Financial Institutions Can No Longer Ignore Cryptocurrencies

Jim Marous:
Hello, and welcome to Banking Transformed. I'm your host, Jim Marous, owner and CEO of the Digital Bank Report, and co-publisher of the Financial Brand. According to a report by JP Morgan, close to 300 banks are planning to roll out Bitcoin trading on mobile apps in the first half of 2022. Another study finds that 44% of regional and global banks will offer crypto support by the end of the year. More than ever, the share of a consumer's wallet is at risk. The question is, how will banks and credit unions respond at a time when differentiation and deploying digital solutions is no longer optional?

Jim Marous:
We are very fortunate to have Patrick Sells, head of banking solutions for NYDIG back in the Banking Transformed podcast today. He is joined by Stephen Bohanon, founder and chief strategy officer at Alkami. They will discuss the opportunities and challenges of traditional banks offering integrated Bitcoin solutions.

Jim Marous:
Welcome to the show Patrick and Stephen. Despite significant volatility experienced by cryptocurrencies over the past several weeks, the banking industry seems to be optimistic toward the potential of offering Bitcoin services to consumer. In the US alone, more than 46 million Americans own Bitcoin today, representing more than 20% of adults. In addition, one in 10 Americans have invested in some form of cryptocurrency in the past year. So let's start with you, Patrick. As I mentioned, Bitcoin popularity is skyrocketing. What would you say is behind the accelerated growth, especially among what I'll call mainstream investors, as opposed to the high income or the wealthy?

Patrick Sells:
Sure. And great to be on again with you, Jim. Thanks for having Stephen and I. I think the best way to understand what's behind the popularity is to go back to, what is money? I think it's to question that isn't one that's we obviously ask ourselves, but it's very helpful. And the reality is that anything can be money, it's just not everything is a very good form of money. And the way you understand how good of a form of money something is is by a three-pronged test that, one, looks at it as a store of value, second, as a means of accounting, and third, as a mode of exchange.

Patrick Sells:
Let's take a Monet painting, for example. As a store of value, it would score 10 out of 10 because there's a finite amount of them. And no matter how much any of us want more Water Lilies, it doesn't exist. But as a means of accounting, it would score like a one out of 10. What are you supposed to do when you order your coffee? Well, that will be 113th millionths of Water Lilies. It doesn't work well. As a mode of exchange, again here, what are you supposed to do? Cut up the Monet. It doesn't score very well. So that's why most people don't use Monets as a form of money.

Patrick Sells:
But now let's look to gold, which has been the dominant form of good money for much of human history. When we look at it as a store value, it scores pretty well. The annual supply of gold only increases by about 2% per year. As a means of accounting, it wouldn't score all that well, we don't have that many increments. We have coins and bars. And as a mode of exchange, it would score very poorly, especially in today's globally connected world. What are you supposed to do, lug around a bag or a vault with gold everywhere you go and make those exchanges?

Patrick Sells:
And so part of what happened human history as we became more connected and began traveling, we realized that we needed a different form factor, and that's when fiat came to be, and said, "Hey, I can leave my gold at this bank and Stephen can leave his gold at this bank, and I can have this piece of paper that represents that. And now it's much easier as a mode of exchange." And so now if you turn to Bitcoin and you run it through that same test as a store value, Bitcoin would score 10 out of 10. There can only be 21 million, it's finite. As a means of accounting, every Bitcoin is divisible by a million units. Think about that compared to the US dollar, we have 15, 16 increments, not nearly the same as we do with Bitcoin.

Patrick Sells:
And as a mode exchange, Bitcoin would score 10 out of 10 as well. Two people on the other side of the earth with flip phones can send a dollar or a billion dollars back and forth front to each other. And so what it comes down to is, when you think about what's the best form of money, and then you go back act through that exercise, you realize how Bitcoin is the best form of money that has been in existence. And you see that in countries here in America, but also third world countries like El Salvador, and it's why they've adopted it as a form of tender.

Patrick Sells:
And so I think there's just a broader awareness and recognition of money and thinking about Bitcoin as money, but also what I know of money being dollars and how do those score, and people choosing to say, "I'm going to store my wealth or my money in a different form factor being Bitcoin." And then the last comment is that Bitcoin is not only this new, better form of money. it's built on network theory. And the best way to think about what's happening here is, I think, look at an analogy of Airbnb. When it first came out, if Stephen and I wanted to go on a trip to The Bahamas, maybe there was one option available, and so we didn't do it, but if we go now, there's 100 options available.

