If you haven’t dipped your toe in the blockchain water yet, then it’s time to start. Your competitors are. After all the talking and evaluating in 2016, we’re now seeing banks embark on pilot projects, accelerating the blockchain revolution. So if you’re considering something similar (and you should be), I thought I’d outline a few obvious areas that are ripe for blockchain pilots.
In general, I see three immediate areas – payments, trade, and capital markets – where you can create industrial pilot solutions. These pilots can bed down, grow in scale, and make the regulatory authorities comfortable with steady progress.
And because these areas are typically involved with core processes, chances are the powers that be within your bank will let them continue to run. Banks rarely uninstall activities once they’re up and running. That means your pilot, coupled with cloud technology, can be installed with minimum interference with legacy systems.
Cross-currency payments pilots, especially where the “lender of last resort” is clearly known, are an easy place to start, as they’re pretty much ready to go. The lender of last resort is the central bank for a given currency, and it’s the group or board of directors for a corporate. If you’re in any doubt as to the need for this type of function, the current banking issues in Italy are a motivating reminder.
One of blockchain’s inherent benefits is the lack of a middlemen. By having currencies such as Bitcoin, where there is no central bank (middleman), payments can be moved instantly, just like a domestic currency. An excellent pilot would be between two central banks. Here, you can discover the real benefits of blockchain at an increasing volume across two currency sets seamlessly linked and with currency owners embedded. The European Banking Authority (EBA) has announced a consultation to provide real-time settlement for instant euro payments.
We are seeing a number of proofs of concept (POCs) now underway between banks and corporates that own subsidiaries in other countries, utilizing blockchain in multi-currency movements. A pilot involving multiple and bilateral netting, for example, could demonstrate blockchain’s security and efficiency.
POCs in trade are also going well. The concept is proven with ethical finance, which has fueled interest. If you’re considering a pilot in this area, you need the underlying technology to scale volume. Volume brings anomalies that will need to be addressed. But, again, they should not impact the day-to-day running of the bank. Scaling the trust and provenance guarantees blockchain can run alongside the legacy systems. In my experience, most banks are expert at linking data from one system to another and have more IT professionals than some of the largest software companies.
No discussion in this area would be complete without mentioning the capital market and investment bank (CMIB) sector, which, as McKinsey noted, is restricting efforts and has yet to produce sustainable performance, with costs remaining high. No surprise here, as every bulge-bracket bank has developed one off, custom-crafted systems, and now maintenance is taking the majority of the IT budget.
CMIBs have some great blockchain POCs underway. In my view, this is an area ripe for collaboration for pilots such as syndicated lending, because the members already know each other.
Likewise, there are many back-office functions that can be automated and provided certainty with blockchain. It’s worth considering a collaboration on blockchain pilots for utility functions to diminish costs, improve trust and certainty, and increase security in a world of increasing cybercrime.
Regardless of where you start, I’d urge you to do just that – start. Let the revolution begin.