Bitcoin: The Next Battlefield for Retail Banking Customers

Jim Marous:
Hello, and welcome to banking transformed. I'm your host, Jim Marous, owner and CEO of the Digital Banking Report, and co-publisher of The Financial Brand.

Jim Marous:
Bitcoin has taken another step toward mainstream adoption, as customers of some of the biggest US banks will soon be able to buy, hold and sell Bitcoin through their existing accounts. This capability is also going to be offered to even smaller financial institutions.

Jim Marous:
According to research by Cornerstone Advisors, 60% of crypto owners would use their bank to invest in cryptocurrencies, even though interest from traditional banking firms is still rather low. Is there an opportunity that's being missed at a time when money and accounts are flowing into FinTech firms globally?

Jim Marous:
We're fortunate to have Patrick Sells, head of banking solutions at NYDIG, a leading technology and financial services firm dedicated to Bitcoin. Sells discusses the opportunities and challenges of traditional banks offering integrated Bitcoin solutions.

Jim Marous:
Welcome to the show, Patrick. Over the past several weeks, it's been announced that Bitcoin purchases will now be directly available to millions of consumers from more than 1,000 US banks and credit unions, as a result of partnerships between your firm, NCR, Fiserv, and FIS. These agreements will enable banks and credit unions of all sizes to offer crypto trading services to their clients through mobile payment applications.

Jim Marous:
The partnerships will also make it easy for traditional financial institutions to handle crypto transactions without having to deal with the regulatory requirement of holding cryptocurrencies for clients, by using your crypto custody services. First of all Patrick, can you tell us a little bit more about NYDIG, as well as your role at the company?

Patrick Sells:
Sure. And it's great to be on with you with this morning, Jim. A little bit about NYDIG, we are a kind of leading Bitcoin platform company. And what we mean by that is we're really the only truly vertically integrated technology stack in the world of Bitcoin. And that allows us to really work with many across the industry, from Bitcoin miners to asset managers, hedge funds, ultra high net worth individuals, banks, credit unions, and FinTechs that are all taking advantage of the entirety of our technology stack, or certain modules of it. And so think about us as the kind of Bitcoin platform.

Patrick Sells:
My role at NYDIG is I run what we call our bank solutions business. And so that means really working to think about what's our go to market strategy, what's the products, what are the partnerships, how do we build and run that business, if you will. And I came to NYDIG, and part of what informed my role here was actually working at a bank called Quontic, which is a community bank headquartered in New York, where NYDIG was a partner of Quontic for about a year.

Patrick Sells:
And so in many ways, I've been working with the NYDIG team for now almost two years, around this idea of Bitcoin in banking, and how do you actually make that possible.

Jim Marous:
Well it's interesting, obviously the Bitcoin marketplaces not only been very active, but it's becoming increasingly mainstream beyond the most wealthy and those who day trade crypto. This is a really nebulous area, and an area that most retail bankers may not understand as much. They may have their preconceived notions, myself included, around what's going on in the crypto market. So overall, why should traditional financial institutions offer the capabilities that NYDIG offers?

Patrick Sells:
Sure, I think that's a good question, and one that I've spent at this point, probably over a thousand hours talking to bankers around the country about. And I think it's important to delineate that Bitcoin is really different than other digital assets or cryptocurrencies. And that's very much how we see it, and the role that Bitcoin will play in the financial future. But also today, Bitcoin was created to be an open source monetary network. It is an asset; it's property.

Patrick Sells:
And so when you think about Bitcoin in that light, and you think about, let's say take America and banks, American banks have always played the role of safe keeper and gateway to asset ownership. You know, the idea of the American dream, which is really about allowing someone to purchase an asset, is about home ownership. And banks have been the primary vehicle through which that was made possible for America.

Patrick Sells:
And so when you think about that, you realize the role of banks and asset ownership are intertwined. And if you now think about Bitcoin as kind of a 21st century asset, it makes a lot of sense that banks would say, "Hey, we can provide access to this asset, and there's ways we can leverage it for our customers." And so I think philosophically, that's definitely something that's resonated with many bankers.

