Disruptor and Enabler: Why Banks Should Clear the Path to Blockchain
“There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking.” — Jamie Dimon, CEO, JPMorgan Chase, 2015, letter to shareholders.)
The conveniences and advantages of today’s digital world are presenting banks with unprecedented challenges. Digital consumers are no longer bound by brick and mortar. When they want to execute a financial transaction – all they need to do is pick up their mobile phone.
Riding on the digital wave are numerous fintech companies, broadly disrupting traditional financial services. New solutions abound for money transfers, loans, fundraising, and asset management. This ‘trend’ is advancing full steam ahead, accelerating every year. In fact, according to the annual FinTech Report, global fintech investments are expected to exceed $150 billion in 2017.
In addition to these up and coming entrants, one technology that is poised to re-invent the global banking framework, accelerate disruption, which banks can’t afford to ignore. This is blockchain, a distributed ledger based technology that is reshaping banking. .
In a recent Harvard Business Review article, it is predicted “to do to the financial system what the internet did to media.” Moreover, Goldman Sachs says this technology "has the potential to redefine transactions and can change everything."
What is blockchain? And, why is it so transformative for banks?
“The question is not whether network business models supported by blockchain technology will disrupt these organizations, but when.” (Knowledge@Wharton Finance blog)
Blockchain is a distributed database of computers that maintains records, manages transactions, and functions as a networked public ledger. It has an open architecture with software that keeps record of and automatically vets digital financial transactions.
Transaction approval is contingent upon satisfaction of certain rules. Instead of appointing a regulator to monitor for breaches, which is how the current financial system works, the blockchain sets the rules while the network checks for compliance. If there is a transgression – such as inconsistent digital signatures, the transaction is rejected by the network.
With automated vetting and execution, blockchain, eliminates the need for a trusted broker, i.e. the bank. The benefits to consumers are compelling and include quicker and cheaper transactions that are also easier to execute than those enabled by traditional banking.
Clearly, for banks – the threat of displacement is real, as is the case for change. Banks can and should leverage blockchain to their benefit. For, while some might feel that blockchain will threaten the banks’ profits and business models, others believe that it is a strategic enabler for streamlining processes, decreasing costs, and improving the customer experience.
“Our research demonstrates how and where blockchain could cut costs and deliver savings of more than 30% across the middle and back office.” Accenture
KYC & Blockchain- a prudent solution for the long term
In the banks’ effort to decrease the risk of money laundering and terrorist financing taking place under their watch – KYC (Know Your Customer) has become an important priority. According to a Thomson Reuters Survey, financial institutions spend up to $500 million annually on KYC. By leveraging blockchain, banks can profoundly improve the integrity of their KYC programs, while no less dramatically decreasing costs. Namely, once a bank has audited and verified a new client, it could put their data on a blockchain that could then be accessed by other banks without the need for their own KYC process. In its May 2016 “Profiles in Innovation,” report, Goldman Sachs estimates that blockchain can save banks a total of up to $5 billion annually on KYC and AML compliance.
Indeed, the promise of blockchain is great, as is the commitment of some very heavy hitters to bring it to its full potential. For example, earlier this year 39 banks, tech giants, and other organizations, including J.P. MorganChase, Microsoft, and Intel, announced the Enterprise Etherium Alliance. The Alliance was formed to build a business-ready version of Ethereum, a decentralized computing network which uses blockchain.
Nevertheless, there are still multiple challenges for banks to overcome, in terms of infrastructure, processes, perception, and culture. But, with the future pulling us in the blockchain direction today, at the speed of digital; with consumers demanding new frameworks for convenience and trust in their financial transactions; and with Fortune 500 giants providing the tailwind to accelerate deployment and adoption – the question is not how will banks adapt. The question is – how can they afford not to?
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