Believe the Hype: Blockchain Is the Next Frontier for Banking

[Former Member]

When bitcoin was released in 2009, it fundamentally changed the way that people think about money and financial transactions. And while bitcoin never became as universal as it hoped to be, the system behind bitcoin is now poised to disrupt the way financial organizations operate. That system is the blockchain. Some have gone so far as to say blockchain will do for business transactions what the internet did for information. Those early adopters might just be right.

The blockchain is, at its core, a ledger of all information pertaining to a digital transaction. For financial organizations, the ability to harness that information poses a tremendous opportunity. It allows for faster processing time, lower costs, greater insight into market moves, increased transparency and compliance. But that’s just the start of it.

In a study from September 2015, titled “Deep Shift: Technology Tipping Points and Societal Impact” by the World Economic Forum, blockchain is listed as one of the driving forces behind the sharing economy. And a report co-authored by Santander earlier this month estimated that blockchain technology could reduce banks' infrastructure costs by up to $20 billion a year. Investors and the Venture Capital (VC) community are pushing hard to realize those cost savings. At the end of 2015, investments and funding of blockchain-related start-ups had grown from $298 million in 2014 to almost $460 million.

This influx of capital has allowed for increased experimentation and partnerships between traditional banks and the VC and start-up communities. This is especially true in the payments space where banks, as well as companies like eBay, PayPal, etc., are using blockchain to build a secure verification process for users.

Since late 2015, these experimentations and partnerships have begun to generate results and momentum for blockchain. In January 2016, R3CEV, a blockchain start-up working with more than 45 banks to advance adoption of the technology, announced that 11 banks, including Barclays, Commonwealth Bank of Australia, Royal Bank of Scotland, TD Bank, UBS, UniCredit and Wells Fargo, among others, had successfully completed a blockchain connectivity experiment. This news followed the announcement from NASDAQ that the Nasdaq Linq blockchain ledger technology had successfully completed and recorded a private securities transaction.

Blockchain’s Potential and its Obstacles

Speed and accuracy are the currencies of the digital economy, and blockchain’s ability to quickly validate trusted partners and facilitate accurate record keeping and trade is very relevant to banks and financial institutions. But with a banking engagement, it’s not often a 1:1 flow of information. Instead, it could be shared access for multiple parties (with the right security clearance) or a one-to-many flow of information.

Let’s consider supply chain processes around letters of credit, as an example. These currently rely on different parties — buyer, seller, bank, insurer, logistics provider, etc. — accessing the same information. Traditionally, it’s taken days, if not weeks, for that information to be passed through each organization. With blockchain technology, that information can be shared instantaneously. It does this by creating a shared repository where all data is accessible in real time to those with the right security clearance or access codes.

As evidenced above, banks and financial institutions are already heavily investing in blockchain. In fact, many have been doing so for years. But it’s still mostly done in a silo – undertaking very specific tasks, like: crypto currencies, managing the clearing and settling process, payments, or R&D initiatives. The true test for blockchain will be in how it integrates with existing technologies and infrastructure to scale from small, test cases to larger, enterprise wide operations. And this is where it will, undoubtedly, get interesting. Leaders in the field will now need to work on establishing procedures that connect blockchain’s rich data to an organization, allowing businesses to quickly analyze information to make informed choices about business operations or strategy.

There will no doubt be challenges along the way to mass integration - blockchain was not initially designed to take on the complexities and challenges of the enterprise. It was meant to serve an individual consumer – the bitcoin user. For it to be a successful, widely used tool for banking institutions, there must be a greater emphasis put on architecture and data integration as well as security and regulatory policy.

Like other new innovations in FinTech, blockchain will have to figure out how to cope with and adapt to regulations that vary in degree and complexity. In April of this year, The Chamber of Digital Commerce and three leading blockchain trade organizations launched the Global Blockchain Forum, whose mission is to help form blockchain regulations. Expect to see those regulations put in place sooner rather than later, especially as the technology continues to advance. Certain countries and states may have an easier time reaping the benefits of blockchain, as regulations and experience with blockchain vary depending on the location.

What Does the Future Hold?

Everyone in the banking sector should be paying attention to blockchain concepts and technologies. For blockchain to advance, technology and service providers – like SAP – will need to step forward and serve as a trusted advisor to the banks that are leading the development of these technologies.

Here at SAP, we are looking at concepts, technologies, existing implementations, partnerships and future product integrations that will allow us to help our customers understand the role that blockchain could play in their business.

For businesses considering the blockchain today, it’s important to keep these questions in mind:

o   What are the operational implications?

o   How can blockchain propel our business model forward?

o   Will it increase efficiencies or allow us to scale more effectively?

In the next two to three years, many of these questions will be answered. There will be an increase in business use case examples, in banking and other industries, which demonstrate ways of overcoming blockchain’s obstacles and the benefits it can bring to a business. As these use cases begin to overwhelm the current, technical discussions, we will have a better understanding as to the long term business relevance and viability of the technology.

While bitcoin may have been a flash in the pan technology, it has given the financial world a new way to look at its architecture and systems with blockchain. As this space evolves throughout the few years and more banks integrate blockchain into their overarching operations, one thing is certain – the possibilities are endless.