Seventy-eight percent of Americans prefer digital banking via a mobile app or website. Because of this high demand, plenty of banks and financial institutions are implementing cutting-edge fintech solutions to keep up.
As such, traditional banks have begun accepting that digital assets like cryptocurrencies and NFTs are here to stay. These banks are developing fintech systems to allow their customers to engage with these assets.
The massive implementation of fintech is a referendum on the traditional banking system, forcing banks to adapt for the better. This guide will explain the interplay between traditional banks and digital assets.
Understanding Fintech
Financial technology has been around since the 1950s, with the introduction of the first credit cards. Eventually, more Americans were issued debit cards from their respective banks.
The development of RFID/NFC-related tap-to-pay technology and mobile banking apps are just a few more modern examples of fintech. The purpose of fintech is simple: to make banking more accessible to and convenient for customers.
Banks, credit unions, and financial institutions rely on advancements in artificial intelligence (AI), machine learning, and Web3 to drive the creation of new technologies to heighten customer experience.
Fintech has come a long way since the rise of cryptocurrencies in 2009. With cryptocurrencies being based on blockchain technology, many banks are starting to find new ways to involve this innovation in their banking services and financial products.
For example, Goldman Sachs, a leading U.S. investment banking firm has begun using blockchain technology to drive the USDC stablecoin. J.P. Morgan has even admitted to using blockchain technology to improve the speed of money transfers.
Digital Assets Explained
The popularity of digital assets is growing with each passing year. As such, traditional banks have been experimenting and investing in the following digital assets:
- Cryptocurrencies: Cryptocurrencies are decentralized digital currencies that operate on a blockchain network. They provide a secure and transparent means of peer-to-peer (P2P) transactions.
The banking industry is exploring using cryptocurrencies for international payments, cross-border settlements, and remittances. For example, El Salvador has created a national Bitcoin wallet to encourage the widespread adoption of crypto.
- Stablecoins: Stablecoins are cryptocurrencies tied to a real-world asset, such as the U.S. dollar or gold. As such, stablecoins are designed to maintain a stable value. Many financial institutions are using stablecoins for cheaper payments, tokenized deposits, and frictionless cross-border transactions.
- Security tokens: Security tokens represent ownership interests in real-world assets, such as securities, bonds, or real estate. Investment firms and banks can use security tokens to fractionalize assets, enhance liquidity, and democratize access to investment opportunities.
- Non-fungible tokens (NFTs): NFTs are unique digital assets that represent ownership of irreplaceable items, such as digital art, collectibles, or in-game assets. Generally speaking, NFTs show value and ownership for the items you buy. Banks are exploring the use of NFTs for provenance tracking, digital identity management, and new asset classes.
- Central bank digital currencies (CBDCs): CBDCs are digital forms of a country’s fiat currency, issued and backed by the central bank. CBDCs have the potential to improve retail payments, wholesale settlements, and financial inclusion.
The Synergy of Fintech and Digital Assets
The overall goal of fintech is to improve financial inclusion, banking efficiency, and customer satisfaction. By offering digital assets, banks can achieve these goals and participate in a changing financial landscape.
If you’re looking for an example of the marriage between fintech and digital assets, look no further than PayPal. PayPal is the world’s most valuable fintech company.
Recently, PayPal rolled out an app that allows customers to buy, sell, and hold cryptocurrencies like Bitcoin (BTC), Bitcoin Cash, Ethereum (ETH), and Litecoin (LTC). It even unveiled its own stablecoin, PayPal USD (PYUSD).
With this app, customers can sync their crypto assets into their PayPal balance to make everyday purchases. In addition, PayPal will work diligently to stop unauthorized transactions to keep their customers safe from fraud.
PayPal and other fintech companies hope that creating infrastructures for digital assets can help them attract new customers and stay up to date on the latest financial advancements.
How Is Fintech Changing the World of Banking?
Digital assets aren’t just changing the world of financial technology companies. Fintech companies are encouraging banks to evolve as well.
Here are some ways that fintech makes modern banking convenient, efficient, and accessible to all:
Streamlined and Efficient Banking Processes
One of the ways fintech is changing banking is by eliminating manual workflows that are time-consuming for both financial institutions and their customers.
Fintech solutions can automate many of the manual processes involved in traditional banking, such as account opening, loan applications, and money transfers. The benefits are reduced costs, improved efficiency, and a faster and more seamless customer experience.
For example, when banks enable convenient mobile banking features such as fingerprint sign-in, customers can sign in easily and securely to access their funds in record time.
Personalized and Data-Driven Financial Services
The advancement of fintech isn’t only limited to mobile banking. Many fintech companies are partnering with banks to deliver customized financial services.
By leveraging data analytics and AI, fintech startups can provide personalized financial services tailored to individual needs and preferences. This personalization leads to more relevant financial advice, targeted product recommendations, and improved financial decision-making.
For example, Credit Karma uses a consumer’s credit profile to match them with credit cards for which they have a high likelihood of approval. This is one of the ways fintech companies can drive their customers to work with banks with the help of AI.
Open Banking and Collaboration
Many fintech companies promote open banking initiatives that enable secure data sharing between financial institutions and third-party providers.
