What does blockchain mean for the future of banking?
The banking industry spends a lot of time and money each year on what is known as ‘post-trade processing’, which involves the buyer and seller comparing details of their transactions, changing records and transferring ownership of cash or securities. Blockchain technology offers the chance to make all of this redundant, but there are some things the industry needs to do before this can happen.
Best known for its use in controlling cryptocurrencies, blockchain is a distributed ledger technology (DLT) that keeps a record of transactions and is shared between the parties conducting them. This shared ledger creates a ‘single view of truth’, which means there’s no need for individual parties to keep separate records that have to be reconciled in order to verify and complete transactions.
What this means in practice is that blockchain-based DLT can be used to transfer pretty much any kind of commodity or asset safely and securely. Transactions are encrypted and linked to those either side, making the chain very secure and removing the risk of disputes and fraud. This is an important factor for cryptocurrency processing, where transactions are anonymous.
What banks need to do
Part of the problem for banks in adopting DLT is that there is, as yet, no accepted standard for the technology across the industry. Some organisations, including the Nasdaq stock market in the US, have developed business-to-client systems but not – so far – business-to-business ones.
Trade finance is one of the areas where DLT systems look set to take hold first. Prototype systems for trade finance are already in operation in a number of places, Japanese bank, Mizuho, has already completed a major transaction between Japan and Australia, using DLT technology to share the data with all participants. This cut the delivery time for documents from days to hours, at the same time as increasing transparency.
While it’s already working in some areas, there are a number of groups within the banking industry that are looking to develop DLT solutions which have the potential to be adopted across the sector. The opportunity for whoever gets it right is enormous. It could lead to the redesign and simplification of back office processes across the whole industry, without the need to link existing legacy systems.
For this to work effectively, all companies need to find value in the process. This means any solution must take account not just of day-to-day business processes, but also of the regulatory structures to which banking is subject. In addition, it must address falling margins caused by new and disruptive players entering the market.
There’s no doubt that a move to DLT will represent a massive change for banks. They will need to ensure that measures are in place to address data protection and security. There also needs to be a clear distinction between sharing services and sharing data. It’s important for industry players to work closely together, to develop a solution that works not just for banks, but for their customers and shareholders too.
This article was written by Ben Palmer, Managing Director, IJB Global.