Patrick Sells:
I think maybe a different lens on that is we as Americans have such a blessing in our lives, in that we have the financial system that we do, and it's safe and sound, and US banks have developed that reputation. They know how to do things in a safe and sound way. And they're obviously held to very high standards with their regulators.

Patrick Sells:
And so, as banks begin to realize that not just a few, but oftentimes many customers own Bitcoin or want to, then there becomes this imperative to say is what they're doing agnostic to my beliefs about it? Does the safest and soundest way for them possible to manage that financial asset? And if not, or if I feel like I can offer a better way of doing that, then I want to, and that's in the interest of my customer. And so you can take anything away from Bitcoin and just think about fundamentally, how can I serve my customer better?

Patrick Sells:
And then I think probably the third lens on it would be that many bankers realized that Bitcoin is here to stay. It's not going anywhere. And so I think watching what happened over the last decade or two in the industry as FinTech came to be, many banks, especially community banks and credit unions, were a bit farther behind that. And seeing what's happening now and saying, Hey, here's an opportunity for banks, not just to get even, if you will, or catch up, but really leapfrog and lead the industry, is exciting for many banks.

Patrick Sells:
And so I think, whether it's philosophical, it's a view towards the customer, or there's a business intent behind it, between those three, and a combination of those three, that's why I think banks have paid attention to it, and why bankers should be paying attention to what's happening.

Jim Marous:
So for organizations that work with NYDIG, does the financial institution hold the crypto? Are they able to trade it on their platform? What actually does this capability give a finance institution? And to another level, when you're talking to financial institutions, and most financial institutions, we talk about on the show a lot, is that they really tend to avoid risk, as opposed to manage risk. How do they deal with the fact that a consumer, one of their customers or members, could end up in a situation that they're rich one day, they're poor the next? How do they deal with all those items?

Patrick Sells:
Sure. So one small comment, and I'll go to some of the bigger comments there, or thoughts. But I think the first thing about what are banks doing when they take advantage of the NYDIG platform? We have really an entire suite of products. I think at this point there's 15 or 16 different kind of products with Bitcoin, if you will. I think that the foundational or building block is allowing what we talk about as our Bitcoin trading platform. So customers can log into their bank's mobile app and they can buy, sell and hold Bitcoin directly with NYDIG in that way. And that's really the starting point.

Patrick Sells:
But then I think what, for me, gets really exciting about the role banks can play in terms of the Bitcoin story, is actually how much easier and novel ways they can bring it to consumers. And so take, for example, a Bitcoin rewards card. This is something that could be a credit card or a debit card. Instead of getting points back, or cash back, I could get Bitcoin. And so for someone who's a Bitcoiner that's obviously a very attractive card. But for someone who has never owned Bitcoin before, maybe been hesitant to invest their money, now all of a sudden banks can create a really, really low friction, safe, easy way to begin to get exposure through the asset class.

Patrick Sells:
And so there's examples of products like that. One of the things that we're working also with many banks around the country now, is related to lending. You know being able to dollars against Bitcoin, like you could property or other assets that you have. And that's a very exciting product, and something that many banks are interested in, because it also helps them generate incremental interest income. Which is important as NIMs have compressed around the industry.

Patrick Sells:
In terms of your second question around like what are banks going to do given the volatility, I think consumers by and large all recognize that Bitcoin and crypto is a volatile asset, and inherent with that is risk. But I think what banks can do is put in place the safety and soundness framework and controls that they use with all other technology they offer their consumer, right?

Patrick Sells:
So when a bank wants to roll out, say, Zelle or peer-to-peer payments for the first time, most of the time, if not all the time, they're going to put limits on how much money you can send in an individual transaction, or in a given day. And the NYDIG platform allows for those types of controls as well, so they can limit how much available cash someone can use to buy Bitcoin, or how many transactions that they can.

Patrick Sells:
And so you can't obviously get rid of the volatility, but banks can put safety and soundness measures in place. Again, that goes back to one of my first points around the role banks can play in helping provide the best product for the consumer, the best access for the consumer. And so I think it's thinking through things like that that helps banks and their customers feel comfortable and safe with getting access to Bitcoin in a variety of ways, whether a rewards card, or just being able to invest in it directly.