Patrick Sells:
And as the network, every user who gets added to the network, the network becomes more valuable, and that's why Airbnb is what it is or Uber is what it is. And there's this inherent value increase in the network every time someone chooses to opt into it.

Jim Marous:
So Patrick, with NYDIG and also the banks and credit union that are working with crypto and Bitcoin right now, how are they keeping pace with the popularity in terms of offering related products and services?

Patrick Sells:
I think that's where partnerships like Alkami are really changing the game for the industry. If you're a bank or a credit union, you want to do something new, you're largely dependent on your technology provider for that user experience or that user interface or the capability, and that's not easily done without the cooperation of your partners. And so as companies like Alkami have made the NYDIG solution, for example, available, now it takes 30 days for a bank or or credit union to be able to offer, buy, sell, hold the way that fintechs like CashApp or PayPal can.

Patrick Sells:
And so I think the industry is quickly moving to say, "Hey, how do we get a V1 product out there, which is buy, sell, hold," but then recognizing there's so much more that they can do from Bitcoin rewards, to lending dollars secured by Bitcoin, etc. And so I think 2022 will really be the year we see the industry completely change in terms of Bitcoin in banking and credit unions.

Jim Marous:
Great. Stephen, at Alkami, you see the banks and credit unions continually transform and digitally transform what they're trying to offer. Why do you believe more mid-tier financial institutions are deciding to offer Bitcoin, and what prompted Alkami to partner with NYDIG to offer these services?

Stephen Bohanon:
Well, I think that as far as what's prompting them to get involved is the same thing that prompts them with any other product that they decide to get involved in, whether it be a certain type of a loan or another deposit product or anything else. It's the desire to remain relevant and therefore competitive within the market. We went from, what, 30,000 financial institutions 40 years ago to 20,000 20 years ago to 10,000 now. And obviously, there's a lot of people that don't exist anymore, further consolidation, you really have to grow and you have to remain relevant if you want to be able to be successful in this market.

Stephen Bohanon:
So I think it's a survival instinct that ultimately really brings them to these types of opportunities and new products, new instruments, whatever happens to be. You also have other headwinds in the market. You look at obviously where overdrafting and SF income is going to be going, which maybe to zero. You look at as the consolidation happens in the financial institution industry, there's going to be more and more of them that are crossing that 10 billion threshold, that magical 10 billion threshold to see a huge haircut to their interchange revenue.

Stephen Bohanon:
And meanwhile still, and obviously, we have the prospect of raising rates over the next year or two, but they're not there yet, and so they're still dealing with obviously very, very small interest rate spreads as well. So I think this desire to have non-interest income or fee income, any sort of income they can get related to payment processing, things like that. So there some macro reasons just financially, why you would look to have more products to be able to drive more fee income. But then I think that the ultimate survival instinct is around relevancy.

Stephen Bohanon:
In terms of why we looked at NYDIG to do it, I think that there's so much innovation that's happening in the fintech space. I read an article, maybe it was a few weeks ago that it was something like 130 billion or something that had been invested in fintech last year. It's just a crazy amount of investment that's happening there. And what we see is that really finance, as we know it, traditional finance, is really changing. Shink about companies like Square or PayPal, Venmo whatever, and what you see is that the market responding to it. So then the market comes out and says, "Well, we've got Zelle." And then the Fed say, "Well, we're going to have Fed now."

Stephen Bohanon:
And then of course now Fed is talking about having a digital currency. So you see the traditional market players trying to respond to the innovators in this space, and it's because of so much fuel in the form of capital that's been poured into the fintech industry over that amount of time. But the thing that generally slows them down is that they are insured and therefore regulated financial institutions. It's not that there hasn't been crypto offerings out there that we could potentially technically plug into, I think one of the main reasons that we went with NYDIG is that they had really just done the legwork. They had done the legwork of working through all the regulators with all the various states and at the national level, because we knew that was going to be the primary limiter to being able to innovate in this way, was the regulators.

Stephen Bohanon:
And by the way, we'd been approached by several other crypto-ish offerings of, "Hey, why don't you plug this in or allow people to buy and sell various crypto offerings?" And it really came back time and time again, "Well, what do the regulators say about this?" And they said, "Oh, we're not really talking to the regulators." And we're like, "Well, then we don't want to go spin our wheels working on this." So the fact that NYDIG was able to come in and say, "We've done the legwork, we've met with all the various states, we've met all the various, at the national level, the various regulators." It's one of the reasons we only offer Bitcoin today as opposed to all the other cryptos that are available.

