Daily Bulletin


Are the big banks going digital?

  • Written by News Co

In February 2019, J.P. Morgan became the first US bank to successfully create a digital currency when it launched the JPM coin. The JPM coin uses blockchain technology to securely transfer payments between institutional clients.

J.P. Morgan isn't trying to compete with the likes of Bitcoin, Qoin and Ethereum; the role of the JPM coin is to allow the bank to transfer money between accounts with blockchain encryption, which is the foundation of digital currencies. One JPM Coin is equal in value to one US dollar, making it an easy way for the bank to transfer US dollars between accounts quickly and safely.

J.P. Morgan may be the first big bank of its kind to fully embrace digital currencies, but it certainly won't be the last. The western world is quickly becoming a cashless society, and with this change, there's no doubt that big banks are going to have to adapt and transform too.

This year, the Reserve Bank of Australia published data showing that cash payments have fallen from approximately 70% of all payments in 2007 to just 25% of all payments in 2019. Australia is well on its way to becoming cashless, alongside other societies including the US and the UK.

Around the world, numerous banks are making progress with their own Central Bank Digital Currencies (CBDCs). China's digital currency system is the most developed in the world, created by The People's Bank of China and is currently being trialled in Shenzhen, Suzhou, Xiong'an, and Chengdu. In Sweden, the Riksbank is testing the e-Krona, a CBDC which is well past due for a nation that has seen a significant decline in the use of cash payments compared to other nations.

It's about time that Fintech fully embraced the digital revolution, although banks are naturally reluctant to risk leaving some customers behind. We're entering a transition period, during which banks must do what they can to prepare themselves for a majority digital future while ensuring that cash payments are still accommodated for under the current system.

J.P. Morgan's creation of the JPM Coin also highlights another concern of banks, which is that digital banking lacks the security of traditional banking. With technologies like blockchain properly implemented, this needn't be true any longer, but banks will have to invest heavily in staff and infrastructure to ensure that all aspects of digital banking are properly secured.

Australia is also seeing a rise in challenger banks, and while these banks may struggle to compete in the same arena as the big four banks of Australia, their enhanced digital services and focus on digital banking puts pressure on more traditional banks to improve their offerings in this sector or risk losing new generations of younger customers. The creation of the JPM Coin is just a single event on the journey towards fully digital banking. We may not be there yet, but it's only a matter of time.

To avoid being left behind during the digital currency revolution a wide variety of online stores now accept Bitcoin, Ethereum and various other digital options. There is also a growing movement of merchants across Australia and New Zealand that accept Qoin as payment. Here we take a look at the Fintech that's made the use of digital currency for the purchase of goods and services a reality.

One of the major drivers towards digital currency becoming as common a payment option as Visa or Mastercard is the development of a digital-friendly PoS here in Australia. Developed through a collaboration between Vend and DC PoS, a Melbourne-based company, the PoS device enables people with digital currency to enjoy a secure, straight-forward transaction process.

With the tech in place to make digital payments an easy reality, a growing number of high street businesses, particularly in larger cities such as Sydney, Melbourne and Perth, are opting to accept digital currency payments. A recent analysis showed that around fifty retailers in Melbourne are currently accepting Bitcoin. The Australian digital currency Qoin, is also accepted by more than 20,000 retailers in Australia and New Zealand.

Like any other decision regarding payment methods, retailers must consider the spending habits of their audience, as well as payment trends at a national level. In terms of the latter, figures show that the number of digital currency payments that consumers are making is increasing month-on-month. Although only a tiny segment of total transactions currently, this is an area that could experience considerable growth over the next year or two, particularly in relation to the demographic most likely to invest in digital currency. As we move further towards a cashless society, it's likely that most retailers are going to start accepting digital currency in the next few years.

In some ways, China's recent trial of the digital Yuan is an obvious step for a nation moving towards a cashless society. With the RBA learning that most transactions valued at $50 or more are already being conducted digitally, the step towards implementing a digital national currency would seem a logical extension of what's already happening across the developed world.

The Peoples' Bank of China, which owns the Yuan, has been quick to point out that the digital Yuan is not going to be a speculative tool. In comparison, many cryptocurrencies are primarily a speculative investment opportunity, with only a few offering options for exchange in return for goods and/or services.

Many digital and cryptocurrencies operate independent of geographical or political barriers meaning anyone can buy, sell or accrue them. In contrast, the Yuan is owned solely by the Peoples' Bank, a national institution. This has significant implications for it’s circulation and control. It is unlikely that investors in other digital and cryptocurrencies, who value the anonymity and lack of regulation that particularly characterises crypto, are going to be similarly attracted to a currency that's controlled by a single, state organisation.

One of the factors that make digital currencies so appealing are their anonymity, and they remain a haven for investors who wish to conduct their affairs with a degree of privacy. Any transaction made using the digital Yuan will be recorded by the Peoples' Bank. The information can then be used for all sorts of purposes. For many digital currency users, the ability for a banking institution to harvest data about personal financial transactions will be enough to dissuade the use of a digital currency such as the Yuan.

The digital Yuan is intended to complement the physical Yuan. The development of digital currencies as part of the Fintech revolution was part of a drive to create a totally digital asset - there are no physical digital currencies. The use of the digital Yuan to complement a physical currency is a new concept in the Fintech world.

The digital Yuan highlights the unique role that digital currency plays in the Fintech industry and investment markets more broadly. It remains to be seen the effect it will have on an ever-evolving industry, but we’ll be tracking it closely.

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