Jim Marous:
So Patrick, from a financial institution basis, they really don't have any balance sheet impact, but they do create some fee opportunities, don't they?

Patrick Sells:
Yeah. So in the NYDIG model, and I think key to the traction we've had today, is NYDIG can come in as the qualified custodian, or the Bitcoin custodian, for the end user. Which means that this isn't even something that the bank has to offer. You know, if you're a nationally chartered bank, the OCC put out an interpretive letter last year saying they can act as a custodian, and some states like Texas have issued similar things. But I don't think by and large, we'll see the market really embrace that just yet, because there's still too much regulatory uncertainty around what that needs to look like.

Patrick Sells:
But what a bank can do is use its finder's power to bring in someone like NYDIG, much like the way banks could bring in an independent RIA, or a broker dealer to their customers. And so they can make NYDIG available as that custodian. And that means that the Bitcoin is never touching the bank's balance sheet as their customers invest in it, but it lets them retain that customer. Many banks have seen customer flight to other FinTech or crypto exchanges. So it lets them offer a new product or service, retain and attract customers.

Patrick Sells:
But then you're hitting on, Jim, one of the key points, which is related to the business opportunity here. And so for banks, this becomes a meaningful non-interest income generator for them. And that's really exciting for me as an only recently former banker, one of the things I observed at my bank was every time we rolled out new technology, it was a cost center. And every time my customers used it, I just spend more money, right?

Patrick Sells:
And now when you look at something like Bitcoin, banks can roll out something new, and actually make money. So when Bitcoin's bought and sold, there are transaction fees. I analogize that to interchange revenue, from a card standpoint. And the retail average today is about 2.3 to 2.5% every time Bitcoin's bought or sold. And so when we look at the market, we see that that's about a $25 billion annual fee stream, that's largely today consolidated with a few players, but banks are going to be able to participate in those economics.

Patrick Sells:
And that's important, as NII has been kind of watered down or reduced over the last decade for various reasons. And right now in the interest rate environment we're living in, with such tight NIMs, the opportunity for meaningful non-interest income is very attractive. And so in the NYDIG model, we let our bank partners determine what they want those transaction fees to be. They could be at market, they could be above or below that. And then they get to retain those as the non-interest income for the bank.

Jim Marous:
That's interesting. There's been a lot of increase in interest from the largest financial institutions, in providing Bitcoin services to different segments of their clients, at the same time that PayPal, Square, and other digital payment firms have announced major Bitcoin initiatives. Are legacy banks and credit unions already in a game of catch up? And take it to a step further, are the regulators also playing a game of catch up right now in the whole Bitcoin marketplace?

Patrick Sells:
It's a good comment. I think in one sense, yes. Banks are behind in the cryptocurrency, because we see what's happening with, as you mentioned, PayPal or Square or Coinbase. And definitely we've seen this year, the largest financial institutions spend a lot of energy and resources, and begin to offer some type of product. But I think I'm able to see the market in a unique position as to what's happening at the community bank and credit union space, if you will. And just very excited about actually I think they're going to not play catch up, but they're really going to leapfrog, and end up leading the industry here. Because there's so many powerful products and ways that Bitcoin can be incorporated into banking, that is for the benefit of both the consumer and the bank.

Patrick Sells:
And so I think while in this moment in time, in many ways it could feel like the industry's behind, I think all the work that's been happening behind the scenes will catapult retail banking to the forefront of the industry. And that's something that I know I'm personally very excited about. And so I think it's coming, and it will actually be a massive change into the way in which Bitcoin can be incorporated into everyone's lives.

Jim Marous:
Speaking of integrating with everyone's life, there's been some discussion in the marketplace around offering Bitcoin capabilities through ATM's, expanding the way that can be used. You mentioned already the possibility of offering Bitcoin as part of a financial reward program on credit cards or debit cards or cashback. How else do you see Bitcoin integrating with what I'll call the natural fabric of retail banking?

