Banking on Stablecoins

FinTech news this week spread out over the ecosystem, with no one theme dominating my view of the financial media. Here are some of the reports that caught my fragmented attention during the week after the holiday that marks the beginning of summer in the U.S.

Can traditional banks keep pace with FinTech challengers?,” The Financial Brand asks. Traditional financial institutions have been ramping up their digital systems over the pandemic year especially. The gap may not yet be too large, but the competition from digitally native challenger banks is great enough now that traditional banks can no longer consider them simply a nuisance.

The solution requires the kind of software-development thinking that’s difficult in an IT environment dominated by legacy systems. It “will require a reduction in operating costs that will necessitate a modernization of back-office infrastructure and a move to the cloud,” writes Jim Marous, co-publisher of The Financial Brand and CEO of the Digital Banking Report.

What’s at stake is banks’ hold on small business lending as FinTech firms in payments and ecommerce embed their services into shopping platforms, as Ron Shevlin argues in, “In The War Between Square, PayPal And Shopify, Banks Are Collateral Damage.” Shevlin is managing director of FinTech research at Cornerstone Advisors.

“Banks will still need to defend their chosen segments from the embedded finance trend and should protect their markets by doing what the platforms do—expand into adjacent value chain areas like accounting and payments. . . The platformification of small businesses is a threat to banks’ small business relationships. Banks are going to get squeezed if they don’t take the offensive.”

Our colleague and friend, Chicago financial writer Chuck Mackie, covered Consensus, Coindesk’s conference on all things crypto. He gives you a tour of the main issues discussed during all four days on his Medium blog, including the speakers from traditional financial institutions and regulatory bodies opining on the convergence of cryptofinance with the systems we all know and love.

My favorite item, from his Day Three report: “In the matter of payments, the divide between the suits on the panels and the cypherpunks in the chat stream couldn’t have been more stark. For example, I was late to the one-on-one interview with Brad Garlinghouse, CEO of Ripple, so I asked the Chat denizens what I had missed. My favorite (name withheld to protect the hilarious): “Ripple summary: ‘We dint do nuthin.’ SEC: ‘Yes you did’”.”

Those of you who know something about stablecoins, digital currency pegged to USD or other national currencies, will be interested in this Twitter thread from Chicago-based institutional investment researcher Jim Bianco. He makes a bold prediction on Decentralized Finance (DeFi):

“Traditional finance cannot compete with stablecoin wallet transfers. . . This will be the massive use case: stablecoin payments! Conquer payments = next reserve currency. DeFi will soar servicing these stablecoins.” Watch for more on DeFin in coming issues.

The institutional interest in and adoption of cryptofinance has been the primary theme of this year’s FinTech Rising. It was not intentional, but it’s where the market has moved with the rising price of bitcoin.

American Banker has increased its coverage with opinion columns and even articles taking this tone: “Crypto is the future. More banks, regulators need to embrace it.” The column provides a gentle introduction to decentralized finance and its basis in crypto stablecoins. It’s written by Brian Brooks, former Acting Comptroller of the Currency and CEO of Binance.US, the cryptofinance exchange. Brooks is one of a number of high-profile financial executives moving to crypto firms this year, part of the overall mainstream move to crypto.

Another traditional finance publication is moving in the same direction. Global Custodian features an article this week highlighting research by Goldman and Citi on, yes, mainstream interest in digital assets.

Some 63% of survey participants indicated they were in the process of developing a strategy to invest in or support digital assets, while 28% said they already have a clear strategy in this regard. Taking into account more than 220 validated responses, the survey results show an overwhelming expectation (91%) that digital assets – essentially a basket of different asset classes enabled by a common technology, cryptographically secured on a distributed ledger – will become dominant over time.

Visa is taking an increased interest, too, as reported by Daniel Webber in Forbes. Visa is banking on fiat-backed stablecoins as a large part of its response.

“We see these as having the potential to be used by consumers and merchants in the same way as existing fiat currencies are,” says Nilola Plecas. “And when it comes to areas of opportunity, there are many for organizations such as ours.” Plecas is head of new payment flows, Visa Consulting and Analytics, Europe.

The tide turns both ways, too. Ant Financial, the giant Chinese FinTech, planned to go public this year. Chinese regulators canceled the IPO. Now Ant has received their approval to create a consumer finance firm to handle its large consumer loan business, the Wall Street Journal reports.

I have kept an eye on FinTech in Asia for the past several years, especially in Singapore. The city-state has become known for a regulatory regime that’s both friendly to FinTech and crypto while maintaining critical oversight. Bloomberg’s interview with Sopnendu Mohanty, chief FinTech officer at the Monetary Authority of Singapore (MAS) caught my eye in that regard.

His comments on central-bank digital currencies, stablecoins, and bitcoin are right in line.

“The first thing which is getting institutionalized is the exchanges. . . . And once this backbone gets created, then the transactions flow through this backbone and eventually becomes more mainstream. There is a value to this shift in how you think about payments and currencies.”

At the Chicago Payments Forum, which we coordinate, the discussion covered two main topics: real-time payments and buy-now, pay-later (BNPL) financing. The bankers on the call noted that demand for real-time payments is increasing from U.S. clients. They are putting systems in place, starting with send capabilities, as quickly as they can.

The change, however, requires even more education than payments organizations are providing. Consumers and small businesses in the U.S., for instance, are used to banks fixing payment errors. That will not be the case when funds are immediately debited from accounts when the customer clicks Pay.

Look for more on BNPL next week. Speaking of which, what would you like to see in FinTech Rising? We are planning for the rest of the year and would like to hear from you in a short survey or reply to this newsletter with your suggestions.

– Collin Canright