Darrel Duffies, Dean Witter Distinguished Professor of Finance at Stanford Graduate School of Business, said in an interview that banks should enjoy its last decade of benefiting from low-interest deposits because cryptocurrencies and its growing global adoption would soon take over.
Many industry accounts published in the past claimed that banks get almost 99% of their lendable assets from public deposits. However, a series of cuts in deposit rates had ensued over the past years, ultimately benefiting financial institutions and loan takers at the cost of depositors. This type of business strategy, according to the professor, would jeopardize the ability of banks to raise funds in the future, especially with the inception of an asset class that presents excellent potentials.
Professor Duffies also emphasized that the general public should not be fooled by the relatively low levels of crypto adoption such as Bitcoin (BTC), nor should they be misled by regulators who are trying to halt the launch of Facebook’s Libra. He noted that people must be prepared as early as today since the coming of cryptocurrencies is inevitable, and those that cling to the old ways of legacy banks would soon be disrupted.
Regardless of its form, may it be a stablecoin pegged to the US dollar, a CBDC, or a digital currency backed by private companies, Duffies stressed that the benefits brought by the digital asset model would inevitably rob banks with the privileges provided by low-interest deposits. He explained that once people found a faster and more cost-effective method of payments, they would resent putting their money in institutions that pay them with minuscule interest.
Duffies revealed that currently, the banks in the United States hold around $14 million of collective clients’ deposits. These financial institutions benefit from overnight loan takers by 2% and compensate depositors with a meager 0.1% interest rate on average.
Currently, a vast majority of depositors depend on banks to process their payments, which incur additional charges. Banks gain huge profits as well from credit card vendors who ultimately pass the burden to consumers. According to the professor, more and more people would realize that the existing system is not sustainable, and it would lead them towards digital asset models and the benefits they promise.
While there are competitive banks that would strategize to maintain their control over the global payment system, Duffies noted that the majority would feel reluctant to let go of their old ways since they had been proven extremely beneficial for decades. However, he warned these institutions that the future is coming and that it is not good.