Beyond the hype, there are really only two fundamental aspects to consider: the business case and the technology. The biggest business case for blockchain, of course, is international payments – a hugely profitable cash cow for banks that’s also woefully inefficient.
If international payments were a racehorse, it would have been shot by now.
International payments are complex as there is a minimum one currency change. Often there are three currencies involved: the initial currency, the U.S. dollar, and the end currency. The U.S. dollar is the world’s default currency; hence, many currencies are exchanged into dollars, and then those dollars are exchanged for the end currency. This, coupled with an anarchic message-driven process, results in high levels of payment failure, with one major bank reporting 12 percent of international payments failing.
That’s because, unlike just about everything else going digital, international payments use last-century messaging and follow a traditional paper process—think of a postman delivering mail to the bank’s address. And while a postman occasionally makes mistakes with your and your neighbour’s letters, blockchain is the equivalent of a recorded door-to-door delivery service.
Years ago, one of my former employers once misplaced a billion euros because it went to the wrong internal trading floor. For about a month, none of us knew where it was. That scenario would never happen with blockchain. I would see the payment and it would be done straight away, point to point.
For traditional banks, their big money spinner is now under threat. Fintechs are steadily nibbling round the edges, consumers are getting more savvy about fees, and with Brexit, interest rates are likely to go lower, yielding less of a return on deposits, adding to the pressure. So what should you be doing?
First, if you’re a traditional bank, you should not be leading in this area. Leave that to the more technology-agile fintechs, who are trailblazing blockchain for you. The price you’ll pay is that they will eat a certain amount of your lunch – so you shouldn’t be completely idle either. If you think of it in cycling terms, banks should be slipstreaming the leaders, watching closely, but staying with the peloton.
Second, be prepared to move quickly. There’s a tipping point coming when blockchain will be de rigueur, and when it comes, it will be quick. To use the same cycling analogy, think of this as a sudden sprint away from the pack. You absolutely can’t afford to be on the back foot, or you will truly be left behind.
For a variety of reasons (market pressures, consumer appetites, the pace of fintech innovation and engagement), I believe this will happen within the next two years. Of course, for a bank, any level of blockchain readiness has technology implications and repercussions, which is a topic for a separate blog in its own right.
Third, be selective about your channels. Chances are that there are different blockchain principles that appeal to different customers and requirements, such as private groups, clubs, or perhaps specific currencies, such as dollars and euros. You should dip your toe in the blockchain water now where it makes most sense to your business, and be ready to jump in with both feet when market conditions accelerate. Things could happen faster in developing countries such as China and Hong Kong, which have larger groups of younger workers.
To give you an example, I’m currently working with a major bank on an ethical finance initiative using blockchain for provenance. This also involves two fintech companies on the investment and supply-chain side. Blockchain is the logical choice for the “collaboration club” in this context, but it is not yet widely deployed elsewhere in the bank’s international payment activities.
Depending on the various projects in your own bank, there are no doubt obvious areas where blockchain would be a valid choice either in your corresponding network or other third parties. The industry is on a blockchain continuum. Bear in mind that it may move faster in some areas than others, and fintechs will spearhead it, but it’s coming. You need to understand how it best fits into limited initiatives now and be ready for the wider tipping point when it comes.
For more insight on blockchain, see Why All The Fuss About Blockchain?