The Role of Fintech in Overcoming Traditional Banking Inefficiencies
Last decades we have been watching how FinTech transformed the financial industry by leveraging technology to provide more efficient, accessible, and personalized financial services that benefit consumers and businesses alike. According to a report by Statista, global fintech revenue was approximately $550 billion in 2021, with the largest segment being digital payments.
On the other hand, according to the joint research report from Oliver Wyman and JPMorgan estimates that of the nearly $24 trillion in wholesale payments that moved across borders via the correspondent banking network each year, global corporates incur more than $120 billion in total transaction costs; this excludes potential hidden costs in trapped liquidity and delayed settlements.
The fingers play against traditional banks: the high transaction costs and potential hidden costs in trapped liquidity and delayed settlements can make it difficult for businesses to manage their cash flows and could result in lost opportunities or decreased profitability. On the other hand, it motivates to develop innovative fintech solutions that could offer faster, cheaper, and more transparent ways for businesses to move money across borders.
As cryptocurrencies and stablecoins have become more popular, the world’s central banks have realized that they need to provide an alternative — or let the future of money pass them by and one of the approaches to do this is CBDC (Central Bank Digital Currencies). The same report from Oliver Wyman and JPMorgan found that a full-scale, multiple Central Bank Digital Currency (mCBDC) network could potentially save global corporates up to $100 billion in transaction costs annually.
This is a huge, ubiquitous opportunity for banks, payment operators, market makers and liquidity providers to add new capabilities, and welcomes new stakeholders like technology providers and other third-party service providers into the fold. Therefore, nowadays CBDC is a global trend of banking: 119 countries involved in examining the capabilities of digital currencies (see statistics on https://www.atlanticcouncil.org/cbdctracker/)
The development of CBDCs brings new tangible opportunities such as subscription-based mCBDC corridor access or smart contract-enabled cash management services. The ability to pivot effectively and quickly is key, and ultimately we aspire for a cross-border payments system that is transparent, inclusive and efficient for all parties across central banks, corporates, and commercial banks.
Actually, it uses DLT (distributed ledger technology) as the underlying technological stack for CBDCs. And there are several reasons of the popularity of DLT among traditional financial institutions:
1. Security: it provides secure and immutable transactions. This is crucial for CBDCs, as the central bank needs to ensure that the digital currency is secure against fraud, counterfeiting, and hacking.
2. Transparency: blockchain allows for a high level of transparency in transactions, as all participants in the network can view the entire transaction history. This transparency can help increase trust in the CBDC and reduce the risk of corruption.
3. Efficiency: DLT can enable the central bank to process transactions more efficiently, reducing transaction costs and processing times. This is important for CBDCs, as they need to compete with existing payment systems and be accessible to a large number of people.
4. Accessibility: anyone with a smartphone and internet connection could get access to the money services.
5. Innovation: DLT and blockchain technologies provide a platform for innovation and experimentation, enabling the central bank to explore new possibilities for improving the CBDC and creating new financial products and services.
Need to highlight that these strengths of blockchain technologies and operating beyond borders empower to create a multiply effect for distributing any assets as fungible and/or non-fungible. As a sample, in DeTech.World we are working on to create a new class of tradeable liquidity — Tech Assets. From DeTech.World perspective, most important and relevant DLT features are:
- Immutability, traceability, security and auditability of all transactions.
- Time-stamping of all transactions.
- Tokenization of high-value Tech Assets in the form of F-NFT and DeFi instruments.
- Creation of DAOs as new-gen communities owning & driving Tech projects development.
- Collateralization of IP for underlying Tech Assets to issue stablecoins, early loans.
- Staking of DeTech tokens to yield farm on the most profitable technology segments.
To sum up, DLT has become increasingly important as a technology that enables secure and transparent transactions for cross-border payments and has brought a huge, ubiquitous opportunity for banks, payment operators, market makers and liquidity providers to add new capabilities and a new class of assets.