In recent months we’ve seen a noticeable increase in interest about blockchain. We’re seeing companies increasingly making significant investments in order to explore its potential and create market changing products and services.
Many banks are actively exploring what the technology means for them and the industry. Indeed, banks in particular find themselves at a crossroads, facing a mix of major challenges – customers want more individualized services, new digital technologies offer new possibilities, there’s fast-moving competition from Fintechs and tech giants, and all this is taking place within a highly complex and changing regulatory environment. What role does blockchain play in all this?
To help get some answers, earlier this month, I sat down with Marco Arce, Belatrix’s Segment Head of banking, financial services and insurance, to gather his thoughts about the impact of blockchain in the banking industry. Here is a summary of our discussion.
What’s the state of blockchain in the banking industry today?
Today, digital enterprises and Fintechs have been at the forefront of exploiting the potential of blockchain in contrast to traditional firms. Traditional organizations are still putting more resources on efficiency, rather than exploring the potential of new business models based on blockchain technology. However, after years of looking at blockchain as hype, the banking industry has begun to expand their view of blockchain opportunities.
Fintechs have not just come up with new business models using virtual currencies (e.g. Bitcoin) but have also created innovative solutions for different areas like payments, insurance, and trade settlement, to facilitate convenient, cheaper, real time, and innovative ways of working.
Some of the most widely-adopted solutions include syndicated loans, customer onboarding, trade finance, digital management of assets, and post trade processing for capital market firms.
What’s the #1 trend that will shape blockchain in banking next year?
Traditional banks are now building the capabilities that are needed to push blockchain into the mainstream of their operations. Payment services with blockchain are starting to grow at a good pace, thus establishing a decentralized ledger and facilitating faster payments, at lower fees than banks.
In fact, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) has launched a pilot Global Payment Initiative (GPI) service to join the growing number of blockchain and fintech services – this will reduce costs and simplify processes. These kinds of initiatives promise to deliver topline advantage to banks and Fintechs who expect to continue their adoption of cases with clear bottom-line benefits.
What’s the #1 challenge to blockchain adoption in banking?
There are many challenges that blockchain faces – the most important from our point of view is the regulatory gap. There are not yet clear regulations or legal parameters which can be used as a universal reference point to facilitate its widespread usage in banking.
As a consequence, despite trial implementations demonstrating the safety of the blockchain network and its benefits, blockchain adoption in banks remains slow, because they believe the network has not matured enough in terms of global regulations.
What’s the #1 benefit blockchain brings to banking?
From our standpoint and considering the necessity of banks to grow their businesses and provide added value services to their customers, we believe the key benefit for banking is transaction speed. Blockchain can dramatically reduce the time required to settle transactions. Usually it takes anywhere from 1-3 days to a few minutes to verify fund transfers between banks and international payments.
Faster transactions could be processed in real time, as one of the strengths of blockchain is the elimination of duplicated data, so both sender and receiver banks would have the exact same copy. This means there is less need for the bank to reconcile accounts.
What’s the future of blockchain in banking?
Banking leaders believe blockchain technology will help to improve the customer experience, streamline product features, and create a more trustworthy exchange of goods, services and real assets at lower costs.
Beyond payments and digital currency exchanges, we believe the implementation of tokenized securities will help banks to significantly reduce global trade costs in the near future by streamlining the complex chain of mediators that is needed today.
Besides financial exchanges, blockchain will also help in the creation of a decentralized client identification system, so a customer will be identified once, their information will be stored in a secure location, and then all banks will be able to access it.