Listen: Weekly Wrap discussion on crypto as an asset or investment

JJ Hornblass
Although what’s interesting is is that crypto really has really straddles the line between an asset and an investment. So historically, banks have stored your assets right your your money I mean in the most fundamental way but and certainly currency could be dollars could be an investment people can buy dollars as an investment. But generally speaking, it is it’s it’s an asset in in the case of cryptocurrency, it really, you know, could just as easily be an investment and many people view it that way. And that’s I think it’s also making its way into Treasury strategies for banks where they’re looking at cryptocurrency as a potential investment opportunity. And so that makes for a very, a different dynamic for most, you know, bread and butter banks, which is they’re, they’re now getting into a situation where it’s there, they’re holding the currency, but they’re also acting as a custodian, potentially for the investment. And I wonder whether that, you know, what the implications are of that? I mean, we’ve had, you know, we’ve had the Glass Steagall Act in this country to, which we’ve done away with, but what but we’ve, historically banks have have, in recent, in recent decades, have have not been engaged in brokerage operations, or at least have had firewalls between their brokerage operations and their retail banking from commercial banking ventures. I mean, how does this change that, does it? Does it matter? I, you know, what do you think?Loraine Lawson
I think regulators are really struggling with this. And, obviously, the focus varies by administration. So, apparently, what I heard at money 2020, is that less administration was more interested in pursuing, say, for instance, a cbdc than this administration is. I don’t know if that’s true. But what I can tell you is that, it seems to me with when it comes to finances, regulators are always day and $1. Short. They lag behind, and I think that’s gonna happen with crypto I. That’s just my personal opinion, obviously. But you see, the regulators are calling for me recently, they they issued a statement saying they, you know, we need to do something about crypto, but there doesn’t seem to be any real leadership around that or driving that regulation. Well,JJ Hornblass
maybe we should maybe it’s good to sort of talk about some blockchain use cases because that might be an extension of cryptocurrency in some way, or at least the least it can drive. It could be a segue into into crypto asset engagement. SoLoraine Lawson
absolutely. I think it’s important to understand, Blockchain is foundational to crypto. But crypto is not foundational to blockchain. I mean, it’s an enabling technology. But what it does really well is it keeps track of contracts, it keeps track of who bought what, who did what. So obviously, they’re looking at using it for financial services. This is CB insights. view on how it could disrupt finance or be a massive opportunity for finance and of course, payments is up there. By establishing a decent realized ledger for payments, Blockchain could facilitate Faster Payments at lower fees than bakes it says another way that banks could be using it or financial services could be using is through clearance and Settlement Systems. So distributed, Ledger’s can reduce operational cost and are more closely aligned with real time transactions. It could also be used for fundraising securities, loans and credits and trade financing according to CB insights. So there’s, again

JJ Hornblass
it kind of broaches over into kind of the brokerage custody investment dynamic. I guess the underlying implication is potentially that you’re going to see banks pushing into new areas of business that maybe historically they may not have been engaged in to, just because of the changing nature of you know, the changes that are happening within their customer base, I mean, if if a wide breadth of their customers are now investing in crypto, because they have to have to recognize that.

Loraine Lawson
Yes. And it’s interesting. You know, I love to troll the patents and I do see several of the big banks doing a lot of blockchain patents so they’re definitely exploring how they can use it, but they’re not really putting it into play yet as far as we know.

JJ Hornblass
I’m on another area of of product development that has, has really flourished over the last bullet six to 12 months is buy now pay later. Aaron, you took a deep dive into the BNPL market in Mexico. Why BNPL in Mexico?

Aaron Marsh
Um, well, the conditions are right there. Um, you know, just as you said, the, you know, BNPL Buy now pay later has, you know, attracted a lot of attention, it’s seen growth this year, it’s been appearing, you know, in in articles, it’s in the media. And so it seems to be a little bit of a media darling right now. So one of the things that is predicted in terms of BNPL growth, is that this may help to provide an alternative to credit and sort of help reach the underserved and unbanked, you know, people have sort of been left behind by traditional financial services. So it presents this alternative, and then potentially very attractive alternative. So you take a country like Mexico, and I heard, you know, this is from a BNPL company in Mexico now, Cholesky, you’re saying that, you know, 60% of Mexicans don’t have access to banking services, and 82% don’t own a credit card. And there’s a lack of, there’s a lack of information that that credit companies and financial institutions have lack of credit information on Mexicans. So it’s, this is provided an opportunity for these companies to step in questi, in particular, had a loan type product, like an instant loan product that they launched in 2012. And interestingly, they have, you know, I think provided now something like, you know, approaching like 5 million loans, like 4.8 million loans. So, you know, they’ve now been able to sort of where there’s a lack of data, in order to serve credit to these people, then I’ll look at harvesting their own data from loan history, loan histories, and and are not able to use that in in credit determination. So what we’re seeing is yes, it’s by now pay later, you know, maybe more, more appropriately compra, ora paga, displace. So same thing, you know, by now pay later. But it’s it seems to be flourishing, he said, but in Mexico, the conditions just seem to be right for this to take off.