Stephen Bohanon:
That for us really gave us the assurance that the investment that we would put into this would not be wasted and to be something that we could actually take with confidence to our customers and be able to offer it.

Jim Marous:
Well, it's interesting you talk about confidence, and one of the things I know about Alkami is you really work with your financial institutions to make it so that you can help them innovate at speed. One of the benefits of using third party providers is that they know the marketplace, they have tested in different institutions, they're able to almost act as the GPS of financial services where you can help them avoid pitfalls that other organizations have had, or streamline operations in areas that they aren't familiar with. But this is very much the same reason why you partner with NYDIG, it's almost like a third party provider partnering with a fintech firm that can streamline the operation.

Jim Marous:
What you just said, to avoid all the pitfalls, to not cover ground that's already been covered. It really provides a benefit to you, but also to your clients. Doesn't it?

Stephen Bohanon:
Yeah. Speed to market is the key. Because if you were to make your checklist of all the things that you would have to do before you had to go on offer this, it'd be a very little long checklist. And so being able to have a package solution and leveraging the finders authority, which by the way, there's lots of products that have been offered through finders authority where obviously institutions that aren't broker dealers, maybe they're not insurance providers, whatever, but they've been offering services that are pre-packaged with people who are specialists in that area for a while now.

Stephen Bohanon:
So it's not a new concept really entirely at all. But if you can imagine this, the concept of cryptocurrency now, well, what do we have to do? Well, one thing's, and when we can talk about hiring later, make sure to ask me about that. But when you think about, there's generally a lack of knowledge and skill and expertise within a financial institution as it relates to crypto. If you were the just go and just poll their employees, "What do you know about crypto?" You would probably have a lot of different answers that maybe many of them would not necessarily be well educated.

Stephen Bohanon:
And so these are all barriers to offering this type of a service. So being able to bring in a packaged expert that can come in, offer a product, say, "We can get rid of the risk for you. We've already cleared all the stuff with the regulators. We'll take care of all this. And all we need is to partner with the digital banking providers to create a user experience to allow you to access your deposit accounts that are on the core, be able to transfer that money, but we take care of everything from there." It really is a great solution for these financial institutions who otherwise would probably view this as a very daunting task to be able to get this spun up and to be able to offer a service like this.

Jim Marous:
Yeah. And Patrick, from a NYDIG perspective, what has your research found around the consumers' desire to use a traditional banker credit union towards Bitcoin offerings or towards trading in Bitcoin?

Patrick Sells:
Yeah. Jim, it's a good question. I think the data showed two things that, as you mentioned about one out of five Americans own Bitcoin today, but the majority of them, or 80%, preferred to be able to access it through their existing bank or credit union relationship. I think some people may find that hard believe or feels kind of counterintuitive, but the reality is, and it goes back to my description about money, if I see Bitcoin as a financial asset that I own or money that I have, I want to be able to take advantage of the trust and strength in the relationships I have today with the people who custody my money in the form of paper or fiat. And I feel the same at about my money as Bitcoin.

Patrick Sells:
And I think in particular, not only do so many Americans who own Bitcoin prefer that what I get excited about as someone who loves both banking and Bitcoin is when you go to the four out of five Americans who don't own Bitcoin, the biggest stat that we saw in our consumer research was that over half of them would, if they could, through their bank or their credit union. In other words, it's not a Bitcoin issue, it's an access issue. And it goes back to this point around, especially with something so new, actually people and businesses alike find a lot of comfort in knowing that their bank or credit union is playing a leading role here because they trust those institutions.

Stephen Bohanon:
Yeah. And Patrick, I'll just add on to that. We've actually seen evidence of that thing. I don't know if, whether the number is 50% or not. Obviously, you never know in those surveys that people say, "Would you if this was available," who knows? But I will tell you, Idaho Central, which is one of our great partners at Alkami, rolled this out, they shared with us a lot of the verbatims that they got as part of their beta pilot or a launch of this. And I saw consistently within the verbatims of the feedback of people saying, "Thank you for offering this, for one. Number two, I'd read a lot about this, heard a lot about it, but was, one, either scared or didn't want to go through the process of opening up an account with Coinbase or someone else to do it. And the fact that it was so easy to go and do it, it made me feel comfortable and like, 'Yay, now I own some crypto.'"

