Blockchain’s Effect On Banking

Blockchain technology is being hailed a great disruptor, and countless startups are attempting to leverage the power of the technology to open new avenues of business. Big banks, while relatively slow-moving due to their immense size, have also woken up to this new disruption, and a wave of banking-focused innovations have begun to gather speed.

Here are just a few notable examples of what blockchain innovation can do for banking:

Blockchain reduces settlement times

When banks transact with each other, they do so via agreements similar to those created when you purchase goods at a store. Unlike the agreements between private consumers and the high street shops they frequent, the time taken to go through the process of honouring these agreements is cumbersome, sometimes stretches across many days, and runs the risk of one or both parties withdrawing their interest or defaulting on the agreement. This period of uncertainty is referred to as settlement.

According to an Oliver Wyman report, these elongated settlement times cost the financial industry as much as US$65-80 billion a year.¹ Due to its digital, interconnected nature, blockchain technology has the potential to reduce or even eliminate these settlements times. By investing in blockchain technology, banks can remove the need for manual processing and authentication through intermediaries, making payments faster, more reliable and easier to audit.

An example of the impact blockchain technology has on settlement and clearance procedures would be the Utility Settlement Coin, or USC. The USC specifically targets the use of blockchain technologies by traditional banks, attempting to harness the emergent technology as a tool for more streamlined and efficient transactions. The USC has already garnered backing from multiple banks, including the likes of BNY Mellon, Deutsche Bank, Santander, Barclays, CIBC, Credit Suisse, HSBC, MUFG, and State Street.²

Blockchain a boon for identity verification

One of the most vital and highly-regulated elements of banking is customer identity verification, or Know Your Customer (KYC). The purpose of global KYC guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal persons or groups for money laundering or otherwise illegal activities. Related to this purpose, KYC guidelines also enable banks to better understand their customers and their financial dealings in order to better manage their institutional risks.

Banks usually seek to achieve the following to please their KYC controls:

• Collection and analysis of basic identifying information such as identity documents
• Cross-referencing of names against lists of known high-risk parties such as politically exposed persons (PEP)
• Determination of the customer’s risk in terms of tendency to commit money laundering, terrorist finance, or identity theft
• Creation of an expectation of a customer’s transactional behaviour
• Monitoring of a customer’s transactions against expected behaviour and recorded profile as well as that of the customer’s peers

This is an inordinate amount of information to gather about every single person a bank does business with, and individuals aren’t bound to operating with only one bank. Because of this, banks could benefit from a shared digital utility to record customers’ identities and keep them updated.

With the development of blockchain technology, banks now have the opportunity to invest in blockchain for identity verification. As a proof of concept, Accenture recently worked with Microsoft to develop a solution to the identity problems faced by over 1.1 billion individuals all over the globe.³ These 1.1 billion people lack traditional identification documents, such as the kind that would be used in KYC protocols. The project, known as ID2020, is a public-private partnership aimed at making digital identity a reality through a technology-forward approach that will leverage secure and well-established systems. The jump from ID2020 to blockchain identity verification for banking could very well be within reach.

Blockchain shakes up loan market

Syndicated loans – loans offered by groups of lenders to single borrowers – allow the individual lenders in the syndicate to spread their risk and gain a stake in investment opportunities that may otherwise be too large for their individuals capital bases. These syndicates can be slow-moving, as many parties need to collaborate and communicate in order for all the checks and balances to be properly completed. For example, the average syndicate loan transaction in the US currently takes banks 19 days to settle.⁴

Identifying the need for change, a consortium arranged by Credit Suisse in 2016 announced the development of a project to demonstrate how blockchain technology could be used to improve the syndicated loan market. Members of the project included R3 consortium members BBVA, Danske Bank, Royal Bank of Scotland, Scotiabank, Société Générale, State Street, U.S. Bank and Wells Fargo; with AllianceBernstein (AB), Eaton Vance Management, KKR and Oak Hill Advisors also involved in the initiative. These stakeholders all brought important market knowledge, process experience and testing resources to the project.⁵

According to Emmanuel Aidoo, Head of Blockchain at Credit Suisse, blockchain technology is “the perfect vehicle for managing the lifecycle of loans.” He says a key challenge is to find a way for separate blockchains to talk to each other, ensuring changes to a loan’s ownership can be quickly reflected across all systems.

The initiative involved each of the agent banks providing a “golden source record” of the loans they administer, which could then be accessed by other lenders.

Blockchain and investment banking

According to a study performed by Accenture Consulting, adoption of blockchain infrastructure by the study’s focus group of eight investment banks could save them US$8 billion of their estimated US$30 billion spend on operational, risk and finance systems.⁶ These savings could be spread across many fields, but the below are some of the most prevalent savings, and how they would come about:

• 70% potential cost saving on central finance reporting – more streamlined and optimised data quality, transparency and internal controls
• 30-50% potential cost saving on compliance – improved transparency and auditability of financial transactions
• 50% potential cost saving on centralised operations – more robust digital identities and mutualisation of client data among participants
• 50% potential cost saving on business operations – reduction or elimination of the need for reconciliation, confirmation, and trade break analysis as key parts of a more efficient and effective clearance and settlement process

Accenture’s study was performed in early 2017, and they admit that the savings estimations could have been conservative at that point.

Here’s what they base that belief on: In late 2015, Aite Group, an independent research organisation focused on financial services, forecast that blockchain spending among capital markets players in 2016 would be around US$125 million.⁷ However, in mid-2016, a study by Greenwich Associates, an independent benchmarking research firm, predicted that 2016 blockchain spend by capital markets firms would be closer to US$280 million.

The Accenture report claims that “there is compelling evidence that blockchain could radically reduce, if not entirely eliminate, many existing clearing and settlement processes”, as well as saving billions of dollars a year, reducing time windows, and impacting cost dynamics.

Blockchain’s potential effect on all business

With such a large, far-reaching and well-established industry such as banking being so affected by the rise of blockchain technology, it may seem safe to assume that no industry is safe from disruption. It now falls to current and future business leaders to realise the potential blockchain technology holds for business, and harness the power to create the next big initiative.

The Oxford Blockchain Strategy Programme from Saïd Business School, University of Oxford aims to empower you to adapt to the changing business landscape through a highly-supported interactive learning journey, entirely online. You’ll leave the programme with a foundational understanding of what blockchain is and how it works, as well as insights into how it will affect the future of business and your organisation. You’ll also gain the ability to make better strategic business decisions by utilising the Oxford Blockchain Strategic framework, Oxford Blockchain Regulation framework and the Oxford Blockchain Ecosystem map.