Banks of all sizes can benefit from blockchain technology.
By Michael Scheibach
As banks brace for an uncertain future rife with demographic changes and fintech competitors, blockchain has emerged as another factor contributing to the industry’s forced transition into a digital-first age. What began simply as a means to support bitcoin transactions has morphed into a digital distributed ledger enabling secure transactions through a shared, decentralized database.
With blockchain technology, virtually anything of value can be tracked or traded in real time. Transactions are recorded in the distributed ledger, and all entries can be viewed by anyone participating in the blockchain. The technology operates using a network of computers with access to synchronized copies of information and continually being replicated, making the network highly secure and resistant to outages and attacks. Moreover, with blockchain there is no central point of failure. Because the blockchain is constantly being replicated across many different points, if one of the points on the blockchain network is attacked or fails, other points on the network step in and provide identical information.
Blockchain initially garnered interest among the nation’s largest banks, especially those seeking expedited and secure global transactions. Yet in the opinion of Eric Marks, senior director, Banks and Credit Unions practice, at consulting firm West Monroe Partners (www.westmonroepartners.com), community banks should be monitoring blockchain developments because they can realize many of the same benefits as big banks, depending on their lines of business. Blockchain, adds Marks, has the potential to lower the entry barrier to certain industries or business functionalities once deemed cost-prohibitive. As such, a broad awareness of distributed ledger technology should be incorporated into banks’ long-range strategic planning — at a minimum.
“All bank presidents, regardless of the size and focus of the bank, should consider increasing their engagement with and awareness of blockchain technology and the ecosystem of companies involved in it,” said Marks. “While some people instantly associate blockchain with bitcoin and other cryptocurrencies, it would be a mistake to overlook the tremendous potential blockchain offers to banking and other industries.”
Some of the potential benefits of blockchain technology, according to Marks, include the following:
- Improved data integrity because of reduced potential for human error or fraud given the decentralized nature of the blockchain.
- Increased transaction speed, which can be close to real time.
- Reduced settlement risk, due to speed and simplification of processes.
- The opportunity for cost reductions resulting from simplified back-office processes requiring fewer personnel and less technology.
- Improved data security and system resiliency, as there is no central point of failure.
- Reduced use of capital for reserves because decreased settlement times mean capital is not tied up for as long, if at all.
- The opportunity to digitize sales transactions and contracts, and to monitor the delivery of related goods or assets.
If a bank has not begun exploring blockchain, it is time to begin. Internally, banks should create a team or committee to study blockchain’s impact on their business models. Externally, banks can participate in a number consortiums currently working to better understand blockchain’s potential, create standards and develop distributed ledger banking solutions.
“The blockchain revolution creates an opportunity for banks and other financial services companies to leverage the benefits and incorporate them into their operating models for a competitive advantage,” said Marks. “With the ability to store shared contracts, support low-cost micro-transactions, facilitate communications between devices and streamline countless processes using distributed ledger technology, the effects of blockchain will be felt by all of society. It is just a matter of which applications will reach mainstream usage first and how soon.”
Michael Scheibach is executive editor of BankNews.