Bridging community banking and the decentralized, digital future of money

“The USD is losing its market share as a reserve currency at a much faster rate than is commonly believed. After declines in its global market share for the past two decades, in 2022 the dollar lost market share at a pace 10 times as rapidly.” – Stephen Jen

Stopping deposit outflows and defending and preserving liquidity and reserves is likely to look vastly different in a future where the electronic dollar must compete with proven, global alternatives. Since the beginning of 2023, Bitcoin value has skyrocketed from $16,500 to over $27,000. Meanwhile, inflation (of national, fiat currencies) remains stubbornly high across the globe, restricting prosperity and economic health.

Institutional adoption of decentralized ledgers and consumer enthusiasm for the tools and “coins” that run on them are also disrupting the controls created for an age that is rapidly fading into history. Remember when transactions settled in days? When were cross-border payments conducted by Western Union? Today, consumer trust and engagement are defined by personal autonomy, speed, and convenience; distrust is expressed just as independently, at times weaponized by the speed of the internet. What’s driving this? We’d argue its popular awareness of fiat instability coupled with practical demands for consumers and communities to preserve their financial health. As consumers and communities continue to confront steeply climbing energy costs, commodities prices, and declining savings balances – as the Dollar (and other central bank currencies) may be forfeiting their most-favored status as stable “assets” – they’re likely to keep exploring alternatives for preserving the purchasing power of their labor.

What does this mean for our community banks and credit unions? Further consolidation and centralization of capital away from your local financial institution.

With this data in hand, even the most nostalgic industry executives must acknowledge that decentralized finance is a force. The lure of speed, security, cost reduction, and, controversially, the potential to exert greater control over monetary policy are proving to be utterly irresistible across the globe. You have probably seen trends like Twitter empowering its users to access stocks, cryptocurrencies and other financial assets through a partnership with eToro, and your members continue to trade in their traditional dollars to participate in a future where money lives on the internet. Understandably, this “change,” can be seen as a disruptive field of landmines. The question is, are you strategically and operationally committed to maintain member engagement in this digital reality, creating sustainable, revenue generating relevance, or are you still focused on old world ways to make up for the rapidly decreasing fee income and loss of liquidity?

There was a time, not long ago, when the transformational power of the internet was a curiosity. It wreaked havoc on businesses at the periphery of our lives, like mail delivery and entertainment. Blockbuster was a required way station for our weekends and, we would learn over time, it would become a bridge between physical media and the emerging era of streaming everything. Many of us inhabited the “record store” even when we purchased digital music in the form of physical compact disks, aka CD’s. So many of life’s experiences are now filtered through the virtual world that we take the technology for granted, and in the financial services industry, we are still operating as if these transformations and industry disruptions will bypass us.

However, 2023 continues to present all of us in the banking sector with some clarity around our collective future. Money is also becoming a streaming phenomenon. It’s transcending the physical world like movies, music, and mail before, reforming itself in the internet with all of the speed, convenience, and security that entails. Through this phenomenon, the paradox of community banking will be to maintain the position of trusted local partner and valued steward of local wealth. To build the bridge between community banking and the decentralized, digital future of money. Consumers and communities are moving beyond the constraints and limitations of archaic banking systems and payment networks more obviously, and indisputably in 2023; so too must banks if they want to continue serving their communities.

What can your institution do in 2023 (and 2024) to prepare for a world which rapidly advances beyond the present day-to-day speed of money? How can community financial institutions start building products and services to meet consumer expectations that money moves at the speed of the internet?

It may seem like a complex question, but there is an elegantly simple answer: if money is overcoming the costs, risks, and limitations of living as dispersed data on assorted legacy banking systems, then the solution to that problem is to prioritize control of data and build digital operations that tie into the distributed networks money is being stored on and exchanged through. That doesn’t mean offering current products and services through electronic channels and platforms, the way a member logs in to check account balances as an alternative to visiting your branch or calling your contact center. It doesn’t mean making the next pick for the right ITM; it means asking the question, “how long will we have physical cash, checks, and plastics,” and creating retail operations which function without vaults and teller drawers, and back-office operations which settle digital assets processed on distributed ledgers in seconds, not credit cards and checks moving via files over days. Building digital operations will mean prioritizing all-new strategies and initiatives with the singular goal of ensuring your institution can store and process more, and more efficient, money data – whatever form that takes in the future (CBDC, Bitcoin, digital securities, digital commodities, etc.). Building digital operations will require an understanding that your institution will either control data, which is money, or it will outsource storage and control of that data to someone else (and that vendor will, by default, control the financial relationship whether they are a ‘bank’ or not in the traditional sense of the word).

Fortunately, partners exist to help you realize these multi-year change management and operational builds. 

What is your local institution’s unique meaning beyond the traditional  transactions of banking? What values has your institution instilled in the community? How will you maintain your valued position in your community and deepen trust in the era of decentralized finance? If you can answer these significant questions, you’re on the path to understanding the technological and social significance of money merging with the internet. As always, we’re here to educate and help.