The Impact of Blockchain Technology: Why Banking will Never be the Same

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.

By mutual consent: Why partnership is the way forward

What is Brazil’s Bradesco Bank doing with a blockchain-based digital wallet from a local startup? Why has UK challenger bank Metro tied up with peer-to-peer (P2P) lending pioneer Zopa? How does one explain India’s state-owned Bank of Baroda – the country’s second-largest player – partnering with financial technology (fintech) startups, such as FundsTiger and KredX, instead of fighting them?

For some years now, banks have admitted in the annual Innovation in Retail Banking survey issued by the European Financial Management Association (EFMA) and Infosys Finacle that there is a growing threat of disruption to their business at the hands of non-traditional competitors such as startups, technology firms, telecom operators and retailers. In 2016, the proportion of banks rating the threat as ‘high’ or ‘very high’ rose to 77% while around half agreed the threat from technology companies and “challenger bank” startups was significant.

Yet at the same time, a substantial majority (73%) of banks believed that the best way to disarm these rivals was to join hands with them; in comparison, the proportion of banks voting for internal research and development (R&D) was no more than 46%.

So, what’s causing this spirit of entente in the highly competitive banking business? The response to a separate question in the 2016 survey offers some clues.

Asked to name the biggest barriers to digital transformation, 50% of respondents said it was legacy technology and 38% cited lack of skills and expertise. To these banks, a startup or tech firm – which has none of their systemic baggage, and is indeed born from technology-led innovation – must seem like the perfect partner on the journey to digitisation. It’s a marriage made in symbiotic heaven: of startups, which have agility and innovation and banks, which have customers and compliance. The respective strength of each complements the other, making a natural case for collaboration.

Forty-one percent of the banks participating in the study said they used startups as suppliers. The banking world is full of such partnerships, with even a massive institution such as JPMorgan Chase seeing value in it. The bank recently sourced technology from OnDeck Capital to offer Chase-branded loans to its small business customers. With this, the bank expected to improve the borrowing experience for small business borrowers significantly, and bring down the cycle time from more than a month to just one day.

Early stage funding

Nearly one in three survey respondents claimed to be even more involved with startups, with direct or fund-routed investments. In March this year, Italy’s UniCredit announced a joint investment venture called UniCredit evo, in partnership with the financial services tech venture and advisor Anthemis Group, which will invest in young fintech firms. The bank says this initiative will lend strength to its digital transformation agenda.

German retail bank, CommerzBank, launched its own incubator back in March 2014 to focus on seed-stage ventures and followed that up the following October with CommerzVentures, an investment vehicle providing “B” and “C” round funding for the most promising fintech start-ups.

Besides entering into supplier-buyer and investing relationships, banks are also establishing accelerators and incubators to work with startups and fintech firms.  In the 2016 survey, over a quarter (27%) of respondents said they had done something like this. As an illustration, the latest report cites Standard Chartered’s new innovation lab in Singapore, called eXellerator, which will explore emerging technologies – including distributed ledger – to accelerate the implementation of digital solutions.

Last year’s report featured, among others, the hugely successful accelerator programme from Barclays in partnership with Techstars that launched in 2013. Two years later, the bank extended that with an initiative called “Rise” bringing together physical spaces and virtual global communities to build the future of financial technology. Barclays said that it planned to establish Rise hubs in North America, Europe, Africa and Asia by the end of 2016 and last month saw it select its first 10 shortlisted start-ups in India.

Although there is a strong argument in favor of collaboration between banks and startup firms, that alone is no guarantee of success. From a bank’s perspective, it is vital to establish the right motive for collaboration by assessing own strengths and then finding the right partner to bridge any gaps in capability. Typically, a bank should consider tapping the partner’s innovation talent and technology/operational model. For the start up, conversely, it is the bank’s expertise in risk management and compliance, deep pockets and ready customer base that are the big draws.

Next, both partners might need to make adjustments in culture, mindset and behaviour to make the alliance work smoothly. Banks might need to “loosen up” a bit, whereas their young partners would probably have to pay more attention to things like client development.

Last, but not least, is the technology environment itself. Given that this is the biggest barrier to transformation, banks have a challenge on their hands to refresh their environment to co-exist with the new technologies, products and services that their partners will bring. One way is to use open application programming interfaces (APIs) to allow innovators to access their environment. Not even the largest banks in the world can put together a portfolio of products and services, deliver them with the features and functionality, and enable the experience and engagement that can collectively be everything to everyone.

An API-driven collaboration strategy can enable a universal banking ecosystem to quickly capitalise on new technology opportunities, such as wearables and the Internet of Things (IoT), and accelerate innovation at the edge of the enterprise. More importantly, it also gives banks the agility to move into new markets and the flexibility to reach out to customer segments that were until now too expensive to serve.

This article first appeared in GT News. You can access the original article here.