Banks that cannot overcome technical, adoption hurdles of digital currency stand to lose out on $150-200 billion in revenue, according to a new report by management consulting firm Bain. The biggest areas of opportunity remain in cross-border payments and trade finance.
Though the technology is still in its infancy, distributed ledgers offer the potential for profound improvements in the operation of the complex pipelines that make international payments possible, the report says. It may impact all forms of payments including domestic cards and automated clearing houses (bank-to-bank) in the long-run.
The report noted that banks’ initial sluggish responses to fast-moving developments in digital currency –have left them flat-footed.
Bain, which interviewed more than 50 senior bankers, venture capitalists, technologists, international payment association executives and start-up CEOs, found most banks are not prepared to retain control of international payments. In theory banks are well positioned to confront the changes triggered by the rise of distributed ledgers. In practice, however, the situation is more complicated, Bain’s research showed.
The consulting firm noted that regulatory and other hurdles may have forced most digital currency start-ups to partner with, rather than compete directly against, incumbent banks. However, most financial institutions remain in ‘experimentation mode,’ wary about the scalability of the technology, privacy issues associated with broadcasting commercially sensitive information about money flows, and the volatility and governance of non-fiat digital currencies.
With such a large prize available, faster-moving, more committed banks stand to gain significant share, Bain opined.
Glen Williams, leader of Bain’s global payments sector and co-author of the report, said: “Change will not come easily for banks. They recognize that distributed ledger technology has the potential to improve the speed, transparency and efficiency with which payments are made, but the current market structure gives them a powerful incentive to stay the course.
“About $300 trillion of transactions flow through these networks each year, creating significant revenues for banks. Further, network dynamics make it hard for alternatives to scale up: participants will not join a network until it has sufficient reach, but reach comes only from widespread participation.”