Written by: Danijella Dragas, Executive Contributor
Executive Contributors at Brainz Magazine are handpicked and invited to contribute because of their knowledge and valuable insight within their area of expertise
Past caution is understandable when it comes to blockchain, but there are a number of areas where the technology could create value for retail banks.
Retail banks have made great strides in developing digital business models, introducing millions of people to mobile banking and becoming expert providers of data-based services. When it comes to blockchain, however, they have remained mostly on the sidelines.
Retail banking’s hesitation on blockchain contrasts with efforts seen elsewhere. Governments, investment banks, and infrastructure providers are experimenting with the technology in the belief that a shared electronic ledger will help them cut costs and increase transparency. Investment banks, for example, envisage a world in which execution, post-trade processing, and settlement are instantaneous, eliminating numerous middle- and back-office processes. They are also focused on the potential for smart contracts to increase automation.
Large investments are being made in the blockchain arena. Across industries, venture-capital funding for blockchains reached $1 billion in 2017. Wholesale banks have launched hackathons, innovation labs, and collaborations with fintech. New York-based software firm R3 works with more than 200 institutions to develop blockchain solutions on an open-source platform.
Still, caution is understandable. None of the financial industry’s initiatives has been rolled out at scale, and tough regulatory requirements in banking create a high barrier to entry. The future regulation of blockchain itself remains uncertain. Some regulators, such as the UK’s Financial Conduct Authority (FCA), are still formulating policy. In the United States, the Securities and Exchange Commission (SEC) has blocked attempts to launch blockchain-based ETFs.
Despite those concerns, a few retail banks are dipping their toes in the blockchain pool. Santander, for example, worked with California-based Ripple in 2018 to launch the first blockchain-based money transfer service. Still, for the retail banking industry to move forward at scale, further proof of value will likely be required.
The potential for retail banking
Early enthusiasm for blockchain technology among capital markets, infrastructure firms, and wholesale banks has not been widely mirrored in the retail sector. Still, we believe there are three retail use cases that could eventually be deployed at scale, and which offer most in terms of blockchain’s three key strengths—data handling, disintermediation, and trust (see sidebar, “How does it work?”). These use cases are remittances, KYC/ID fraud prevention, and risk scoring.
Remittances
Cross-border payments total around $600 billion annually, and the market is set to maintain its recent growth of around 3 percent a year, driven by international trade. However, payments processing tends to be clunky, opaque, and highly mediated. As a result, costs are high. Fees are commonly 2 to 3 percent of transaction value and can be as much as 10 percent.
The emergence of numerous fintech in payments (around one in four is focused on the segment) is increasing competition and leading to more efficiency in some parts of the value chain. In addition, incumbents are developing their own solutions. The Society for Worldwide Interbank Financial Telecommunications (SWIFT), for example, is working with banks through its global payments innovation initiative to improve the cross-border payments experience. Still, blockchain may be able to generate value by fixing certain inefficiencies. If counterparties were to exchange cryptocurrency assets (digital currencies that do not need a central regulating body) rather than fiat currencies, for example, payments could be made and settled in minutes via blockchain, rather than in days as with current systems. The distributed nature of blockchains would mean greater transparency and immutability (data recorded to blockchains cannot be altered), estimates that blockchains applied to cross-border payments could save about $4 billion a year.
Some blockchain providers are already active in payments. Ripple connects banks and payments providers via RippleNet, allowing them to make payments with fiat currency or Ripple’s own XRP cryptocurrency. The network is based on a private, non-distributed ledger, which relies on a limited ecosystem of correspondent banks. Financial institutions are also making progress. In late 2017, Australia and New Zealand Banking Group, JPMorgan Chase, and Royal Bank of Canada launched the Interbank Information Network (IIN), a cross-border payments service. “By leveraging blockchain technology, IIN will significantly reduce the number of participants currently needed to respond to compliance and other data-related inquiries that delay payments,” JPMorgan Chase said in a statement.
Despite the growth of blockchain-based payments solutions, there remain significant barriers to adoption at scale. One issue is that blockchain networks are transparent to their members, meaning that there are limitations to anonymity in some scenarios. In response, several companies are experimenting with “tokenization,” which disguises sensitive data by substituting it with a token that serves as a reference. However, this approach is still in the early stages of development. Another challenge is that real-time settlement is currently impossible due to the lack of fungibility between crypto-assets and fiat currencies. There is inevitable friction in converting back and forth, particularly given recent volatility (the value of bitcoin fell by 75 percent from December 2017 to November 2018). So-called “stable coins” the value of which are pegged to real-world assets are one solution, but they still require correspondent banks to make the eventual conversion.
Two ways forward:
Krisk assessment using customer data
Know-your-customer/ID fraud prevention
The way ahead
Blockchain technology could bring value in core parts of the retail banking business model. However, retail banks have been slow to engage, and the technology faces challenges in terms of scaling, the volatility of crypto assets, and trust. In addition, there is little evidence that incumbents have bought into the need to collaborate and share data. Despite that, we see three things that could help increase adoption:
There needs to be a more seamless transition between fiat and digital assets so that customers do not risk losses as they switch back and forth. One solution would be for central banks to issue a crypto-fiat, which would support product manufacturing. It would also enable real-time peer-to-peer payments and potentially cross-border interbank clearing and settlement.
Regulation is required so that participants have certainty around the status of crypto assets, rules of engagement, and investor protection.
Consumer identities should be created on the blockchain, enabling banks to offer real-time loan decisions based on authenticated ID. The government of Dubai is currently piloting such a project.
Finally, there needs to be a strategic watershed. Executives need to believe that the long-term benefits of blockchain are worth the cost. That requires taking a long-term view and working with the possibility that blockchain may lead to the cannibalization of some revenue streams. The key to countering those concerns is to keep an eye on the prize: lower costs, less friction, and a safer retail banking system.
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Danijella Dragas, Executive Contributor Brainz Magazine
Born and raised in Oxford, England. She earned a BS in Economics/International Trade and Banking from the prestigious University of London. Miss. Dragas was employed by Bear Stearns Investment Banking firm for over 18 years. She worked in their offices of London, San Paulo, Beijing, New York, and Irvine. Her specialty was asset management, capital markets/investment banking during her final four years at Bear Stearns, Miss. Dragas was one of the original team members that introduced Bear Stearns mortgages to the banking industry in the residential wholesale market.
She has continued her career in residential, commercial lending for 36 years. Her focus has been on construction finance, asset repositioning, fintech, and the blockchain market. In addition, numerous prestigious commercial projects on an international level. Miss. Dragas has also worked on multi-sector business finance, corporate sponsorships, hospitality, clean energy, trade programs, and pre IPO.
Her primary concentration of late has been on fintech, technology start-ups, sports arenas, and sports franchise business plans, commercial lending, focusing on construction, and working with numerous boards and CEOs in an advisory capacity.
She is extremely competent in international banking, structured finance and corporate strategy, strategic partnerships.
Miss Dragas enjoys biking, tennis, horse-riding, skiing, self-development, and golf in her spare time. An avid sports spectator and athlete, she is Managing Director of Global Soccer Pro, the United States division of Global Football Pro United Kingdom, and USA Founding Board Member, Executive Steering Committee for Football For PEACE.
Additionally, her philanthropic endeavors in the cure and treatment of Parkinson’s Disease and Football for Peace keep her very active in the global community.
