How Blockchain is Changing Banking

Few subjects in the finance and banking world are more top of mind than the use of blockchain technologies.  A recent Accenture survey found that 9 out of 10 banking executives polled said their bank is currently exploring the use of blockchain technologies.  There is good reason for this, the time and cost savings that can potentially be seen could as one IBM white paper states have ”revolutionary potential to develop new business and trust models.”  This kind of a statement is why, in 2018 $1.7Billion what poured into the distributed ledger technology space by financial institutions, and leads to a few questions that we will look at; What is the progress of blockchain use?  What is required for blockchain adoption?   And what does the future hold?

What is the progress of blockchain use?

JP Morgan has created the Interbank Information Network (IIN) and this network has attracted over 397 participants, allowing banks to make cross border transactions.  The traditional pain points, screening exceptions, slow these transactions by up to two weeks are nearly eliminated by the providing of needed information.  Also UK based HSBC has tested it’s FX Everywhere which deploys blockchain technology to align HSBC’s FX transactions with its internal balance sheet.  The test showed that the platform’s ability to automate the otherwise manual processes surrounding payments and forex trading holds promise.  The success of both these projects is based on the blockchain being used to solve a current problem rather than trying to improve current infrastructure with the blockchain.  According to a Business Insider report, “it’s possible that investing more resources in the status quo will yield a higher return.”

What is required for blockchain adoption?

Though initial hopes of this technology were great there are significant hurdles that are in the way that make early adoption more difficult now realized.  The three main issues found have been the performance when scaling of the technology for commercial application, ongoing regulatory uncertainties, and the difficulty of trust when bringing together various competitors.

A scalability issue must be surpassed.  The bitcoin blockchain currently processes only seven transactions per second, which is paltry compared with Visa’s average of 1,700 transactions per second, workarounds exist, such as permissioned block chains with fewer nodes, but they come with their own issues, reduced security because it is less distributed.  These issues need to be worked out before adoption can happen.

The hardest requirement for the setting up of a global clearing network is the correct architecture.  Accenture research found that “The most effective network should have two defining characteristics: It should include the necessary defined rights, obligations, controls and standards; and it should offer a quick and efficient onboarding process that enables banks to essentially “plug and play” into the network for both existing and future corridors.”  Additionally internal buy in for the technology is required.  As with all change, there needs to be a champion, able to push forward the initiative as well as educate key stakeholders to the benefits of the blockchain adoption.  Finally the fostering of an uncommon coordination among banks that are normally competitors, combined with a development of a legal and regulatory framework is needed for adoption.  This may be daunting but the successes above show that it is possible.

What does the future hold?

The first important element to understand the future is that the blockchain works.  This has been shown to be the case.  The future can be built on this fundamental understanding.  The future is in inter and intra bank adoption.  The IIN has shown that complex transactions are possible, not just for international banking transactions but non-banking institutions will have to be added to the mix.  Richard Meszaros Accenture Digital, Acting Global Lead for the IoT Connected Commerce Practice sums is up best, “Now it’s time for banks to look at the bigger picture and work together—and with non-banks—to help define the backbone that can underpin a universally accepted, ubiquitous global payment system that can transform how banks execute transactions.” 

In closing

Only when the technological, regulatory and adoption both internally and externally hurdles have been passed will the banking sector truly see the benefits and savings that are possible from the blockchain.  The services provided will benefit the consumer with faster and cheaper transactions, in a more secure way.  The future needs forward thinkers that dare to address issues and are willing to collaborate with former advisories on positive diplomatic terms.  The blockchain is both the present and the future.

Disclaimer:  The author of this text, Robin Trehan, has an undergraduate degree in Economics, Masters in international business and finance, and MBA in electronic business. Trehan is Senior VP at Deltec International The views, thoughts, and opinions expressed in this text are solely the views of the author, and not necessarily reflecting the views of Deltec International Group, its subsidiaries, and/or employees.