This openness is driving collaboration and innovation, leading to the development of new financial apps and services that seamlessly integrate with customers’ existing banking relationships.
The most common example of this is through early direct deposit services. For example, Walmart allows its employees to view their earnings before payday and cash out through a third-party app called Even.
With this app, employees can easily integrate their Walmart direct deposit information into Even to withdraw their earnings securely.
Mobile-First and Digital-Centric Approach
By embracing modern fintech solutions, many banks take a mobile-first and digital-centric approach, providing customers with convenient access to financial services anytime, anywhere. This digital transformation is enhancing customer engagement and satisfaction.
For example, banks like Regions and Chase offer mobile check deposits to their customers. This mobile-first solution makes sure that customers can deposit checks using their camera app so they don’t have to wait at their local bank.
Increased Security and Fraud Prevention
People take their money seriously. As such, banks are using advanced security technologies, such as biometrics and machine learning, to enhance fraud prevention and protect customer data.
This focus on security is building trust and confidence in digital financial services. In the previous example, we explained how banks can allow fingerprint sign-in to improve customer satisfaction.
This regulatory feature can also serve as a form of two-factor authentication (2FA) to prevent unauthorized users from hacking into customer banking accounts.
Global Reach and Cross-Border Transactions
Global banks rely more on fintech to facilitate cross-border transactions and payments.
This makes it easier and cheaper for individuals and businesses to send and receive money internationally. This global reach is breaking down geographical barriers and promoting financial inclusion worldwide.
For example, Chase Bank operates in more than 60 countries worldwide. With the help of fintech, customers can travel to foreign countries and easily make international purchases.
How Are Digital Assets Changing the World of Banking?
As we’ve explained before, digital assets are becoming widely accepted by traditional banks. Here is how this inclusion can alter the world of banking moving forward:
Improving Financial Inclusion
Digital assets can promote financial inclusion by providing access to financial services for individuals and communities that lack traditional banking infrastructure.
Cryptocurrencies and mobile wallets can empower individuals in underserved regions to hold, send, and receive funds without the need for formal bank accounts. El Salvador, with 70% of its population without bank accounts, is the first country to address this on a national scale with the launch of the Chivo wallet in 2021 — the country’s government-backed Bitcoin wallet.
But there are other initiatives aimed at improving financial inclusion for underserved markets. For example, Mastercard has recently announced it will invest $100 million to provide fintech solutions to the underbanked populations in Guatemala, El Salvador, and Honduras.
Through this program, Mastercard will fund the creation of digital payment cards and mobile solutions so more people in these countries can process remittances and make everyday purchases.
Fractionalization of Assets
Security tokens enable the fractionalization of assets, making it easier for investors to participate in ownership of previously inaccessible asset classes, such as real estate or collectibles.
This democratization of asset ownership expands investment opportunities and can help investors diversify their portfolios. For example, NFTs can fractionalize assets, such as artwork.
Traditionally, this would be impossible as physical art can’t be separated into separate assets. However, sellers can assign NFTs to investors who want a stake in popular art pieces.
Tokenized Securities and Seamless Trading
Fintech platforms can leverage digital assets to facilitate the issuance and trading of tokenized securities, providing a more efficient and transparent secondary market for investments.
Tokenized securities reduce the complexity and costs associated with traditional securities trading. For example, tokenized stocks and bonds offer a secondary market to investors looking for fractionalized assets.
With fintech, investors can buy pieces of real estate via a real estate investment trust (REIT).
Automated Investment Solutions
With fintech solutions, companies can leverage digital assets to create automated investment solutions, such as robo-advisors, that tailor investment strategies based on individual risk profiles and preferences.
These automated solutions provide accessible and personalized investment opportunities. Stockbrokers have already begun using these solutions to give their customers personalized investment tips.
The popular personal finance company SoFi offers automated investing via robots that can make decisions on behalf of customers.
Resilient Financial Infrastructure
Digital assets can contribute to a more resilient financial infrastructure by reducing reliance on traditional intermediaries and promoting decentralized networks. This decentralization can enhance system robustness and reduce the risk of systemic failures.
While decentralization in the financial sector has been a controversial issue, many will agree that fintech offers much-needed checks and balances. With fintech, customers don’t have to rely heavily on centralized financial platforms controlled by banks.
For example, many banks are using blockchain to fuel the delivery of transparent financial services. Since blockchain is immutable, this technology provides transparency to customers who want to make sure their finances are secure.
AlphaPoint’s Role in Transforming Banking
For banks and financial institutions, simply acknowledging the changing landscape of banking isn’t enough. Many banks know that the financial world is changing — but the most successful institutions are those that understand that they need to invest in solutions to remain competitive.
This is where AlphaPoint comes in. AlphaPoint transforms traditional banking with white-label digital asset exchange solutions designed for rapid deployment, enabling financial institutions to expand in the marketplace without heavy lifting — and without sacrificing quality or compliance.
With AlphaPoint, there’s no need to create exchanges, wallets, or other digital asset solutions from scratch. Our team of experts is committed to promoting the worldwide adoption of digital assets and helping businesses realize the benefits of this technology through premium white-label solutions.
If you’re ready to learn more about our service offerings, request an AlphaPoint demo today.