Stephen Bohanon:
So I do think there is a pinup demand among people that are maybe otherwise intimidated by what crypto is, because of course, our entire lifetime is we've been... Of course, I guess it was before Nixon, I guess, it was all the Gold Standard, but then even after that, we've always understood the American dollar, that's what you can count on. So this whole idea of crypto is a bit confusing, intimidating, for grandparents, it's things their grandkids talk about, but it's confusing to them. And so I think that Patrick's right, I don't know whether the number's 50% or what it is, but we definitely saw that in verbatim feedback on what they liked about the experience. And it was that, "I was intimidated and scared before, you made it easy. I already trust you. And so I went in and did it, and now, hey, I'm a holder."

Stephen Bohanon:
And so then of course, once they do that and they didn't get burned by it, per se, in other words, it was something that they felt comfortable with. Well, then now that person comes back for the next thing that now they can offer around crypto because they now feel educated by it. And they feel like, "Hey, I'm with the times now." There was a lot of great verbatims that came out of that beta pilot group, I think it was around 1,000 users that were using it, and we are obviously using even to improve the product even further.

Jim Marous:
Patrick, we talked a little bit about the fees, but what are the financial and non-financial benefits of offering Bitcoin trading and custodial services at a traditional financial institution?

Patrick Sells:
Yeah. So I think the biggest is that they get to partake in the transaction fee. So whenever Bitcoin or any cryptocurrencies bought or sold, there's typically a two to 10% transaction fee being charged today in the retail market. And that's the dominant way companies like Coinbase or other crypto exchanges generate their revenue. And for a bank or a credit union, they can now earn those transaction fees in the form of non-interest income. And Stephen highlighted this earlier, especially in the NIM environment we've been living in, that's amazing. And it's a meaningful source of revenue enough to more than compensate for the cost of making Bitcoin available. We expect that the average FI will earn about $40 of net profit every year in an active customer.

Patrick Sells:
I think in terms of the non-financial benefits, it's a couple fold. We already see this when we look at the mobile apps of the partners that are live with us, like ICCU, is that they see increased app engagement. Think about it, you want to log in and see the price of Bitcoin. It's awesome if you can open up your ICCU mobile app and see the price of Bitcoin. You want to see what's happening. And so there's a lot of benefit there and we've heard stories of people already having grown their deposit relationships at an FI since they made Bitcoin available or they've bought additional loan products. And so again, you're just able to stay top of mind, which I think is very important for existing FIs as they continue to compete with fintech and all of the digital marketing that they are doing.

Patrick Sells:
I think the other benefit is culturally. This has been something I've loved hearing, is I think many of us in the bank and credit union industry feel like we're not the most innovative at times. And all of the sudden when now, "Hey, I've got Bitcoin. Wow, holy crap. I have Bitcoin available." And watching employees respond to that and react to that and just infuse energy in life, I think is another soft benefit that the FI gets.

Jim Marous:
Stephen, you mentioned that you referenced and you asked me to ask you about, so I'm going to do it now. One of the components of this is that, as you mentioned, that most people are really confused by what Bitcoin is, the benefits, the risks, is it an investment or speculative? How are you seeing financial institutions educate their employees around the basics of Bitcoin, but also the people that are actually doing the transactions, the deeper understanding of the service?

Stephen Bohanon:
Well, I think that's one of the biggest problems that I don't see them doing it. And it's not really happening, and probably because there's not as much comfort and education level at the executive leadership and at the board level and so it's not being mandated to who have this instructional teaching, I guess, at the frontline level, which is a shame, quite honestly. And I think that's one of the things that I really like about... There are a lot more opportunities than what is offered through the NYDIG product within the solution they're offering the digital banking providers, obviously, a lot more cryptocurrencies, there's lending. There's trading on crypto ETFs and all kinds of stuff.

Stephen Bohanon:
And I would say that there is a huge difference between what's available in the market. And then the knowledge of it would bite your typical employee of a traditional financial institution. It's staggering how different it is. I had written an article, I guess it was a couple months back, and just talking about how it was funny how the big banks for years, ultimately, because they saw this control slipping away, were trying to create all this fad around cryptocurrency and calling it a fraud and some it's a rip off and all these things.