Patrick Sells:
Sure. So here's an example of a product that we're working on that I'm super excited about. Today Bitcoin does, I think the market cap is probably around $800 billion or so, and that's a lot of value. And a typical fiat kind of credit decision, whether that's for a home loan, a car loan, a credit card, whatever, banks underwrite someone's income and their net worth and their assets. And today, all of that value in Bitcoin is really left out, because there's no way to do that, right? If you have Bitcoin or Coinbase, how can I make a credit decision? Because I have no clue what you can do with that Bitcoin.

Patrick Sells:
And in the NYDIG model and how we partner with banks, all of a sudden Bitcoin becomes an asset that can be factored into a credit decision. And that will allow banks to offer lower interest rates to consumers, which will make them more competitive than I think many of the kind of alt lenders, if you will, and again, begin to unlock even more of the power of Bitcoin.

Patrick Sells:
And so a great example of that, I actually have a friend in Austin, Texas, who has a good job, but not a great job per se, and his credit score isn't spectacular, but he has many millions of dollars worth of Bitcoin. But when he goes to get a car loan, he's usually ... he was paying the highest interest rate possible, because there's no way of underwriting his true net worth.

Patrick Sells:
And now all of a sudden he can bring that to his local bank, and will be able to take into account that he has millions of dollars of Bitcoin, and offer him a far lower interest rate. And so I think Bitcoin as property, or as an asset, is an example of how it will be integrated into retail banking, and consumers' lives, and again, equip and arm the banks with a far more powerful and beneficial offering to consumers.

Jim Marous:
So Patrick, when PayPal announced that they were going to support cryptocurrencies, the announcement was made in conjunction with the discussion around PayPal wanting to create a super app. Their logic was that they wanted their customers to spend as much time as possible on the PayPal app, to create higher levels of engagement and loyalty. Is this one of the foundational reasons why a traditional bank would want to consider expanding their services into Bitcoin trading? In other words, as you mentioned earlier in our discussion, the fact that consumers are continually fragmenting their relationships, and this will help get them more back onto the same app that they want to keep them on, from a retail banking perspective.

Patrick Sells:
Look, I think we all saw what happened with PayPal, and just the tremendous product market fit that they experience. I think one of the stats that has stood out to me the most is PayPal report a 95% year over year growth in new accounts last year. And that's pretty startling when you think about an incumbent, and an incumbent of that size, experiencing that type of new user growth. Forgetting about the app engagement, to your point, that offering Bitcoin has brought, I think PayPal has reported that the Bitcoin holder is multiples more engaged in the app than a non Bitcoin holder.

Patrick Sells:
And really what that underlies is something that we saw in our research, which is 71% of people who own Bitcoin today would switch banks for one that offered access to Bitcoin. In other words, consumers will be making a decision about their financial institution of tomorrow, based on access to Bitcoin today. And we see that playing out in PayPal.

Patrick Sells:
Now, I think PayPal, if you think about their business, and what we know about them and their desire to build that super app, makes a lot of sense in terms of why they would want to offer access to Bitcoin, because of how much retail demand there is. But I think what's powerful about the banks is, the intent behind the decision is much deeper than just, "Hey, we want to create more engagement." That's something that I think many of our bank partners look at as like a cherry on top. That's not driving this decision. What's driving it is the recognition that they can offer a far safer and better access to this product, unique access to this product, and unlock Bitcoin in a way that enriches the consumers' lives that they serve. And so that desire to say, "Hey, let's not just roll out access, being buy, sell, hold, let's really begin to think about how we bring Bitcoin into the banking system in a myriad of ways." That in doing so we can create the most powerful platform of fiat and Bitcoin, and that's in the best interest of our customers.

Patrick Sells:
And so I think that's part of why, again, we'll see actually much more innovation happening out of the banking sector. Because this isn't just about driving engagement. That's a nice to have. There's a much deeper, more meaningful reason behind what's driving these banks' decisions.

Jim Marous:
It's a very dynamic marketplace right now, and especially in the crypto area. And, as you mentioned, the number of people that hold crypto right now is continuously increasing. It's getting broader and broader.

