In an era defined by digital innovation and financial transformation, the world of banking and financial services is witnessing a paradigm shift.
One such shift is brought about by blockchain technology, giving rise to cryptocurrencies which have opened a door to unprecedented opportunities for both traditional banks and nimble neobanks. In a report released by PwC in 2023, it was revealed that banking executives are refining their growth narratives to stand out in a highly competitive market, with cryptocurrencies emerging as a prominent narrative.
The growing acceptance of cryptocurrency is evident in traditional banking institutions, where some have invested in the underlying blockchain technology or begun offering cryptocurrency services to their clients; Citibank, Goldman Sachs and Barclays are just some of the banks that have done so. Beyond the established banking giants, newer, more modern banks such as Revolut have also embraced cryptocurrencies, even achieving its first ever annual profit following the cryptocurrency surge in 2021.
In this blog, we explore how banks and neobanks are strategically redefining their roles in the financial ecosystem. By embracing cryptocurrencies and offering them as diverse investment products to their customer base, these institutions are not just evolving; they are pioneering a new era in finance. We'll delve into a case study of Revolut to witness how cryptocurrencies have empowered them to achieve profitability. Additionally, we provide actionable insights on how other forward-thinking banks can follow suit, taking measured steps to seamlessly integrate cryptocurrencies into their product portfolios, and thereby, unlocking growth in a rapidly evolving financial landscape.
The advantage in embracing cryptocurrency
The increasing popularity of cryptocurrencies in both traditional banks and neobanks is driven by several factors. Not only does the diversification of services aim to attract a broader customer base, catering to the growing interest in digital assets and allowing their users to capitalize on the investment opportunities presented to them. In the rapidly evolving field of modern banking, institutions face an imperative: adapt or risk falling behind. That’s why many banks have begun to explore the addition of cryptocurrency into their offerings. Among the benefits it offers are:
1. Attracting a new customer base
The attractiveness of cryptocurrency extends far beyond its financial potential; it's a symbol of innovation and digital progress. By offering cryptocurrency services, banks can appeal to the growing cohort of customers who are not only comfortable with digital advancements but actively seek them. This forward-thinking demographic is increasingly drawn to banks that embrace the future of finance, and cryptocurrency is an enticing gateway.
2. Diversifying product offerings
Cryptocurrency's versatility extends beyond being just a speculative asset. Incorporating it into their portfolios allows banks to diversify their suite of financial products. From savings and investment options to payment solutions, cryptocurrency opens doors to new financial experiences that cater to a wide range of customer needs. This diversification strengthens banks' competitiveness in an era where customers value choice and flexibility.
3. Competitive differentiation
In a fiercely competitive financial landscape, differentiation is key. Banks that lead the charge in offering cryptocurrency demonstrate their commitment to innovation and staying ahead of industry trends. This sets them apart from traditional peers and positions them as progressive financial partners in the eyes of both existing and potential customers. Such differentiation can be a pivotal factor in attracting and retaining clientele.
Incorporating cryptocurrency into their offerings is not just about staying relevant; it's a strategic move that allows banks to tap into the benefits of innovation, diversity, competitiveness, and global accessibility. By embracing this digital evolution, traditional banks can reimagine their role in the financial landscape and chart a path towards a prosperous and customer-centric future.
Potential cryptocurrency offerings for banks
Neobanks, with their agility and tech-forward approach, have a unique opportunity to provide a wide range of cryptocurrency services to their customers. Here are several potential cryptocurrency offerings for banks:
Crypto investment portfolios
One of the most accessible ways to provide customers with exposure to cryptocurrencies is by offering curated cryptocurrency investment portfolios or facilitating the trading of stocks with cryptocurrency exposure. For instance, users can invest in stocks of cryptocurrency companies or opt for assets like Exchange Traded Funds (ETFs) that directly track cryptocurrency values. This approach streamlines the investment process, making it more straightforward for users, even those without extensive knowledge of individual cryptocurrencies. In June 2023, BlackRock, the largest asset management company globally, submitted an application for a spot Bitcoin ETF, marking the beginning of a wave of similar ETF applications from major asset management firms such as Fidelity and Franklin Templeton.
Buy and sell cryptocurrency tokens
For banks that want to cater to the segment of customers who do have some knowledge of individual tokens and want to invest into specific tokens, they can establish partnerships or collaborate with liquidity providers such as established cryptocurrency exchanges and enable clients to trade cryptocurrency through the banking mobile apps or online platforms.
Crypto savings accounts
Neobanks can offer crypto savings accounts that allow customers to earn interest on their cryptocurrency holdings. These accounts may provide competitive interest rates compared to traditional savings accounts, attracting crypto enthusiasts looking to grow their digital assets.
Crypto payment solutions
Neobanks can integrate cryptocurrency into their payment systems, allowing customers to make purchases, transfer funds, and pay bills using cryptocurrencies. This feature enhances the utility of digital assets in everyday transactions.
