Like a boot to the rear, the coronavirus pandemic has accelerated the push for banks to digitize, will it also provide the catalyst that will digitize currencies too?
When James Bradley stepped into the offices of Stanford Financial Group in the moneyed Post Oak region of Houston, Texas, he was immediately impressed by the grandiose nature of the office.
Bradley had been to plenty of posh offices in oil-rich city of Houston before, but not quite like this one.
With ornate fittings and what looked to be expensive Italian marble — even Stanford’s logo was etched into marble on the floor of the office foyer — Bradley was immediately taken aback by the lavish decoration of the investment manager.
Lured to the offices of Stanford Financial Group by its consistently higher-than-market returns, Bradley was immediately put on alert by the stately appointment of the firms offices.
Because some of the best investment managers that Bradley, a seasoned 20-year investor had visited with still worked out of their parent’s basements and wore stained T-shirts, Bradley was immediately put on guard.
“Anybody who does up their office like this is trying to make a statement,” Bradley thought to himself.
And that statement was to cover up a US$8 billion Ponzi scheme cooked up by Allen Stanford and one which Bradley discovered while doing his due diligence with the firm.
From stately offices, Stanford routinely passed off hypothetical past performance as actual historical data in sales pitches to clients — which immediately sounded alarms for Bradley, who noticed the discrepancies.
And unlike other investment managers who were more focused on discussing their strategies — Stanford was much more keen on showing his potential clients, the luxurious offices which he occupied in Post Oak, a wealthy suburb of Houston.
But Bradley saw through the smoke and the mirrors — because an office does not a firm make.
But does a branch a bank make?
Banks have often gone out of their way to convey stateliness through their architecture.
Whether it’s been ornate balustrades or soaring roman columns, the architecture of the bank branch of the past was a deliberate choice to imbue confidence in its customers.
Since the Italian Renaissance, when the Medici family made banking “respectable,” after the Christian laws on usury were creatively re-interpreted — successive generations of bankers have put great thought into the architecture of banks in order to convey, status, safety and security.
But the 2008 financial crisis and the collapse of some of the most storied names in banking has led many to realize that a bank’s balance sheets are perhaps more important than the aesthetic balance of its branches.
And while banks in the western hemisphere have been cutting their brick and mortar presence — and related costs — for years, there’s still plenty more to do.
Digitizing On A Dime
As the coronavirus pandemic has rippled through our economies, banks have had to digitize and in a hurry.
Many of the trappings of what it means to “be a bank” have been rendered somewhat irrelevant because of the lockdowns imposed by the coronavirus pandemic.
Like countless other businesses upended by pandemic lockdowns, banks were forced to reorganize with little time — shuttering large parts of their branch networks and sending most of their employees home to work remotely.
And necessity may be the mother of digitization.
A survey of retail bank customers in France, Spain, Italy, Germany, Portugal and the United Kingdom, conducted by consulting firm McKinsey in mid-April, showed that online banking rose in all of the countries surveyed, from a 7% increase in Italy to 19% in Portugal .
Significantly, over 20% of bank customers in Spain and the United Kingdom tried out online banking for the first time, ever.
According to McKinsey, a shift to digital banking of this magnitude would probably have taken a couple of years at the very minimum, without the coronavirus-induced branch closures.
In Italy, France and Germany, the average bank branch services fewer than 3,500 locals — which is shocking when you consider that the average branch in the Netherlands serves three times that number.
And ask your average Millennial when was the last time they visited a bank branch and you’re likely to be met with a sarcastic rolling of the eyes.
Yet for all the digital savvy of a new generation of banking customers — Millennials are more likely to be clueless about investing than their “Boomer” forebears.
Whereas a “Boomer” may have visited a bank branch and met with a bank representative that they may have known for decades for investment advice, Millennials are more likely to turn to the internet or the uneducated advice of their friends.
