Blockchain, Banking, and Payment Networks: Adapt or Die
“Adapt or die”
— Over time, this quote has been attributed to many people in different forms, and we have to assume that’s due to its inherent truth.
And here’s another truth: with the advent of peer-to-peer currency networks like Bitcoin, banks and payment networks are in a perilous situation. These networks provide unprecedented access to your own money and the ability to send it to anyone, anywhere, for less than pennies on the dollar. People are starting to question why they would pay upwards of 7 percent for a bank to do the same via remittance payment.
In other words, the beauty of a cryptocurrency is that it’s both a currency AND a payment network.
The US dollar is a currency; VISA is a payment network. Bitcoin is both.
Trustless and Secure
Let’s explore this from a commercial standpoint. Remember the credit and debit card breach at Target in 2013? Due to Target having a vulnerability in their payment system somewhere, hackers were able to scoop up the card details of 40 million people, exposing them all to fraud.
This illustrates the greater issue with today’s Point-of-Service transactions. Every time you swipe your debit or credit card, you’re trusting that company to safely secure and transmit your information. As Target and a dozen other data-breached companies have shown, this trust exercise is a fool’s errand.
Now you may be thinking…
“But my money is PROTECTED by my bank!”
This is a fair conjecture, sure, and one that banks are eager to prove is true. Yet let’s take a closer look at the Target hack. The breach occurred on Black Friday, and in the following weeks, JP Morgan limited ATM withdrawals to $100 a day and purchases to $300 a day. So during the busiest buying season of the year, your JP Morgan protected ITSELF by limiting access to customers’ money due to the carelessness of a third party.
Yes, it’s true that customers would be reimbursed for fraudulent purchases. But that’s beside the point — customer money was technically not “safe” at the bank anymore. The bank’s key role of “facilitating transactions” was fundamentally undermined by limiting customers to $300 worth of transactions a day. And even though the customers weren’t on the hook for these transactions, SOMEONE had to pay.
So, let’s recap. First, Target lost potentially millions of dollars of merchandise in fraudulent purchases. Next, the banks had to reimburse the individuals whose credit card information was stolen, resulting in huge losses for them. The banks then looked at Target to recover their losses because Target’s security practices were what caused the breach.
In the end, unfathomable mayhem was caused because a centralized entity was careless with transaction security practices. This is the fundamental utility of a cryptocurrency, and why businesses will be integrating crypto-POS systems in short order.
Fraud of this type simply doesn’t exist with cryptocurrencies. By using a verified open-source wallet, maintaining strict control of the private keys and creating a secure, never used elsewhere account password, it’s virtually impossible for someone to hijack your funds.
Furthermore, stores like Target never receive information that can compromise my account. Transactions are fully settled in seconds over systems like Lightning Network or NANO, compared to days or weeks. This limits both the customer and Target’s exposure by including NO middleman. The complex security of blockchain networks makes these transactions safe and permanent. No chargebacks, late-payments, or withholding funds!
Oh, and did I mention that these transactions occur at FRACTIONS of the cost that credit card companies charge for settlement?
Practical Adaptation
Now, the implications of this technology had bankers extremely rattled at first. Both Jamie Dimon and Lloyd Blankfein held skeptical opinions towards the digital asset. To quote Upton Sinclair, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it.”
Bitcoin was a self-described “bank-killer” from the start, even hailed as such by Israel’s Prime Minister in late 2017. The rancor the digital asset initially elicited from industry leaders wasn’t exactly shocking. However, as cryptocurrencies and crypto-assets skyrocketed in popularity, they found themselves wondering how they could capitalize on this nascent technology. And boy, did they find it.
JP Morgan Chase now has their own blockchain division, called the Blockchain Center of Excellence (BCOE), which has my bullshit radar on high alert.
And they aren’t the only ones. Credit Suisse, along with over a dozen other financial partners, developed a project to revolutionize the issuance and management of syndicated loans. Banks are feverishly studying new ways to leverage this technology, which makes sense. The best course of action they can take is implementing efficiencies where possible to compete with truly peer-to-peer solutions.
Now, it’s important to note that while cryptocurrencies allow people to take control of their money without relying on a middleman, the technical hurdles that (currently) come with such a responsibility can be prohibitive. Let’s be honest, a majority of people would rather sacrifice some autonomy with their money for the simplicity and insurance that comes with keeping it in a bank.
For this reason, the biggest impact that blockchain will have on the banking sector (at least in the short term) is by improving process efficiencies by providing long-awaited modernization of how information is stored, processed, and shared. This will benefit both businesses and consumers as processes become faster and cheaper. Indeed, companies like Ripple are positioning themselves to partner with banks to fill exactly these needs in direct competition to legacy cross-border payments giant, Swift.
But truthfully, the bell has already been rung. The key function of a bank — being the most secure steward of your hard earned money and acting as a trusted middle-man for transactions — is becoming increasingly undermined by blockchain technology. As decentralized entities gain popularity, and people are more easily able to invest or transact directly, banks will need to provide more incentive than 0.01 percent interest for people to fork over their cash.