Stephen Bohanon:
And then once they realized it was, it was going to happen whether they were with it or not, they switched quickly. The major banks, there was like 1,000 new cryptocurrency positions that were created then hired for over the last three years. I don't see the same type of thing happen in the regional community financial institutions, unfortunately. And so I think that the NYDIG offering is a good first step, but I would say that these institutions need to leverage that then as a way to start educating their employee base, just like they educate them about what a credit card versus a mortgage versus a deposit account versus a checking account versus a CD and anything else, they need to be educating them on cryptocurrency, start with a NYDIG product, but there's got to be that level of comfort.

Stephen Bohanon:
Like today if you were to walk into our customers who offer that, and I don't know, I haven't checked on this with ICCU, but probably if you walked up to the teller there and said, "Hey, I heard this." They may say, "Yeah, that's something you got to do on our mobile app, but we don't really know a lot about that in the branch." I don't know that. So I could get a call from Kent or someone saying, "Stephen, that's not right." But I'm just saying, I'm not seeing that as much where people are saying, "Look, we got to hire some specialists." And when you look at that, it's really ironic too because we've seen like in the credit union space, as an example, they've really started to get more into business banking.

Stephen Bohanon:
Some of them are buying banks, some of them are hiring commercial bankers from banks because they're saying, "Look, I don't have this expertise internally, and so I need to hire this externally to come in here because this is going to be a key part of what we offer going forward. And so I've got to attract the talent." I don't see them yet doing that with cryptocurrency, and I think they're behind the curve because we actually do see the big banks doing that. And they started with, obviously they're investing in their private wealth clients, they're starting to roll that out to their retail clients, but I would say they're more prepared for it.

Stephen Bohanon:
And so the challenge I would give probably to our customers in the regional community financial institutions in general is don't wait until it's too late, it's a cool feature that you can offer through your app, but it really needs to be more ingrained and embedded throughout your organization that people know about these products and understand them and can have a conversation with their customers and their members about these types of things.

Jim Marous:
And a related subject, and we talked about the education of the employees, we also have to talk about the education of the regulators. They're playing catch also in regards to issues to transparency and safety. What measures can the financial institutions take to protect themselves against non-regulated digital currencies and maybe doing something wrong?

Patrick Sells:
Jim, I think a couple of comments here, and I think this something we've been very focused on, if you logged into the ICCU app or another great partner of Alkami and NYDIG is STAR Community Bank. What the consumers see is educational material like, what's Bitcoin 101? And what's Bitcoin mining? And I do think to that very conversation, there needs to be a lot of education happening at both the consumer level and the staff level. And that is something that I think we spend a lot of time trying to do and working with Alkami on how do we continue to make that more and more robust.

Patrick Sells:
I think my comment there is I think we all are aware of the need for it and push and support that. From the regulator's perspective, look, I think there's this misunderstanding that crypto isn't regulated. And the reality is anything that involves money in this country will ultimately fit inside of a very well established legal framework of either being a security, a commodity or tinder. And it's obviously not tinder, that's only what the central bank prints. And so then what happens though is because some fundamental attributes have been rearranged because of the technology, it didn't make it readily apparent, wait, is this a commodity or is this a security?

Patrick Sells:
And I think frankly from the regulator's perspective, if I look at it globally over the last 10 years, you got to go focus on the things that are the biggest problems in the world, you can't focus on every problem. And as crypto got bigger and bigger as an industry, I think we have seen the regulators very quickly begin to step in and to say, "We got to stop this. We need to think about it like this us." Even the most recent news in the crypto space with the SCC is another example of that. But I think what's important for financial institutions, and I came from a community bank before joining NYDIG, I had a very pretty good grasp on banking regulations, but I was pretty ignorant on securities and commodities law.

Patrick Sells:
It just wasn't something that I understood because I hadn't been exposed to it. And as I got here and I began to realize, "Hey, there's actually a lot of similarities in banking regs through commodities and securities, but there are also differences." And until you have that framework installed or that knowledge, it's really hard to know how to look at anything and say, "Isn't this just technology?" Well, no, no, no, it's not technology. And that's the thing I think that's really important for FIs to do is to say, "Hey, just because something's new and customers may be talking about it or it's shiny, not all cryptos are the same and I need to figure out or find someone who can help me think about what is that fundamentally."