Jim Marous:
Yet overall, the number of financial institutions offering the services that you provide is still very thin. Two things. Number one, about what percentage of organizations out there are currently offering these kind of services? But more importantly, when you're out there trying to sell this concept to financial institutions, what's the biggest challenge you hear from retail banks?

Patrick Sells:
So I think for any bank, regardless of what you're doing, whenever you're thinking about offering something new, or doing something new, you have to think about what is that safety and soundness framework that's required for this. And then B, how will I make the technology possible? How will I make that kind of feature or access easy? And those are two big headwinds in the industry, is limited ability to modify your technology or your front-end, and the need to create safety and soundness framework for something that's new.

Patrick Sells:
And so what we hear from our banks is consistent with those two themes generally, which is that is where their concern is. And I think if you now look at some of the news, as you mentioned, that came out from NYDIG, we've really partnered with the top, you know, the major core providers and digital banking providers, to make that technology side really easy. So there isn't like a one-off integration you have to do, it's really a flip of the switch, so to speak.

Patrick Sells:
And then I think on the compliance side, that's still probably the most prominent concern that we hear come up. But I think one of the things that I love about banking is this opportunity to say, look, there's perceived risk and there's real risk. And what banks need to do is work through that spectrum, and bring something from perceived perception to reality. And I think part of our role as NYDIG is to help them do that.

Patrick Sells:
And so one of the things we've done uniquely is build a model compliance package, that helps get you 80% of the way there for what you would need for MIS reporting or notice to your regulators, or the disclosures and testers that are needed.

Patrick Sells:
And so the concern that exist are related to the compliance side, but we're able to, I think, help many banks work through that. And Jim, as you know, when you're ... those listening, the industry likes to move in a herd, right? Very few want to be on the bleeding edge, but there's a lot of comfort in being in a cohort of banks moving.

Patrick Sells:
And really NYDIG's tripped that herd, so to speak, if you will. And so that also gives banks a lot of comfort, in terms of being willing to offer this. And so I think you're right in this moment in time, there's not as many institutions live with the product. I think if we were back on this show in 90 days or 180 days, it would be a very different conversation. And despite I think this is probably going to go down as one of the fastest chapters of innovation in US banking history, it's still banking, and things need to go slow for a reason, because they need to be done in the right way. And a lot of work's been done this year to make this all happen. And so I think we're really at the dawn of beginning to see many, many, many institutions rollout access to Bitcoin in a variety of ways.

Jim Marous:
So are financial institutions viewing crypto and the Bitcoin marketplace as being something that is going to be like mainstream product, like a checking, savings or an investment account? Or just going to be a segmented relationship, where really it's offered through maybe their small business group, or their investment services group, or through their top tier offerings?

Patrick Sells:
Yeah, so I think Bitcoin will ultimately be much more mainstream. I think it already is mainstream. We see that about one out of five Americans own Bitcoin. And so when we talk to our banks, and again, here I delineate Bitcoin between really others. I think there's a very big difference in terms of the desire and understanding of it. But I think what's been very fun and rewarding for me this year, as we've gone through this journey with our bank and our bank partners, and really focused on education, beginning to see everyone realizing how powerful Bitcoin can be, from a financial inclusion standpoint, from a wealth creation and preservation standpoint.

Patrick Sells:
And I think the more that the banking industry really begins to understand that, the more excited they become about the product, and the more they want to make it widely accessible. And so I believe that our bank partners consistently with us, will see that the world will increasingly become Bitcoin as mainstream as something like a checking account. That every American ends up having access to Bitcoin and owns Bitcoin.

Patrick Sells:
It will take some time to get there, but that's also very consistent with how networks work. And Bitcoin is just a network, much like Airbnb, right? When Airbnb started, it took a few people to say, "Yes, that sounds good." And now you look at it today, Airbnb has more listings than the top seven hotel companies combined, right? It's become ... it's it's everywhere. And I think we'll see a very similar thing happen with Bitcoin, and banks will play a key role in catalyzing that type of transformation.