That has resulted in apps from fintech startups with zero-fee trading, such as Robinhood, surging in popularity and coronavirus lockdowns have led to surging user numbers, from scores of young people locked away at home.
But the long term disconnect caused by the coronavirus between customers and their bank branches may usher in an entirely new era of banking.
In a BCG survey of banking customers in the United Kingdom, in the first three weeks of April, 63% of respondents said they’d reduce their use of cash since the start of the pandemic and 43% sent more payments through social media messaging apps.
And the convenience of digital banking means that even when lockdowns are lifted, consumer behavior may have changed forever — which presents some unique opportunities.
Not so long ago, banks used to issue commercial banknotes.
These banknotes only traded at face value in the market served by the issuing bank and were progressively replaced by national banknotes issued by central banks or monetary authorities.
But with the advent of blockchain technology and the rise of decentralized cryptocurrencies such as Bitcoin, the technology for a return to commercial bank-issued “banknotes” may be possible yet again.
Take for instance JPMorgan Chase’s JPM Coin — a digital coin which represents fiat currency that runs on blockchain-based technology and offers instantaneous transfer of payments between institutional clients.
In a sense, JPM Coin and the many other digital coins that banks such as Standard Chartered are considering for internal settlement, are very similar to the commercial banknotes that were issued of old — they work within their own networks, without the need to involve external parties.
For instance, say two customers of the same bank want to transfer money across to each other, a commercial bank-issued digital coin could reflect that transfer, post it on the blockchain and essentially require close to zero fees for the transaction to be executed.
Using the blockchain would also speed the settlement process.
In the case of JPM Coin, it represents United States Dollars held in designated accounts at JPMorgan Chase and transfers using JPM Coin are instantaneously redeemed for the equivalent amount of U.S. dollars, dramatically reducing settlement time.
That even those most reluctant to dabble in digital banking were able to embrace the transfer of money digitally has demonstrated just how quickly notes and coins were replaced.
And now that even those most likely to visit a bank branch and reject digital banking have been forced to embrace it, the trajectory towards more digital payments has been set.
According to the BCG survey, 20% of respondents plan to do less in branches or to stop using them altogether, even when lockdowns are lifted.
And for the more well-heeled banking customer, dealings with relationship managers jumped by a factor of almost three — because why go to a branch if the same advice can be had via video chat from the comfort of home?
The move to digital banking makes particular sense for European banks.
Plagued by high expenses, legacy systems and ageing bureaucracies resistant to change, the expected declines in revenue, surge in pandemic-related credit losses and competition from fintech startups, will mean that embracing digital banking is no longer an option, but an existential necessity.
But will branches disappear completely?
To be sure, there will always be a segment of banking customers who will still feel more comfortable banking in person — but this increasingly smaller number will likely be served by an increasingly fewer number of branches.
Banks will also need to adapt in the way that they cross-sell and market other banking products to their customers — particularly if their key interaction with their customers is through that most intimate of devices — the smartphone.
In many ways, banks have an incredible opportunity to do more with their customers, considering that now, more than ever before, the bank is just a few taps away— but banks will need to find ways to interact with customers without being intrusive.
And with the twilight of the bank branch, what “currency” means will also take on an entirely new complexion.
Whereas in the past, customers had a very tactile experience with what it meant to bank and handle money — the eventual digitization of banking means that the physical hangups that we used to have with money will eventually start to decay — leaving an opportunity for an entirely different type of currency as well, cryptocurrency.
One of the biggest criticisms leveled against Bitcoin and other cryptocurrencies is that they’re not backed by anything.
But with the coronavirus pandemic resulting in record money printing by central banks — what is money backed by anymore other than a promise (not) to pay?
While it is unlikely that our national currencies are likely to be replaced in the immediate future, divorced from the physical trappings of branch and bullion, the rapid digitization of money and the processes surrounding it means that what money is, and what we consider “value” will evolve and that opens the door a crack to the potential of cryptocurrencies.