Patrick Sells:
Take Bitcoin, we only make Bitcoin available on the Alkami platform. There's only two, I think crypto that have been commented on by the regulators as to what it is. Bitcoin's a commodity so it's regulated by the CFTC, just like lumber and all other commodities. And then XRP the SCC has sued and said, that's a security. And the absence of that it's not been defined. That doesn't mean it won't be, and/or it shouldn't be, it's just there's got to be a maturation happen across all of the regulators, as they say, "Okay, what is this? And where does it belong?" And I think as an FI, as we know inside of safety and soundness framework is to be cautious and intentional in what we go after.

Patrick Sells:
We don't need to be the first ones out to do something. That's not how banks do it. But I think it's the recognition that there's another legal framework that they need to come to understand at some level to really be able to understand crypto.

Stephen Bohanon:
And what's funny when you talk about the regulators, it's funny, I don't know what the right word is, and maybe in writing and documentation and from a legal perspective, it seems like they're caught up, but in their knowledge, they're actually behind. Here's the example, a STAR Financial Bank, which Patrick mentioned that they were early adopter of this. And as they went through, obviously the state of Indiana, got their approval to do this, and [inaudible 00:28:31] says, "Okay, well technically, yes, you can do this. According to the regulations, you can do this."

Stephen Bohanon:
And then I had a call with their folks over there, she told me, she said, "Wow, I just got off a call." This was like two weeks after they rolled it out or something, "I just got off a call. I had more regulators on that conference call than we've been in 20 years, state, federal everything. And they're just asking us lots of questions. How does this work again? And so what happens if this, and what happens if that?" And so it was like just going through all the various risks, ensuring that they had done their due diligence, that they had accounted for all the risks. So then they said, "Okay, great." And I think that she said, then they followed up and said, "Hey, we're probably going to follow up with you as we have more questions."

Stephen Bohanon:
So I think what you're seeing is all the regulatory bodies are still trying to get their ducks in a row and down to the individual auditor or regulator themselves, really that same kind of education we talk about at the bank employee level, it needs to happen across the regulatory agencies level as well. And so they're saying like, technically you can do it, but gosh, we just don't know enough to give... What about all the nuance, which we know is involved in regulation? And so I don't think they feel educated enough and there's not enough history, there have not been enough mistakes made, I guess, if you will, to really inform a lot of the guidance that would be given that would be nuanced regardless of what the regs themselves are written in black and white.

Stephen Bohanon:
So I think this will continue to happen. By the way, we took all that feedback, the Q&A session that they gave and we shared that with some of our customers that are rolling that out, so that they're prepared to say, "These are likely the questions you're going to get when you start to roll these things out and make sure you've got good answers for them. And that you've actually done the work to evaluate this." So it is a mixed bag in terms of what the law actually says versus the boots on the ground, the regulator, auditor, whatever, that actually, it feels comfortable with it and understands it.

Jim Marous:
We talked about the regulators and some lack of clarity in that sense, is that the major hurdle you have, you're reaching out to your financial institution partners that trust you on everything they do inherently, is that the major hesitancy that organizations have around going forward with offering Bitcoin as a service? And secondly, and related to that, how important is speed of implementation right now to be able to get ahead of the curve as opposed to playing catch up?

Stephen Bohanon:
Gosh, the first question, it is a mixed bag. So I don't know that I have enough data to say what the primary inhibitor is to speed of mass adoption. I'll give you just some of anecdotally what I've heard across the board. Some of it is no different than what we would hear with any other product or any other heck digital banking feature, which is, we don't want to be first. So like, let's let a certain group of pioneers go out there, learn some of the lessons early, and we'll be "fast follower." So there's certain institutions, I would say culturally, that's how they are. They've been that way with everything. And so they're definitely going to be like that with Bitcoin.

Stephen Bohanon:
So I don't really look at that as any different than just the nature of the culture of the institution and generally the leadership and the board and executive leadership of the financial institution. The other one that we see is there is, this is a very small number, there is this debate around, I don't know, it's almost like a morality issue, kind of, well, what happens... Isn't our job as the financial institution to quote, protect our uneducated customers and members from making a mistake. And so that's where they are. Now, these are the same people that will allow them to obviously swipe their card at a casino and gladly take the interchange on that.

Stephen Bohanon:
These are the same folks that offer investing in many basis through partner or broker dealers of theirs, that they are able to go and invest in stocks or short stocks or whatever. But for whatever reason that they have this thing of like, "Is this a high risk thing? And if we offer it, are we endorsing it and then therefore, do we feel comfortable endorsing it?" And so I do think you see that playing out a little bit, and I know specifically of a couple of our customers who are having that argument internally, and there's not agreement on it, but it is something where people are getting over this idea of, are we in essence endorsing gambling as part of it?

