Central bank digital currencies (CBDCs) are becoming a reality and challenging traditional banks. CBDCs have shifted from sideshow status to a meaningful part of the future of money conversation. Financial institutions, particularly banks, need to stay abreast of CBDC developments and invest in software tools to modernize their operations.

CBDCs: Governments’ path to modernizing money 

Governments around the world are looking into CBDCs as a replacement for traditional fiat currency, which makes up the current money supply.

Software market response and space for innovation

The advent of CBDCs increases the pressure on banks to innovate and provide their customers with well-designed digital products. To do so, banks will be looking to software vendors. Vendors can highlight digital currencies as another lever to prompt banks’ investment transformative tech. G2 has seen a 20% increase in traffic to robotic process automation (RPA) software products over the past 12 months (YOY). 

We’ve added new categories like digital customer onboarding software to represent a new slate of products to automate large swaths of financial institutions’ interactions with customers. There is a significant opportunity for vendors to address a long-standing issue like cross-border payments. The process is messy and costly, and the customer pays the price. A vendor able to cut through the knot of intermediaries would reap the benefits and get banks lining up to take advantage and present themselves as first movers addressing a historically neglected space.

The current state of CBDCs

Eighty-one countries (including most of the global economic powers, representing 90% of the global GDP) are actively researching CBDCs, experimenting with them, or deploying pilot projects. That level of interest from the world’s leading economies indicates potential staying power. 

Society is already predominantly cashless. CBDCs are just a step further—currency enabled by blockchain technology, designed to remove barriers to money movement, particularly those that impede cross-border payments. A cynic might say that CBDCs are first and foremost a way for states to retain control over the money supply. I expect that a desire to stay ahead of the curve and be well positioned to take advantage of new technology is driving most of the development. Governments that want a say in shaping the future of money need to be involved from the start.

Satoshi Nakamoto’s dream of a world in which currency exists outside the purview of powerful state actors may be dead. Cryptocurrency has gained traction as a tradeable asset, getting the sign-off of traditional banks that have embraced, if nothing else, its potential to make them and their clients a lot of money. However, it has not experienced widespread adoption as a store of value. 

The irony is that the technology the mysterious creator of Bitcoin championed is now being adopted by the states they sought to circumvent. CBDCs do have the potential to benefit citizens and businesses in a few ways—reduced cost of cross-border payments (larger benefit for businesses, but significant benefit for individuals when it comes to remittances) and financial inclusion for the unbanked/underbanked. Consumer payments are faster than ever, but cross-border payments have languished, remaining expensive multiday ordeals. CBDCs implemented using a set of global standards can catalyze significant development within cross-border payments. 

CBDCs and banks 

CBDCs present a threat to traditional banks, but governments are not neobanks or fintechs looking to upend the traditional financial services system. If, or when, a CBDC-centric future materializes, banks will need to have their systems set up to deal with CBDCs. However, most of the burden is on the government issuing the digital currency to develop the currency using technology that will reduce the friction of the transition and set guardrails to avoid economy-damaging phenomena as bank runs. Governments have a vested interest in easing any transition into a CBDC-based money supply. 

CBDCs may remove the need for traditional banks entirely for large swaths of the population, specifically those currently financially excluded. Traditional financial institutions have neglected unbanked and underbanked people. CBDCs present a way to get those people involved in the financial system without banking, as long as they have mobile devices with a reliable internet connection. Banks also stand to lose a good amount of revenue from the efficiencies inherent in a world where functional multi-currency CBDCs facilitate cross-border transactions. Cross-border payments currently generate $120 billion in transaction fees per year, and lengthy settlement times contribute to uncalculated hidden costs. 

How banks can ride out the transition

If banks want to retain customers and entice long term loyalty, they’re going to need to not only offer the same level of convenience as any government-issued digital currency but sweeten the pot with higher interest rates, reduced service fees, and access to a swath of financial products that would otherwise be unavailable to their customers. Letting money rot in a savings account paying out 1/6th the average inflation rate will seem a lot less enticing if another option greases the wheels of money movement at home and abroad. It will cut into profit margins, which means they’ll need to rely heavily on tech where possible to introduce internal efficiencies. 

Luckily, there are many fintech solutions designed with a mind towards that end. Automated credit decisioning, robo-advisory software capable of considerable degrees of personalization, RPA for repeatable tasks—there are a ton of options available. And if the C-suite needs to cut down their bonuses by 10% and downgrade from a Ferrari to a Lexus, well, that’s a sacrifice they may have to make.