Instant crypto-to-fiat conversion
Enabling customers to convert their cryptocurrencies into traditional fiat currencies instantly can enhance the usability of digital assets for day-to-day financial needs.
Crypto lending and borrowing
Neobanks can facilitate crypto lending and borrowing services, allowing users to earn interest by lending their crypto holdings or access liquidity by borrowing against their digital assets.
Integration with DeFi services
Integration with decentralized finance (DeFi) protocols can provide neobank customers access to advanced financial services like yield farming, liquidity provision, and decentralized exchanges.
Crypto Rewards and Cashback
Neobanks can introduce crypto-based rewards and cashback programs, allowing customers to earn digital assets as rewards for using their banking services, making purchases, or referring new customers.
By offering a combination of these cryptocurrency services, neobanks can cater to a diverse customer base, from beginners looking to dip their toes into the crypto space to experienced traders and investors seeking convenience and advanced financial solutions. These offerings position neobanks as innovative and forward-thinking financial institutions in the rapidly evolving digital economy.
Revolut's remarkable growth with cryptocurrency
Revolut, one of the early pioneers among neobanks, made waves in the financial industry with its bold foray into the world of cryptocurrencies. Founded in 2015 by Nikolay Storonsky and Vlad Yatsenko, Revolut set out to revolutionize traditional banking by offering a range of innovative financial services, all accessible through its user-friendly mobile app. In 2021, Revolut decided to offer cryptocurrency services to its customers after heightened interest in cryptocurrencies. As a result of this, the neobank rebounded from a loss of £223 million ($269 million) in its previous year, reporting a profit of £26 million ($31 million) for 2021, its first ever annual profit. Furthermore, the company saw continued growth in 2022, with revenues surging by over 30% to reach £850 million ($1 billion). Notably, its cryptocurrency trading division contributed to approximately one-third of its total revenue.
Revolut's embrace of cryptocurrencies played a pivotal role in its rapid customer acquisition and impressive growth. Here are some key data points that showcase their journey:
Growing Revolut’s customer base: Revolut quickly amassed a large and diverse customer base, reaching over 15 million users globally as of 2021. Their crypto services significantly contributed to attracting individuals seeking streamlined access to digital assets.
Increasing crypto demand and adoption from users: By offering a straightforward way for users to buy, hold, and exchange cryptocurrencies within the app, Revolut tapped into the growing interest in digital assets. A Chainalysis report on 154 countries indicates that worldwide cryptocurrency adoption went through a period of consistent growth since mid-2019 and started to stabilize in 2022, visually represented in the chart below.
Revolut's success in the cryptocurrency space can be attributed to several unique strategies and features:
User-friendly interface: Revolut's app boasts an intuitive and user-friendly interface, making it easy for both crypto novices and enthusiasts to navigate the world of cryptocurrency. This accessibility was crucial in attracting a broad audience.
Multi-Currency Accounts: Revolut's ability to offer multi-currency accounts, including cryptocurrencies, allowed users to manage various forms of money in a single platform. This convenience resonated with travelers, freelancers, and international users.
Real-Time Conversion: Revolut enabled real-time conversion between cryptocurrencies and traditional fiat currencies at competitive rates, eliminating the need for users to navigate external exchanges.
Crypto Education: Recognizing the importance of user education, Revolut provided educational resources and guides on cryptocurrencies within the app, helping users make informed decisions about their digital asset investments.
Stablecoin Support: Revolut introduced support for stablecoins, which are less volatile cryptocurrencies, and are pegged to traditional currencies like the US dollar. This feature appealed to users seeking a more stable cryptocurrency experience.
Revolut's journey into cryptocurrency exemplifies how a neobank's strategic approach to cryptocurrency can lead to remarkable customer acquisition, retention, and growth. Their user-centric design, commitment to education, and multi-faceted cryptocurrency services have made them a trailblazer in the neobanking industry, setting the stage for other innovative financial institutions to follow suit in the ever-evolving world of banking.
How to get started with crypto for banks
Getting started with cryptocurrency services in a bank or neobank involves a careful process of planning, technical integration, and regulatory compliance.
1. Meeting regulatory and compliance requirements
Start by thoroughly understanding the regulatory environment related to cryptocurrencies and digital assets in your jurisdiction. Ensure that you comply with all applicable laws and regulations, including anti-money laundering (AML) and know your customer (KYC) requirements.
Establishing strong KYC/AML procedures is paramount when dealing with cryptocurrencies. Your bank should employ a comprehensive KYC process during user onboarding, requiring customers to provide verified identity information and proof of address. Additionally, AML procedures should involve continuous monitoring of user transactions to detect and report suspicious activities. Regularly update your KYC/AML protocols to stay in compliance with evolving regulatory requirements and industry best practices.