JJ Hornblass
There were two things that sort of struck me about that. The first is, is clearly there’s a a cultural inclination towards installment payment in Mexico, which we have that to some degree in the United States, but it seemed like, from your reporting, that it’s maybe more prevalent in Mexico, I don’t know if you would agree or disagree with that. The other point that was kind of interesting to me is that, and, you know, the rain tell me if you agree with this, I think BNPL for or many of the providers of BNPL, in the US position it as a card replacement option. And in Mexico, Aaron, you’re talking about it, you know, they’re talking about it as more of a a financing service to the underserved. And that has a completely different risk dynamic than just a credit card replacement at the POS. And I wonder whether there’s a greater underlying risk there in the Met in in Mexico that perhaps the BNPL providers are not necessarily, you know, getting on top of.

Aaron Marsh
I have heard about that, in fact, that’s, that’s one of the research aspects that you you hear it’s sort of the risk involved with BNPL is, you know, looking at looking at defaults, looking at late payments, looking at problems that arise within the business model. And yes, I mean, that’s certainly a concern. That’s got to be relevant as well in Mexico, if you’re, you know, you’ve got similar kinds of conditions and then you just have more of it or a greater percentage of it. That’s something to watch. Maybe Maybe that’s going to come up

JJ Hornblass
So that could be a difference in the in the markets for that product, Mexico versus the United States. Or maybe it’s just that BNPL in the US has been marketed as a credit card replacement, but actually, it’s more. It’s better suited for the underserved.

Unknown Speaker
It could be,

Loraine Lawson
yeah, I think it makes sense for, I mean, who else is going to need installment payments on some of this stuff other than the underserved and credit? And I will say that, by now pay later, companies have told us that they generally have loss rates of one to 2%. Now that’s in the US. So that’s, you know, that’s not bad. And she has seen them. Let’s see. And they have, they also said that 20% of bn PIL PL borrowers have missed a payment. So.

JJ Hornblass
Right. I guess it also matters, what the dollar amount of losses are, you know, as a percentage of the total outstandings? Maybe it’s the big items that are defaulting? Yeah.

Aaron Marsh
Well, the other thing, the other thing with BNPL, is it’s, it’s partly about perception. You have this element with the unbanked to the underserved by the present financial system. And they may have like a negative view of banks and in traditional financial institutions, so you’re kind of presenting them something that may be more attractive to them more, maybe more palatable in some way. So there’s a while you know, what, instead of pursuing this avenue, you know, for financing, I like this, and it’s a matter of perception. So you know, there is that element that may be at work here, too. Sure.

JJ Hornblass
one more topic we wanted to cover today was a new product offering or no sorry, new new performance results from BMO Harris bank on its cloud initiative that started it was four years ago, the rain five years

Loraine Lawson
ago. Oh, yeah. I’m not sure. 2015 I think well, that’s when they acquired, I’m not sure. I don’t remember the year sorry. But, but I can tell you what it was VMO decided to that it was going to adopt a cloud first strategy. But one thing that was really smart about the way they did it was that they were going to focus on automation and cleaning up the process, not just moving it to the cloud. So I talked this week, with their head of GE, or head of sorry, of finance, transportation. The let me just look at that, sorry, I’m forgetting all the BNPL stuff has gotten me all excited here. Lawrence was the chief architect and Innovation Officer of BM OHS Financial Group. And he talked about how their transportation finance group has moved to the cloud and automated along the way, too. And the result was a savings of 30% year over year on their cost. So that’s a significant savings. And one of the things that was interesting to me was this wasn’t just automation of processes, but it was an automation of their IT processes, in particular. So whereas they’re running these 70 apps, they move this portfolio to the cloud. Whereas if they had a PEDOT, as they did before, on a dedicated center, they would have had to scale up and bring in a systems engineer and a network engineer. And anytime they wanted to scale up, they’d have to redo the whole environment. They’ve moved to Amazon Web Services, which allows you to create templates of your environment that you want and scale easier. So no longer do they have to bring in the network engineer and the systems engineer to do that. They just apply a template and it will scale that up automatically for them.

JJ Hornblass
That’s a good metrics. What do we have on tap for next week, Lorraine and Erin?

Loraine Lawson
Well, I’m working on a five questions with a tool Verma, who’s the CIO and US personal and business banking for BMO. I’m also looking into a couple of podcasts. So that should be fun.

Aaron Marsh
Yeah, I think we’re gonna see a deeper dive into the Microsoft Cloud for financial services. Just a just a horde of integration partners, you know, kind of jumping in on that. And we’re going to look at some of those potential benefits, what they might mean for banks, and maybe what some of those integrations partners are doing in particular

JJ Hornblass
Great. Well, we, we are looking forward to that. And we’re looking forward to seeing all of you at Bank automation news.com Thank you for joining us for this episode of the buzz and our weekly wrap for what’s going on in banking automation. It’s kind of a return to the weekly wrap. We haven’t done this in a while. We’re gonna start producing this on a regular basis. So stay tuned and thanks again. We’ll see you next time.