Stephen Bohanon:
And then the third category I would put it in is and probably the most common, so this is the one I would settle on if I'd said the most common, is strictly just the comfort and confidence that they know enough about it to feel like they can offer it. And I think that's really what it comes down to. The majority of them, like I said, if you look around the room and say, "Well, who's going to be our internal expert on this?" And everyone just says, "Not me." So I think that, again, like I said, I view it very much like offering commercial banking services or business banking services.

Stephen Bohanon:
If you have been a retail-focused financial institution for a long time, you say, "Hey, we want to have a business banking division, and we want to start offering cash management services," and you look around and say, "Who's going to tell us what we should offer and what the rules are?" Not me, not me. So I think it's really a knowledge problem, a knowledge gap that exists within the institution. And obviously when you have more knowledge, you feel more confident, and the more confident you feel, the more things that you do. And so I think that's probably the number one thing probably keeping seen from mass adoption.

Stephen Bohanon:
And they're actually being dragged along because of the FOMO, whether it be the fear of missing out or the fear of irrelevancy, but it, but hey, that may be as good as a reason or motivator as any, sometimes. Again, survival instinct sometimes makes people push outside their comfort zone, and I think that's what we're going to see here. What we're really excited about are some of these early numbers that are coming out of the beta groups and things like that and the amount of dollar flow, the amount of adoption of the people that are actually going into it, and now buying some Bitcoin.

Stephen Bohanon:
I will tell you this, Jim, that everyone agrees that deposit leakage is a major problem as it relates to crypto. I had a conversation with one of our customers that they're north of 10 billion, but not too far north of 10 billion, and they said, "Stephen, we did analysis last month of how much money was flowing out to the various crypto providers, whether it be Coinbase and others." And they says 40 million just last month. And it's not necessarily that there's 40 million being bought in crypto, but what's happening is people are parking their assets in a place that give them the ability so that when Bitcoin dips the next time, they can quickly buy it.

Stephen Bohanon:
And so that even if it's just help holding there, and we know that Coinbase and others, that's their entire motive is okay, let's get you holding that there. It might not all be in crypto, but now I'm going to offer you a savings account with a high rate of return. So once I get you in the door and get you to park some assets so you can be opportunistic around the rise and fall of crypto, now I can start offering you these traditional banking services. And boy, it is a foot in the door, and it's something that I just hope that our customers and the regional institutions in general, don't wait till it's too late.

Jim Marous:
That's interesting because I was talking to some bankers last week at a conference, and they said, everybody talks about the fact that the savings rate went up so greatly at the beginning of the government funding and the government benefits and all that, but people did not look behind the scenes to say, "Oh, how much did that flowed out to alternative service providers?" In other words, yes, our savings rate went up, but how much of that stayed? And where did the money go? And they said, they had never seen so much money going toward alternative financial instruments than during that period.

Jim Marous:
And so we sometimes get a comfort level that is fictitious because we've never measured it enough. And Patrick, from your perspective, what do you recommend the financial institutions do today? What's the first step? What should they do right now?

Patrick Sells:
Yeah. And I can't help, but that very comment going back to this, what is money, if we think about the US Dollar through those same three lenses, as a store of value, it's really like a zero on a score because there's an infinite amount of it that can be printed. It was only two years ago, we saw the first trillion-dollar plan. Now, I think there's been eight or $9 trillion plans proposed. And in that regard, it's much more like tulips than any other form of money we've looked at. And that's, again, part of what's happening is not just in this country, but around the world, there's over a billion people living in hyperinflation and realizing that they need a form of money that scores much better as a store of value.

Patrick Sells:
And I do think we saw just as the government printed a ton of money, that money flowed into a ton of spots. I think the thing that financial institutions need to do is to recognize that this isn't just another technology, this is more like another language. It's easy to be able to say a few words in French or Spanish, but if I actually want to be able to have a conversation with someone who's a fluent speaker, I've got to spend real time here to understand it. And that means I got to get off of ignoring tweets or news articles and really begin my own journey of understanding what is happening here.

Patrick Sells:
Because whether it's Bitcoin or Ethereum or blockchain, what all of that represents, and we have views as to what we think, but it's also early days, this technology fundamentally is going to change every part of the world we know it much the way the internet did 30, 40 years ago. And I can't ignore it. And so I think it starts with a recognition and a hunger to go learn a curiosity to say, "Maybe things I've always assumed are wrong." And I think that's true at a meta level.

