Consider Crypto Before the Window Closes: SRM Report

A new report from consulting firm Strategic Resource Management, Inc. (SRM) asserted banks and credit unions must begin strategizing for how they might offer cryptocurrency services to customers and members, given the expanding level of engagement with crypto happening in the U.S. and how it could impact financial institutions’ business long-term.

The Memphis, Tenn.-based SRM began offering crypto advisory services to clients in early 2021.

“Cryptocurrency 2022: Converting a Threat Into a Reality” noted one-third of American households currently own crypto, according to a Visa survey of 6,000 households, and that recent moves by numerous groups point to a growing urgency for financial institutions to enter the space. These moves have included PayPal, Venmo and Square enabling Bitcoin in their digital wallets; digital payments platform Flexa allowing for crypto to be spent at the point of sale; Visa and Mastercard working on stablecoin-based payment solutions; the Federal Reserve collaborating with MIT to explore the potential for a central bank-issued digital currency; and companies like Amazon, Apple and Walmart looking to hire crypto experts.

In addition to educating financial institutions on key cryptocurrency terms and offering a rundown of current regulation in the crypto space, the report outlined key benefits of introducing crypto services and the most feasible use cases. The benefits included:

• Defending your deposit balances. With consumers moving their funds out of traditional financial institutions into crypto exchange destinations like Coinbase, the deposits at those crypto exchanges are likely to grow, meaning it may only be a matter of time before they start introducing expanded financial services such as lending – and stepping onto traditional institutions’ territories.
• Reaching new members from groups your institution may be targeting, such as the underserved. SRM noted a Morning Consult study found that 37% of underbanked consumers hold crypto, compared to just 10% of fully banked consumers.
• Increasing customer/member engagement. The report pointed out that crypto holders are likely to check their accounts more often, with altcoin prices regularly fluctuating and crypto exchanges being open 24/7/365.
• Establishing your institution as a crypto service provider of choice. Given that crypto service providers are currently still in their early stages of entering the market, the time to stake a claim is now, SRM argued.
• Gaining new sources of interest and non-interest income.

The report summarized four key crypto service areas for financial institutions, including credit unions, to explore:

• Custodial services: As a first step into the realm of crypto services, SRM recommended offering the safekeeping of crypto assets for members. Credit unions can isolate these assets from standard deposits in a manner similar to that of investment management units, the report said.
• Crypto rewards: Credit unions can integrate a crypto rewards program into their debit or credit card, mobile wallet or digital banking app. Such a program would allow members to receive cryptocurrency as a reward for specified account use instead of traditional rewards such as cash back or airline miles.
• Buy/hold/sell capabilities: This service would require a full integration into the credit union’s existing digital banking app.
• Crypto lending: The most ambitious out of these options, this would entail the credit union extending credit to a borrower who would use their digital assets as collateral on the loan. The primary challenge of crypto lending is the lack of consensus on how to value the volatile underlying asset as collateral, SRM noted.

The report concluded that the window is currently still open for banks and credit unions to engage in the crypto space, and recommended they take preparatory steps now, such as gathering information on how crypto might be impacting their current business, keeping an eye on emerging players in the space – especially those offering services in line with traditional financial services – and differentiating potential partners from potential competitors, all while understanding that the future of crypto services is very uncertain.

“This (crypto engagement) window could close, and perceptions shift quite rapidly,” the report warned. “As history has shown with e-commerce and the rise of companies like SoFi and PayPal, such cycles continue to accelerate. If banks and credit unions fail to act promptly, players like Coinbase and Crypto.com could easily be playing a similar disintermediating role in just a few years’ (or months’) time.”