Compliance with cryptocurrency regulations often requires generating and submitting various reports to regulatory authorities. Your bank should have robust mechanisms in place to generate and securely store these reports. This includes transaction reports, suspicious activity reports, and any other documents mandated by local or international regulators. These reports should be easily accessible and ready for submission whenever required, demonstrating your commitment to regulatory compliance. Conduct regular audits to ensure ongoing compliance with regulations.
Implement state-of-the-art fraud detection tools and algorithms that can identify suspicious activities, such as unusually large transactions, rapid transfers, or irregular login patterns. Additionally, establish protocols for freezing or flagging accounts associated with potential fraudulent activities, protecting both your bank and your customers from financial harm.
Lastly, implement strong security protocols, including multi-factor authentication, encryption, and intrusion detection systems to protect against cyber threats.
2. Setting up technical Infrastructure
First, you will need to choose your wallet model and a provider. When it comes to institutional wallets for cryptocurrency, there are two popular models: Multi-signature wallets or Multi-party computation (MPC) wallets. Find out more about the different wallet design models in this blog post.
The choice of a wallet model depends on your institution's priorities. While MPC prioritizes operational efficiency and flexibility, multi-signature places a strong emphasis on provability to enhance the security of digital assets against external threats. Levain has chosen to implement multi-signature technology for our wallets, providing institutions with unparalleled transparency and allowing them to thoroughly verify and audit the entire custody process.
Next, decide which cryptocurrencies your bank will support. Popular options include Bitcoin, Ethereum, and stablecoins like USDC or USDT. Evaluate the technical requirements for each cryptocurrency, and work with providers that support the tokens that you wish to offer to your clients. It is also important to choose a provider that can support new chains and new tokens so that you can offer the latest opportunities to your customers.
Once you have decided on the tokens, you will need to either create your own APIs or find a provider offering APIs tailored to your specific use case. Whether it involves setting up individual wallets for users, facilitating cryptocurrency transactions, or enabling crypto-to-fiat conversions, these APIs must be seamlessly integrated into your banking applications. Levain has published a technical guide which provides a step-by-step process to enable any bank to seamlessly integrate APIs into their core banking systems, supporting various cryptocurrency use cases. You will also need to ensure these APIs can scale to handle increased demand as more customers start to use your cryptocurrency services.
Next, you will need to consider working with various partners such as integrating with reputable cryptocurrency exchanges or build an in-house exchange platform for buying, selling, and trading cryptocurrencies. Integrate these platforms into your banking infrastructure.
3. Building seamless user-facing services
Creating user-friendly mobile and web applications is a cornerstone of offering cryptocurrency services. These applications should prioritize ease of use, intuitive navigation, and a visually appealing interface. Ensure that users can effortlessly access their cryptocurrency wallets, initiate transactions, and explore additional features.
To empower users with up-to-the-minute insights into the cryptocurrency market, integrate real-time data feeds within your banking applications. This data should include live price updates, trading volumes, historical price charts, and order book depth. Real-time market information equips users with the knowledge they need to make informed investment decisions and execute transactions at the right time.
To cater to users interested in cryptocurrency trading, offer a suite of trading tools within your applications. This may include various order types (e.g., market orders, limit orders), advanced charting features with technical analysis indicators, and price alerts. These tools enhance the trading experience, allowing users to execute trades efficiently and tailor their strategies to market conditions.
Recognizing that many of your users may be new to cryptocurrencies, it's essential to provide educational resources within your application. These resources should encompass a range of topics, from the basics of blockchain technology and cryptocurrency fundamentals to risk management and security best practices. Consider offering tutorials, articles, video content, and even interactive quizzes to help users build their knowledge and confidence in cryptocurrency use. Furthermore, educate users about the potential risks associated with cryptocurrency, such as price volatility and security concerns. Encourage responsible investment practices and emphasize the importance of securely storing private keys and passwords.
Levain is the trusted partner for banks and neobanks exploring crypto
In today's fast-paced financial world marked by digital innovation, traditional banks and nimble neobanks are seizing the opportunity of cryptocurrency as a catalyst for growth. This is not only seen in banking giants like Citibank, Goldman Sachs, and Barclays, but also in modern banks like Revolut. Not only can banks attract a new customer base of tech-savvy customers, they can also diversify product offerings – such as cryptocurrency token trading, crypto-to-fiat transactions and DeFi services – and gain a competitive edge.
For banks that are looking to incorporate cryptocurrency products services to their customers, they will need to consider the compliance and regulatory requirements, the technical infrastructure required to support cryptocurrency and build seamless user facing interfaces for their users.
Levain's suite of APIs is tailored for banking institutions, offering full customizability while ensuring the highest level of security for those looking to venture into digital assets. Apart from that, Levain's bank-grade storage guarantees the security of client funds, with no unauthorized access possible, and single-tenancy server instances to meet regulatory requirements. Unlock DeFi opportunities for your banking clients, expanding your offerings beyond traditional financial products.