A Comparative Analysis: Money Transfers in Traditional Banking vs. Cryptocurrency (2024)

Cash is dead; long live crypto. Although this proclamation is not entirely true, the changes in the financial world hail the adoption of cryptocurrency and the rising power of digital assets.

As an alternative decentralized method with ways to keep inflation in check. Take Bitcoin, for example. Namely, its supply is limited and known in advance, and the creation of new Bitcoin will decrease over time in a predictable way.

On the other hand, centralized banking monetary systems are under a lot of pressure. Fresh minting of fiat currency causes the rise of inflation and, consequently, the living costs. However, with a central authority in power, the value of fiat money and the importance of the usual money transfers will never wane drastically.

Will the rise of cryptocurrencies remove the need for traditional money transfers and banking? What are the risks involved? In which areas does traditional banking still hold sway? In this article, we compare money transfers in the traditional banking environment and the world of cryptocurrency to give you a detailed analysis of the two.

Traditional Banking: Money Transfer Process

The traditional banking system has been around for centuries as the sole method of carrying out financial transactions. The money transfer process in the banking system implies sending funds from one account to another.

There are two ways to execute a money transfer: Automatic Clearing House (ACH) Transfers and Wire Transfers. Both of these are electronic funds transfers, but the difference is that wire transfers are faster and can be used for international transactions. In contrast, ACH payments are primarily used for domestic transfers and are mostly free.

To complete a money transfer through a bank, you need to complete the following steps:

• Log in to your banking app and choose the account you are transferring funds from.
• In the recipient’s section, input the transfer amount and the recipient’s account number, together with their personal details.
• Provide the routing number or SWIFT code in case you are making an international transfer.
• Confirm the transaction.

Once all the information is in place, the bank can process the transaction and deduct money from the sender’s account, which will be credited to the recipient’s account.

The process is quite similar if you transfer money through other remittance systems, such as Western Union or MoneyGram.

Traditional money transfers take place between banks. The process is further facilitated by intermediary or correspondent banks that serve the role of a middleman between the bank that issues the payment and the one that receives it, especially in international transfers.

With this many participants in the process, high fees are incumbent. Moreover, money transfers usually take between one and seven banking days to complete, effectively making it one of the slowest methods out there.

Cryptocurrency: Money Transfer Process

Cryptocurrencies are digital peer-to-peer payment systems that don’t need banks to verify and handle transactions. Instead, crypto payments are digital entries whose records are recorded in a distributed public ledger called a blockchain.

The blockchain’s role is to verify and record data about each transaction and protect it through advanced cryptographic systems that make it virtually impenetrable. We can see a block of information as a collection of information run through an encryption algorithm that creates a hash (hexadecimal number).

That hash gets entered into the next block and encrypted with the data from that block, thus forming a collection of blocks called the blockchain.

When making a cryptocurrency transfer, you effectively transfer digital assets to another user without any third-party involvement. Since the blockchain is a public ledger, no regulatory body oversees it, making cryptocurrencies entirely decentralized. Let’s illustrate how a Bitcoin cryptocurrency money transfer works.

Once you enter a new transaction from your digital wallet, it gets transmitted through a network of peer-to-peer computers across the globe. These computers then solve complex equations to confirm the transaction as valid. Then, these transactions are grouped into blocks, which are chained together to make the transfer permanent and irreversible.

All data on the blockchain is disturbed across the entire network of computers supporting the system, called nodes, making the alteration of records in the database impossible. Also, because of this decentralized nature, all transactions on the blockchain are accessible to the public, delivering an unprecedented level of transparency. In fact, through your node, you can track virtually every Bitcoin.

Comparative Analysis: Key Differences

The average processing time for crypto transactions goes from near instant to 40 minutes at the latest, compared to at least one business day that a regular money transfer in the banking system takes. In fact, on average, it will take at least three business days for the remittance to be visible in your account.

Another key difference lies in the cost of the transaction. Cryptocurrency transactions cost between 0% to 1.5% of the value of the transaction, whereas typical international money transfers can cost about $50, depending on the payment size. Chip in currency conversion rates, and you get a hefty price tag for the banking money transfer.

As decentralized fintech, cryptocurrencies do not fall under any central financial jurisdiction. Therefore, cryptos are truly global, providing access to users even in territories with restrictive financial regulations.

Ultimately, the only thing you need to perform a crypto transaction is a digital wallet and funds in that wallet. There’s no need for bank accounts and loads of personal information to be shared with financial institutions for the payment to go through.

Advantages and Disadvantages

Traditional banking is deeply rooted in the consciousness of users seeking the means to make secure payments. First of all, banking methods are accepted everywhere, so there are no regulatory obstacles to worry about. Secondly, bank money transfers work in any fiat currency. Ultimately, there’s bank-level security, a form of encryption that protects financial data and personal information at all times.

On the other hand, crypto payments are significantly faster than bank transfers. They do not entail the considerable fees that are an indelible part of money transfers via traditional banking methods. Furthermore, there are no currency conversion rates that apply in the case of international wire transfers.

Nevertheless, cryptocurrency payments are not without risk. Sure, in a bank transfer scams vs. crypto cons duel, the former has been more ubiquitous, but the blockchain has also fallen victim to hacking attempts, phishing scams, and other cyberattacks. Hackers can trick users with phony addresses of digital wallets and even create fake currency exchanges to steal money from customers.

Additionally, crypto transactions are irreversible, unlike bank transfers, so you won’t be able to get your money back in case you make a mistake when sending crypto.

Security and Privacy

Banks use advanced security techniques and methods to protect the clients’ funds. These include multifactor authentication, such as using PINs and passwords, SSL encryption, fraud prevention systems that detect anomalies, and more.

As for cryptocurrencies, their decentralized blockchain nature and the way data is stored on that blockchain make cryptos the safest digital asset. The only way cryptocurrencies can be vulnerable if there is a loophole in the code that created its security level.

Both methods involve certain security risks, including identity theft, the loss of credentials for digital wallets, phishing scams that can mislead consumers into believing that their banks sent the notification, and many others.

Adoption and Future Outlook

Unlike cryptocurrency transfers, traditional banking money transfers are available in every jurisdiction and territory. Since governments can’t control cryptocurrencies, legislators are not keen on legalizing them.

Luckily, in recent years, the European Union, with its proposals on regulating digital assets, and the acceptance of Bitcoin by the United States, Canada, Australia, and other countries, a wider presence of cryptocurrencies is expected.

The critical issue is the form in which cryptocurrencies will be seen in the markets. Will they be an asset, legal tender, or simply a payment method?

Incorporating digital currencies into existing financial markets is also an issue, but the transition can be smooth with the proper regulatory framework.

It’s no denying that cryptocurrencies are here to stay. Digitalizing fiat currencies has also become an option for governments as a way of taking advantage of virtual currencies while staying in control of their value.

However, a comprehensive strategy for legalizing cryptocurrencies is visible in countries worldwide that is bound to help cryptocurrencies become a mundane payment method.

Conclusion

For the time being, banking money transfers are able to retain a larger market share and remain the number one option for financial transactions. However, cryptocurrencies bring about faster and more cost-effective payments.

The likely future of money transfers lies in a liaison between the two, with the acceptance of cryptos by all financial institutions and banks carrying out transfers in both fiat and cryptocurrencies.

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