The battle for the future of finance

Over the years, the financial industry has undergone significant transformation as challenger banks and crypto institutions have emerged to challenge the traditional banking system (TradFi). According to data obtained by Finbold, downloads for selected six European mobile-only banking apps peaked at 26.3 million in 2022 for Android and iOS operating systems, representing a growth of 54.09% from 2021 of 17.06 million from year to year.

Number of European mobile-only banking app downloads in 2022

Source: Finbold

Similarly, the global cryptocurrency market cap has grown significantly over the past year, reaching a total market cap of over $2.5 trillion by early 2022. As digital banking and crypto adoption gain traction, the race to shape the future of finance increasingly stronger. So, who will come out on top?

Challenger Banks

Challenger banks represent financial institutions that “challenge” the conventional banking sector by operating entirely online.

The likes of Revolut, Monzo and Wise provide customers with a seamless onboarding process and efficient banking experience. Unlike traditional banks – which require extensive documentation and background checks – these banks usually only require a few simple steps to open an account, often within minutes.

In addition, challenger banks offer features such as budgeting mechanisms, real-time transaction alerts, and even rewards programs to give consumers a more enjoyable experience managing their finances.

Crypto institutions

While challenger banks have made significant strides in disrupting the traditional system, with the rapid innovation of crypto institutions, there is a growing recognition that the next wave of disruption in finance may come from the world of cryptocurrency. Institutions like Coinbase and Binance offer many of the same benefits as challenger banks, but with additional features that come with the use of blockchain technology.

Crypto institutions can offer users greater security, faster transaction times and a range of financial products comparable to TradFi banks, including sending, receiving, spending, saving, remittance, trading and lending. Although furthermore, beyond these conventional offerings, blockchain technology enables these institutions to offer an expanded range of services, such as decentralized governance mechanisms that prioritize transparency, accountability, and community decision-making. In addition, they can also offer stake and decentralized finance (DeFi) liquidity provision, allowing users to effectively “become their own bank.”

As transactions are recorded in a public ledger, they are more resistant to fraud and manipulation. Overall, these innovative financial products and services are transforming the financial services industry and providing a viable alternative to traditional banking.

The overlap

Although challenger banks and crypto institutions have different characteristics, they share similar financial products.

For example, Revolut, a leading challenger bank, has successfully integrated cryptocurrency trading into its product offering, allowing users to buy, sell and hold digital assets such as Bitcoin and Ethereum. This strategic move has enabled Revolut to capitalize on the growing demand for cryptocurrencies while providing users with an accessible and user-friendly platform.

Likewise, although crypto institutions use blockchain technology to facilitate transactions, some, such as Coinbase, operate on a centralized platform governed by a central authority. Despite this, Coinbase recently launched Base, a platform that aims to simplify the development of DeFi applications on its blockchain.

This move demonstrates Coinbase’s use of newer technologies and its expansion into DeFi, which could attract users interested in innovative financial products.

Looking to the future, this convergence offers an exciting opportunity for the emergence of better financial innovation: crypto bank.

Crypto bank

By incorporating the user-friendly interfaces and modern features of a challenger bank with blockchain transaction infrastructure, running crypto-powered financial services has the potential to change the way consumers manage their finances.

A cryptobank can be very beneficial to not only consumers who are currently banked but have difficulty with the traditional banking system, but also those who may not have access to the traditional system as a whole – the unbeaten.

In developing countries, where traditional banks charge high fees and offer limited financial services, a crypto bank can provide a more affordable and comprehensive alternative to these demographics. Essentially, this can be particularly useful for individuals who do not meet the strict requirements of traditional banks, such as a high credit score or substantial collateral.

In addition, a crypto bank can offer faster and more secure transactions than traditional banks, providing a significant advantage to those who rely on remittances from family members working abroad.

According to the World Economic Forum, global remittances were estimated at $794 billion in 2022, with developing countries receiving approximately $551 billion of the estimated total.

Countries receiving the highest global remittances

Image: Visual Capitalist

These transfers are essential for people in low- and middle-income countries and are often the largest contributor to some national economies. In this context, a cryptobank can offer faster and more secure transactions than traditional banks, providing a significant advantage to those who depend on remittances from family members working abroad.

Final thoughts

Indeed, the potential use cases for financial services running on crypto rails are vast and varied, and their emergence represents a significant step forward for financial innovation.

In light of these potential benefits, it is clear that the answer to the question of which is superior – challenger banks or crypto institutions – is not binary. Rather, it is a matter of recognizing the strengths and limitations of each and exploring the potential of combining them.

The future of finance lies in the middle ground between challenger banks and crypto institutions, where the advantages of both can be leveraged to create something new and better – a crypto bank. This new concept is a great example of how technology can drive economic innovation and create new opportunities for people around the world.