Garnet Capital Advisors Blog

How much of an effect will bitcoin have on the banking industry?

Next time you order a pizza or pay for your Swedish massage, you won't necessarily have to whip out your wallet.

Instead, you can pay for goods and services like these by using 'bitcoins', a virtual currency that's not tied to any specific nation's currency nor subject to regulations.

But the question begs to be asked: what effect will bitcoins have on the banking industry?

Since bitcoin surfaced in 2009, it has had a significant impact on worldwide finance, despite the odd lull in popularity and drop in value through the last year. While it had little or no dollar value in its early days, bitcoin's value has increased since its inception, despite being well off its highs, and an increasing number of merchants, lenders, and financial institutions are adopting it.

Early Concerns in the Banking Industry

Bitcoin is completely controlled by computer software and is, therefore, theoretically impervious to the volatility that tends to affect the economy. When bitcoin first emerged, many bankers feared that it could pose a threat the public trust that's required to corroborate government-issued currencies. The integrity of central banks, such as the US Federal Reserve, is dependent on the validity of government currency.

As bitcoin continues to be a global phenomenon, it is feared that many currencies may suffer if the level public trust fizzles. This is nowhere near reality just yet, but some bankers still believe that bitcoin could pose a potential threat to the US dollar and other currencies around the world. Whether or not this perception is a valid one remains to be seen.

Opponents to bitcoin believe that if the use of physical money and credit cards are minimized or even eliminated, the cost of transactions will be demonetized, and the need for middlemen - including banks - will also be wiped out.

Yet despite such fear and concern, some banks are starting to slowly come around and understand that a level of adaptation is warranted in order to remain relevant in the banking industry.

Coming Aboard With Bitcoin

Proponents of bitcoin say that the digital currency would be a lot more efficient and cost-effective for both consumers and banks. And while banks have always been a very traditional and closed platform, evidence suggests that they are starting to come around to this cryptocurrency.

According to 'Blockchain' CEO Peter Smith, at least 100 banks have expressed interest in the bitcoin wallet provider to implement the fledgling transaction technology into their own systems.

And fintech company R3 says it currently has a group of over 20 banks that it is creating a framework for applying blockchain technology.


There's evidence to suggest more and more banks are jumping on board with bitcoin.

This 'blockchain' - the same name as Peter Smith's firm - is the public ledger of all bitcoin transactions that works like a decentralized ledger that securely records trades.

Global investment in fintech is poised to double from $10 billion in 2014 to $19.7 billion by the end of this year, and the total is forecasted to be $46.1 billion by 2020.

And when looking specifically at bitcoin itself, the numbers are astounding as well. Bitcoin startups raised an impressive $347.29 million in 2014, compared to a more modest $2.13 million in 2012. More bitcoin startups have launched in 2015 - over 500 - compared to any year prior, and more and more major corporations are accepting it, including the likes of Microsoft and Overstock.

But the road to fully implementing blockchain is going to be a long one. It's a fundamental departure from the traditional banking and monetary strategy, so adopting this innovative technology will take years.

According to a report by TABB Research, it's estimated that capital markets may adopt the cutting-edge technology behind bitcoin as early as 2Q 2016, which could completely revolutionize the financial industry by keeping transactions more secure and generating new streams of revenue for bitcoin startups.

One thing is for certain - at some point, banks will have to adapt to the changing times, and to the continued emergence of newer and more technological means of payment transactions and banking. And if bitcoin continues to gain greater mainstream adoption in the market, banks have only two choices: either beat 'em or join 'em.

Keeping Lending Strong Amidst Radical Changes in the Banking Industry

With the likes of bitcoin seemingly making waves in the financial industry, banks will continue to have to keep their traditional means of profiting as strong as possible. How much bitcoin will truly affect the banking industry remains to be seen, but it becomes more crucial than ever before to ensure that the loan portfolio - the traditional means of profiting in the banking industry - is stronger than ever before.

At Garnet Capital, we've got the skill, experience, and industry expertise to help banks of all sizes maintain a profitable loan portfolio to pursue long-term revenues. In these times of dramatic changes on the financial scene, we can effectively help banks stay abreast of the continual innovation of fintech firms and the technological modernisms and opportunities they bring along with them.

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