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Torn between grown-up banking and crypto 20 January 2022 153

The possibilities in the crypto world are attracting the attention of digital challenger banks. But should they want to get involved? 

The CEO and Co-founder of N26 offered a revealing quote last week to the Financial Times, saying “Should we have built trading and crypto instead of launching in the US? In hindsight, it might have been a smart idea,” said Max Tayenthal. It is rare for executives to admit this type of error publicly. But given the German digital bank is exiting the U.S. market this week, Tayenthal and his leadership team are surely pondering some “what-ifs” regarding their American (mis)adventure.  

The lack of uptake in America is not the only reason for that statement. The German digital bank is very likely eyeing their British rivals, Revolut, with some crypto-envy. Revolut has gone hard on trading, and specifically crypto trading. I don’t use Revolut but have multiple friends who do and they have shown me the amount of push notifications they receive from Revolut, touting the hottest coin they need to invest in. The notifications might seem a bit in-your-face and tacky, but they appear to be working. When Revolut reported 2020 revenues last year, CNBC noted that “a rise in the value of cryptocurrencies, which Revolut supports through its trading features, led to a £38.7 million windfall for the firm.” With total revenues of £222m, cryptocurrencies are making a significant difference to the company’s bottom line. 

N26, on the other hand, has notably lacked any trading features in its app. Instead, it has devoted many of its resources to international expansions – United Kingdom, U.S. – that haven’t panned out. Now, in 2022, the company is refocusing on its core market, the European continent. Curiously, N26 said they are planning to launch a cryptocurrency trading business in 2022 before an equity trading option. It hopes it has not missed the boat when it comes to crypto and trading. It is very possible they have, though, with the retail trading boom that took place during pandemic lockdowns now in the distant past. People already have their money tied up with one of the myriad trading apps on the market. 

Now, Revolut hasn’t had unmitigated success across the pond either. They exited the Canadian market last year, just a year and a half after they had launched a beta version of their app in the country. And after nearly two years in the United States, they have only amassed 300,000 customers, a pittance in relation to the market size and Revolut’s global customer base. But their early forays into the trading space appear to be paying dividends, with the London-based startup now Britain’s most highly valued private company.  

I think the self-reflection from Tayenthal – along with Revolut’s crypto ventures – raises a broader question: what do these digital challenger banks want to become? Traditional banks are approaching the crypto question with understandable trepidation. A number of Efma members have approached us, curious as to how peer institutions around the globe are thinking about crypto. My colleague Boris Plantier looked into the matter and found that fintechs are largely leading the way when it comes to crypto trading and holding. There are a few examples of crypto offerings for private banking clients at BBVA Switzerland and DBS, but by and large, established financial institutions have not rushed headlong into the crypto space. This could reflect a certain sagacity on the part of traditional institutions who recognize a passing fad when they see one. Or it could represent companies with their feet stuck in concrete who are missing out on the next big wave of financial innovation. Your opinion on this question may primarily be a function of your age and/or how much time you spend online (and if you know what Web3 means). 

Crypto certainly had a moment in 2021 and entered mainstream consciousness. Much of this can be attributed to the crazy amount of capital sloshing around the world of crypto. Matt Damon’s $100m, cringe-inducing ad campaign for crypto.com that compares investing in crypto to, uh, the men who invented the airplane, is stark evidence of that. But there is a difference between fintechs wholly dedicated to crypto trading and digital-only banks that want to be taken seriously on the global stage. These maturing banks must straddle a fine line between growing into cross-border, deposit-holding financial institutions and trying to profit from a corner of the fintech scene that is filled with hucksters trying to hustle their latest coin on YouTube, hoping to take it to the moon. 

So much of the branding of digital banks revolves around “transparency” and “ease of use” and “financial control”. These are admirable values and many digital banks do deliver on these fronts. But if these are their animating qualities, it is hard to see how highly volatile and skeptical crypto trading fits into “reaching your financial goals faster”. Not that the business models of these challenger banks are oriented entirely around crypto, but given the amount of crypto revenue made by Revolut, it makes you wonder whether crypto regrets emanating from certain fintech executives stem from missing a profitable opportunity as opposed to providing a truly valuable and asked-for service to clients?  

I may be suggesting a false choice. These banks may be able to continue their evolution into major financial players and offer crypto trading to their users. Bitcoin may become a fiat currency. Cryptocurrencies may mature into just another asset class like commodities and real estate. Ethereum could underpin a blockchain revolution within the financial industry. 

On the other hand, the rise of crypto is prompting regulators to take notice. The massive energy consumption required to mine crypto has resulted in the top EU financial regulator calling for a bloc-wide ban on the main form of bitcoin mining. American lawmakers are demanding increased scrutiny of the crypto market. The unregulated and unchecked world of crypto could be in for a reckoning in the near future. 

Certainly, neo and digital banks need to start turning all of their customers into actual profits. However, much like actual crypto investing, organizing a business model around the continued growth of such a new and controversial phenomenon is a speculative proposition.   

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