Jim Marous:
It's interesting, because you mentioned about how quickly it can come up to speed. You know, we introduced PPP loans in a weekend. The product did not exist on a Thursday. It was out there in the marketplace on a Monday, because government said, "We're going to offer these." And so the ability to develop new products at scale quickly, the financial institutions, after never really needed to do this, figured out how to do this last year. So the capability is there.

Jim Marous:
On the other hand, offering a loan that is a small business loan, is something financial institutions are used to, and you didn't really have to educate their employees on it. How are you seeing traditional organizations educating their staff to be familiar enough around the Bitcoin offering to be able to offer it, or at least answer questions from customers?

Patrick Sells:
The PPP was obviously such a great example of the industry at large all kind of unifying and aligning, to make that possible. And it speaks to the power when we, as an industry, do that. And I think we're seeing a very similar thing happen with Bitcoin, in the sense of unification, and whether, across all our partners in banks that we're working with, that's helping actually accelerate this, right? And it's a good, I think, reminder for us generally as an industry, that when we choose to collaborate, we can bring innovation much faster to all of our customers. And that's good for our banks, and it's good for the US financial system. So whether it's PPP, or Bitcoin, or RPA, or whatever the next thing is, is just a good reminder, I think, a good lesson for all of us in the industry, in terms of where we go from here with it.

Patrick Sells:
I think we'll see that, or kind of the education side is that, consistent with opportunities to talk with people like yourself, we've also worked with many of the trade associations at a national and state level, to do education events. We provide educational content for our banks and also for them to provide to their end users. And so a lot of it really starts with education, and helping people begin that journey, for those that don't understand Bitcoin.

Patrick Sells:
And then I think one of the other things that's been very helpful for what's happening this year is NYDIG does provide a call center, that's there to support the bank partners from questions like, "What's a Satoshi?" that their customers may call and ask them, to a Bitcoin transaction. We won't probably always need that, but we see that as something key we can do in the industry Day One. And so really from an education standpoint, it's how do we help do that? And taking advantage of relationships like the ABA and the ICBA, and many of the state associations, to continually drive education and awareness.

Jim Marous:
You know, it's interesting. On this podcast on an ongoing basis, people that listen, regular listeners realize that I talk about the need to embrace change. The reason why legacy leadership really has to understand that things are changing, and that this change is happening faster than ever before. And it won't ever happen to this slowly again. And I think this is a great example in the marketplace, of something that is at the tipping point right now with becoming very commonplace, but also another area of financial services that we could lose, because of missing opportunities because of the slowness reaction. We're starting to see all the major competitors, all the technology companies, and many of the FinTech firms offering these kind of services. And it's going to really be a challenge for traditional financial institutions to say, "Are we willing to take this step?" A step that right now is a great opportunity to offer a broad array of services, and really test their chops on the ability to innovate at scale quickly.

Jim Marous:
Patrick, I really appreciate you being on the show today. I think it's a very interesting concept. But as you said, maybe we have to get together 180 days from now and say, maybe it's going to be an, "I told you so." Maybe it's going to go slower than we thought it would be. But the reality is, the marketplace is not going to go slow.

Jim Marous:
So our ability to catch up, our ability to keep up, is really going to be determined on an individual institution basis. And it is something that is going to be part of the financial fabric that is offered retail banks and retail banking customers. Just a matter of whether or not financial institutions are going to play in the game.

Patrick Sells:
Yeah.

Jim Marous:
Thank you again, Patrick. Really appreciate your time.

Patrick Sells:
Thank you, Jim. It's been great to be on.

Jim Marous:
Thanks for listening to Banking Transformed, rated as a top five banking podcast. I genuinely appreciate the support you've provided since we started this endeavor. If you enjoy what we're doing, please be sure to follow Banking Transformed in your favorite podcast app.

Jim Marous:
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Jim Marous:
This has been a production of Evergreen Podcasts. A special thank you to our producer Leah Longbrake, audio engineer Sean Rule-Hoffman and video producer Will Pritz. I'm your host, Jim Marous. Until next time, remember that the hallmark of successful people is they always stretch to learn new things.