Patrick Sells:
And there have been many, I know of 1,000 institutions last year, who in many ways began that process. I think now there's also the ability to say because of the work that Alkami has done, for example, to say, "Hey, I don't just have to have educational seminars, I can actually begin to roll out products, I can begin to talk to my regulators. I can begin to tell my customers." And this is possible, and this is coming. And so it's really just wherever you are, recognizing that I can take another step forward, that may be to start your education, or maybe to say, "Hey, Alkami, I want to go live."

Stephen Bohanon:
I would say that the other thing that's really interesting, we talk about a different language and we're seeing this because it happens in the mindset as well as the underlying, the technology underpinning that's there, is in banking today, we very much have this Monday to Friday, obviously, unless there's a holiday, but we have this idea of a banking week and then there's a banking day and your balance is changed once a day or for even in the credit union world where they've had online real time for a while, there's still like a transaction had to post, that's what affects your balance.

Stephen Bohanon:
There's none of this idea of true real time, 24 by seven by 365. And so now this is one of the interesting things is we now within the app, you've got your Bitcoin balance that changes every second. And this is a whole different mindset around of like, "Oh, Bitcoin's open on Saturday and Sunday and President's Day and everything, at 24 hours a day." And I think it's a good thing because really, the world is becoming global, the world is becoming 24/7, the world is becoming real time, but I will just tell you that that is not the way the traditional banking industry measure events, it is a very much a daily-type thing.

Stephen Bohanon:
And so we already had to do some things within our technology to account for this difference. Whenever you log in Friday, well, obviously I pull your balances from what happened on Thursday night when you batch posted, but the core doesn't go into update mode and batch posting mode and things like that with Bitcoin, it's happening consistently all the time. So I think there's also still a disconnect in the way that we do service for it and everything else and what people expect around it. It is much more like what you think of in the e-commerce world of real time, all the time and not when you think about the traditional deposit balance or loan balance of which updates no more than once a day generally.

Stephen Bohanon:
And that's only Monday through Friday and that's not a holiday. So this new world, that's why I said, hiring people that understand crypto, very important. And when they come into this and say, "If we're going to be in the crypto business, we also have to look at how that really is juxtaposed against our traditional way of thinking about how balances and transactions update, and this new world of 24/7." So that's another, I'd say, educational thing they're going to have to get comfortable with as they offer this. But again, the good thing is, that's where the world is moving anyway to real time. And so this is just a way to dip your toe in the water a little further to get to that spot.

Jim Marous:
Gentlemen, I thank you so much for being on the show today. We've learned a lot. We're still learning as we go along. As I mentioned, Patrick was on the show last August, a lot's happened since then. And I think this is a great example of the innovation and transformation of the banking industry, but it also highlights the need to work with partners that really understand where the business is going. It doesn't matter if you're looking at faster ways to open a new checking account or new ways to do lending or offering Bitcoin services, you can't build it from within, in fact, the biggest organizations aren't building from within, they're using partners.

Jim Marous:
A great example of not only from an educational perspective, but really being able to kick the tires and see how it works and see how it can work and with partners that you can trust, and Alkami and NYDIG are two organizations that really are on the cutting edge of this, but realized that the difference between cutting edge and bleeding edge has narrowed significantly. It no longer is to the benefit to be, "I'm going to see what happens and I'll be a fast follower." The reality is in banking, there's no fast, but there's a whole lot of followers, and we need to start rethinking the way we look at innovation. Again, gentlemen, thanks so much for being on the show today. Appreciate having you.

Stephen Bohanon:
Thank you, Jim. Thanks Patrick.

Patrick Sells:
Thank you, Jim.

Jim Marous:
Thanks for listening to Banking Transformed, rated the top five banking podcast and the winner of three international awards for podcast excellence. I appreciate the support you have provided since we started this endeavor. If you enjoy our show, please be sure to provide a review on your favorite podcast platform. Finally, be sure to catch my recent articles on The Financial Brand and check out the research we're doing on The Digital Banking Report.

Jim Marous:
This has been a production of Evergreen Podcast, a special thank you to our producer, Leah Longbrake, audio engineer, Sean Rule-Hoffman, and video producer Will Pritts. I'm your host, Jim Marous. Until next time remember, just because you don't understand something doesn't mean that it's nonsense or that you can ignore it.