Big American banks, including JP Morgan, Citibank, Bank of America, and are changing their core systems to a digital structure based upon a technology created by bitcoin. However, the rest of the banking industry is not taking this technology seriously, in part because they don’t understand it. As a result, many smaller banks will be acquired or fail because they didn’t invest in the technology.
For the past few years, startups have been challenging the banking industry, with most adding to the system rather than changing it. Lending Club, Prosper, SoFi, Square, Venmo, and Stripe are not changing the banking industry, but adding to it. Lending Club, Prosper, and SoFi get most of their funds from the traditional financial markets and lend to clients the banks have little interest in serving, like small businesses and students. Square, Venmo and Stripe make online payments easy by adding their services to the underlying card systems of Visa and MasterCard, but that doesn’t change any bank system. Moven and Simple promised to disrupt the banking system, but they are just front-end apps that beautify the back-end systems of banks.
But now the technology called blockchain is changing everything. Blockchain is a shared digital ledger system that was created by bitcoin that promises to completely restructure the back-end of banking. This is because the technology allows banks to reduce costs, increase trust, and improve the speed of processing transactions. Blockchain technology achieves this by providing a digital ledger that banks can share on the Internet – a shared ledger – allowing banks to record transactions on the Internet and exchange anything, anywhere, anytime in real time at low cost.
Until the bitcoin blockchain structure appeared, recording financial transactions in a secure digital form on the Internet has been difficult. Now that banks have this technology, it allows them to create a system for exchanging value that is far cheaper, faster, and more reliable than any paper-based record. This is not just for monetary transactions, as it allows banks to record any transaction. In other words, it can be used to record the exchange of payments, investments, mortgages, loans, savings; in fact, anything that needs recording as an exchange of value or recorded as a contract.
The biggest banks, like JPMorgan, Bank of America, and Citibank, are investing heavily in developing these technologies and are partnering with blockchain startup firms like Digital Asset Holdings, Ripple, and Chain. A good example is Chain, which, working with Nasdaq has developed a blockchain for equities trading that processes transactions in minutes. Compare that with the New York Stock Exchange (NYSE), which processes in days, and you can see the difference.
For the big banks, the promise of high-speed, low-cost processing means that they are rapidly replacing their core systems to gain the advantage of the new technology and stay at the forefront of the markets. For smaller banks, community banks, credit unions and thrifts, changing their core operational systems is a big task. Many do not have the resources, monetary or human, to do it. As a result, we can expect a large swathe of mid-size banks to disappear over the next decade, and bearing in mind that the big banks are leading the way, we can expect the big banks to get bigger.
For more on how blockchain is affecting the financial industry, see Blockchain Poised To Be The Hot Tech For Moving Money In 2016.