For the vast majority of banks, it is 5 to 12. This is more true of European financial institutions than any other. In addition to a dwindling interest margin, low equity ratio and high macroeconomic risks, it is the outdated IT infrastructures and a lack of innovative strength that are causing concern about long-term viability. What measures are necessary to increase the probability of survival and what role blockchain technology plays in this.
In order to prevent the European economy from falling apart and sovereign defaults, the European Central Bank is forced to keep interest rates down – or at least to guarantee a negative real interest rate. As a result, the ECB is not only provoking an investment crisis, since there are hardly any government bonds with positive interest rates, but it is also depressing the interest margin of credit institutions. Savings banks and Volksbanks in particular, which often generate more than three quarters of their income by granting loans, are increasingly deprived of their business basis.
But even private banks such as Commerzbank or Deutsche Bank find it difficult to compensate for a falling interest margin through other branches of business such as the securities business. Especially since margins are coming under increasing pressure here too. Be it through increasingly low-margin financial products such as ETFs, increasing competition from the FinTech sector or a bond business that pays less and less interest. Large-scale job cuts are the result.
If there is then macroeconomic turbulence that causes high loan defaults, the already low equity ratio of many institutions quickly reaches its limits. But the situation is not only serious from a macroeconomic point of view.
Technical change: More empty phrases than understanding
It seems that many banks are still not aware that they are facing the greatest structural change of all time. What the internet did to the music industry or the publishing industry is now threatening the financial sector. Instead of the pure information and communication level as was previously the case in the Internet economy, it is now about new infrastructures for our money and our assets.
Specifically, the three most important core functions of a bank are affected: payment transactions, credit and custody. In addition, there are other functions such as the securities business, whose infrastructures will also be fundamentally changed in this decade.
E-Euro and Facebook’s Diem need new infrastructures
Specifically, with the switch to digital central bank money, the infrastructure will also be adapted to the new medium token. Both a digital euro in the sense of a Central Bank Digital Currency (CBDC) and in private form in the form of a stablecoin must then be embedded in new and programmable infrastructures . Every bank has to cope with blockchain-like infrastructures – even if they have little to do with an open blockchain à la Bitcoin. Be it for payment transactions or lending and securities business.
Ultimately, this change also entails a departure from the previous document requirement. Fewer and fewer securities will be processed via the old infrastructure in the next few years.
Are our authorities more innovative than our banks?
Only in December did the federal government take the first step with its law on electronic securities. In the first quarter of 2021, fully digital bonds should be exchanged before the law via tokens and blockchain registers. In the long term, this means that the securities account of the future will also need a wallet function in order to be able to store digital securities (security tokens). Equivalent changes through token-related dematerialization and automation, in which smart contracts replace manual processes, are only a matter of time. A small study by the FinTechs Finoa and Cashlink had already shown how great the savings potential is .
With the increasing regulatory framework, the way will be cleared for a token and blockchain-based financial economy. At the moment it does not look as if the current market shares will remain with the previously dominant banks. There are individual payment traffic pilots with stablecoins and at Commerzbank part of the securities processing takes place via a distributed ledger infrastructure. But that is not enough to keep up with the innovation dynamics from the FinTechs and blockchain sector.
New business models for banks, no ifs or buts
A consequence of this technological transformation process are also new business models. Be it the staking of cryptocurrencies or the digital securities issuance of small and medium-sized enterprises (SMEs). Every universal bank that is serious about digital innovation – that means more than cool innovation hubs in Berlin – should already be able to present blockchain projects for each of the above-mentioned core areas of a bank, at least in cooperation with a FinTech.
Just as a Deutsche Telekom is already experimenting with staking , a Deutsche Bank must also ask itself how staking can complement the investment business and how the corporate customer business can open up new sources of income through the tokenization of GmbH shares. Even if staking and tokenization are still practically irrelevant economically in 2021, everything indicates that this will change in this decade. The same applies to so-called crypto lending, i.e. decentralized loans, the volume of which is also still irrelevant, but this could also change in the next few years.
Everyone should consider the development of Bitcoin, which a few years ago was also economically irrelevant and infrastructurally undeveloped. Today, however, it has fought for a place in the traditional financial market. The newer crypto phenomena like staking or crypto lending are where Bitcoin was a few years ago, in 2013 or 2014.
Central meets decentralized
In addition to the classic CeFi offers, i.e. financial services that are provided centrally by an intermediary, the DeFi area will also continue to develop. These decentralized financial services will not replace the centrally organized banking business anytime soon, but they will complement them. Specifically, it is to be expected that market shares will be transferred to decentralized financial protocols.
If there were a certain willingness to disrupt, banks could also develop their own decentralized protocols to help shape standards and participate in the new value-added infrastructure. Even at the risk of attacking your own value chains, this proactive addition to the existing business would massively increase the future probability of survival. There is a merger between traditional banking and the crypto economy. The earlier you understand this as a bank, the sooner you should be able to maintain market shares and save jobs.