total replacement of fiat and the traditional banking sector.
Despite all of its strengths, cryptocurrency has a few inherent weaknesses of its own. Perhaps we will use a future blog posts to discuss those weaknesses. In the meantime, consumers can choose to continue using traditional banking services exclusively or get involved in cryptocurrency.