Banking will never be the same, with distributed ledger technology. The industry is changing very rapidly. Banks are dealing with the most sophisticated customers in history, whose basic demands include speed, convenience, and personalization. The banking sector is facing unprecedented levels of regulation in the wake of the financial crisis, with regulators demanding greater transparency in banking operations. Economic uncertainty and slowing growth around the world are straining the core business, forcing banks to look at shoring up non-interest income. Last but not least, new, non-banking players are rewriting the banking landscape with their innovative, often disruptive, business models.
There are many technologies that will change banking forever. The cloud will change the cost structure of operating a data center. APIs and mobility will change where and how banking services are consumed. But blockchain and distributed ledger technology will change the fundamental solutions of the entire financial services industry by automating the processes between entities.
An explanation: Distributed ledgers (an example being blockchain) record transactions and ownership using pervasive, persistent, and permanent data structures replicated across a network. Transactions are kept secure and tamper-proof with digital signatures and public-key cryptography while validated and replicated across the network. This provides a single authoritative and immutable ledger that ensures that everyone sees the same version of the facts. Facts can take several forms – an indisputable view of providence (that some action/event was recorded at a specific time), a confirmation that something is indeed what it says it is (a matching digital fingerprint for example), a digital asset transferring ownership, or a smart contract representing the if-then-else logic governing a transaction. With these basic building blocks, it is possible to build new automated real-time processes between organizations.
The financial services industry is buzzing with excitement over blockchain’s potential. Blockchain and digital ledger technology are clearly emerging as the disruptions that would define the new banking business models. To quote the Bank of England’s Chief Economist, blockchain may offer an “imaginative solution to that distributed trust problem”. First efforts will go into messaging systems, competing with our current rails, but this is just a technology change. Transformation will be initiated when banks begin to explore the implementation of blockchain technology for business improvement.
As a real-time, trusted platform that securely transmits data and value, distributed ledger technology promises to not only reduce the cost of processing payments and other financial instruments, but also create new products and services that can generate important new revenue streams. Banks need to start leveraging blockchain technology for a truly digital transformation. CIOs should look at their business requirements and define a clear road-map for blockchain adoption.
Banks need to collaborate and create the necessary networks to leverage blockchain’s true potential. We have demonstrated through pilot projects that the blockchain technology itself works. Banks now need to take a long-term view and work with technology partners, regulators, and other service providers to define a framework that can act as the platform for a distributed ledger that is universally accepted.
When that happens, banking will not be the same. It will be better.