The traditional chain of financial service providers consists of a high number of intermediaries. Every middleman has its own cost structures, which means they each charge commissions in return for providing the services required.
These corporations have been using the same operating principles for years. There are two reasons for this. On the one hand, the scale and scope of these operations means they are not easily changed. On the other hand, maintaining the same traditional business models is convenient for these players. Well-established financial corporations use their market dominance to ensure their expensive and ineffective operations continue unchallenged. And it’s usually their customers who pick up the tab.
Two major problems arise due to this lack of change:
• Firstly, important services become expensive for customers, for some user groups prohibitively so.
• Secondly, a limited number of players dominate because it is very complicated for any new business to enter the market and become an equal player in the ecosystem.
Combined, these two problems create a sort of lock-down in the sector. The offerings brought by the traditional finance and banking industry fail to serve the needs of a significant part of the population. However, new entrants who could meet these needs by challenging the status quo are unable to easily enter the market with new product offerings because the intermediaries involved are highly interlinked.
So where has this lock-down brought us to? An example that highlights the inefficiency and expense it causes is international bank wire transfers. Using ordinary banking systems this kind of procedure is slow and complicated. What’s more, the cost can easily exceed 10% of the amount being transferred, especially with small sums.
It’s a service that brings few, if any, benefits and a lot frustration. But for many customers, this is the only option available. But an alternative is possible.
With cryptocurrencies and other blockchain based products the story is completely different. Critically important is the fact that there are usually no middlemen between the two parties making the transaction, just the blockchain itself. This fact brings two major benefits:
• It takes seconds to perform the transaction, and this time is not affected by how far apart the parties are.
• The cost of the transaction is reduced to just a fraction of a percent of the amount being transferred.
Blockchain based transfers benefit both private users and businesses. For the former, it makes it possible to transfer small amounts at a low cost. For the latter, they can rely on blockchain to execute substantial wire transfers to clients or partners in a fast, reliable manner that is also highly cost effective.
But there’s a problem. At present, cryptocurrencies function fairly well as an asset, but remain virtually impossible to use as a means of payment in everyday life: users have to manually sell their crypto assets on an exchange, then transfer the resulting amount in traditional currency to their bank account. Only when this transfer is completed can they use these funds to make purchases.