Long Story Short: Implementation of Blockchain Systems in the Banking
Can Blockchain Revolutionize the Banking Industry?
Blockchain technology will help to provide value to the banking industry through shared updated digital databases and ledgers as well as an additional level cryptographic security. Blockchain systems create an informational network allowing banks to efficiently and accurately process transactions and payments while lowering costs. Successful implementation of blockchain into banks will require global networking and unification, along with control standards to manage payments and limit risks. Banks will be able to use blockchain systems for cross-border transfers and remittances, providing additional identification processes with fewer errors.
Security and Identification: Blockchain systems have a sufficient level of security against data breaches, fraud, identity theft, denial of service attacks, and other hacking exploits. Blockchain helps banks accurately identify and track individuals through digital blockchain ID’s. Blockchains natural fraud prevention will help reduce the costs of doing business, providing greater savings to both the users and firms managing the systems. Verifying a customer’s identity is absolutely necessary for the banking industry, since lenders and regulators need to check criminal records or track any illicit activity. Blockchain systems can help to provide banks with a shared, cryptographic protected digital identification record with multiple parties constantly updating customers information. The United Nations and Microsoft have been working in coordination with Accenture to develop a blockchain system which can identify customers who lack any form of proper identification paperwork. Blockchain identification systems and ledgers can help prevent money laundering, which is costly for banks to vet information regarding illicit activity.
Record Systems: Investment banks spend billions of dollars running record systems for loans and securities. Richard Lumb, head of financial services at Accenture, stated "the first place we will see it have an impact is clearing houses, such as Deutsche Börse, the Australian Stock Exchange and Depository Trust & Clearing Corporation [DTCC]. Today it is managed through a myriad of messages and manual reconciliation. There is a big opportunity for blockchain to seriously restructure that industry." Accenture estimated that blockchain banking systems could save investment banks up to $10 billion in costs, through efficient settlements and clearing systems. The Australian Securities Exchange seeks to restructure its settlement and post-trade clearing through the development of blockchain systems. IBM, R3 and Axoni are developing post-trade clearing blockchain systems for single-name credit default systems in coordination with the DTCC. Blockchain system integration could be further used to help process derivatives through the United States clearing house.
Modernized Solutions: Blockchain can provide a modernized solution for trade finance by removing stamped fax or post, and providing multiple users access to the same shared information. Simon Whitehouse, senior managing director at Accenture, stated "it is literally Dickensian, because it is so paper-based. This is a very important element of the supply chain and blockchain can offer a vast amount of elements in this area. For instance, if you are shipping goods from China, as many as 50 people need to access the data." Removing the amount of paper needed to be sent will provide value for banks by expediting trading processes. Managing director of R3, Charley Cooper, stated "trade finance is an obvious area for blockchain technology. It is so old it's done with fax machines and you need a physical stamp on a piece of paper." Blockchain technology will revolutionize trade finance through faster access to information by limiting time consuming and costly paper trails.
Investment: Blockchain firms had raised large amounts of venture capital investment from banks in early 2017. The Ney York firm, R3, solely raised $107m in blockchain investment. Venture capital investment in blockchain technology firms had almost doubled to $367m in 2018.
Unified Process: Blockchain technology will require banks to collaboratively develop a unified network in order to provide support for global payments. It is necessary that banks work together for blockchain transaction and payment systems to be successful. Head of innovation for commercial banking at HSBS, Vivek Ramachandran, stated, "It could take you a day to ship oil from Singapore to Malaysia and a week to deal with the paperwork. Digitizing trade finance is quite a pointless exercise — you need to digitize trade. You have to include not only the shipping companies, the agents and the freight providers, but also the ports, the customs and the insurers. The moment you need a physical stamp on a document, it can't be digital. This has to be ecosystem driven." Blockchain startups have begun to modernize trade ecosystems through the development of digital bill of lading processes.
Early Adoption: Banks are still in the early adoption of blockchain technology, developing strategies for proper internal implementation and exploring proof-of-concept before integrating business systems. Mass organization network adoption is necessary for successful incorporation of financial transactions.
Convincing Stakeholders: Company shareholders need to still be convinced that blockchain technologies can provide fundamental value for users and be profitable. Banks will need to successfully integrate blockchain payment systems involving substantial coordination between organizations in order to develop a positive networking.
Work in Progress: Blockchain systems will provide banks with a platform that can efficiently transmit data through secured ledgers reducing costs of payment processes and providing additional streams of revenue. Blockchain networking needs to be robust and a unified global process involving multiple parties in order to be successfully implemented into banking systems. Many banks are still in the proof-of-concept stage and working on developing a blockchain network under certain control standards and basic rules for customer engagement. The integration of blockchain will provide great value and benefits to the banking industry improving business models and limiting security risks.
https://www.ft.com/content/615b3bd8-97a9-11e7-a652-cde3f882dd7b, Martin Arnold, October 16, 2017
https://www.thebalance.com/how-blockchain-is-changing-banking-and-financial-services-4174354, Justin Pritchard, September 21, 2018