Business Opportunity for Banks

Banks have been exploring the use and application of blockchain for multiple purposes and the technology looks to be all over the Finance Industry. What is the best way for a bank to learn, experiment and start using the technology to develop its business without making any huge investments in the technology? How can a bank stay risk averse and yet involve itself start to use and learn about the innovative technology?

Customer retention is one of the key focus of well-established Banks in order to have stable deposits. In order to encourage customer retention, throughout the last half century, there have been several successful and unsuccessful loyalty rewards programs by various industries. Frequent Fliers program by American Airlines is one of the earliest and most successful loyalty program. These rewards programs evolved through time by embracing new technology.

Blockchain provides a new avenue to explore, aggregate and simplify the rewards programs. Before looking at the technical aspects of implementing the rewards program based on blockchain, let us look into the new business opportunities that this can bring to a bank. A flexible rewards system that can mine, reward, transfer and exchange token in a secure and well defined environment can provide following business avenues:

· Commercial Banking: A bank that has a strong commercial customer base can offer to extend its reward program to provide a robust reward program to the commercial customer as well. For example, let us consider a bank A with its customer being a chain of book stores (B). B can use an extended and customized reward program offered by A to provide a reward structure to its customer. Bank A can also advertise its services to customers of B via this flexible rewards program. Hence helping itself to grow both its commercial and consumer banking at the same time.

A well connected reward system.

· Consumer Banking: A bank can encourage the use of rewards by offering customers to use rewards points (tokens) instead of money as transaction costs. Here is an example of how a flexible reward point in a customer perspective can be an advantageous for commercial customer, individual customer and bank: Let us say Bank A offers rewards which can be exchanged between individual customers (I and J) and also can be used for additional services at Commercial Customer (B). Now a customer I can go to a book shop B and use tokens rewarded by A(Bank) to get a special offer or reduction in cost of the product. Although such ideas are under implementation in the form of cashback for credit cards, the flexibility of use of the reward points is very limited and its rigid rules and limits result in the expiry of the reward points rather than being used regularly.

Flexible Transaction of rewards among multiple entities.

· Employee Benefits: The success of such rewards points is higher when the circulation of the points (tokens) is high. The Bank can offer its employees the rewards points that can be used to receive certain exclusive benefits. The use of the points in cafeteria and rewarding of points to honor excellence can also create a unique culture and increase the circulation of the points and benefit the employees of the bank as well. This can also be encouraged to be used by commercial customers as well.

As mentioned above, a well-planned and flexible rewards system can provide a great base to develop a banks customer base in multiple avenues. Having looked at potential benefits, let us look into the technical aspects and implementation of a robust blockchain based system.

The key aspects for a technically successful blockchain network is well defined rules and a sustainable token generation algorithm. There are several questions to answer in the process of making choices in blockchain implementation. Let us refer to the rewards points as tokens.

§ Starting from picking the type of blockchain (permissioned or open) or building a blockchain structure from base. Initial

§ Building APIs to serve the customer base to use the tokens.

§ Building smart contracts for token transfers among multiple entities.

§ Prior to Initial Token Offering, deciding upon the number of tokens on offer. Initial value of tokens, Amount of tokens, catered to customers, for sale and to employees would all require a thorough understanding of the financial aspects of the process.

§ Rules for generation of new coins. Here there is an interesting opportunity to develop a unique mining algorithm which can generate coins upon accomplishing specific task. For example, a deposit of every 100 dollars can generate a new coin. There can be multiple such avenues which more sustainable rewards.

These are few of the basic aspects which need to clearly planned before taking the aforementioned advantages of the new system. Having discussed the advantages and technical aspects, let us have a brief view on the potential risks in implementation.

o Any blockchain based system has a potential risk of 51% hostile takeover which is quiet impossible once it reaches a critical mass of circulation

o Lack of customer interest or having complex and rigid rules for token usage might lead to inactive system leading to a collapse or failure of the reward system.

o Loss of investment in case of failure of initiative which will be fractional keeping in view the limited investment.

Weighing potential benefits and risks, keeping in view the fact that the failure will not have any impact of the traditional banking operations, it can be concluded that the venture is worth investing in and contributing to research and development of a potential technology and reaping the initial fruits of success in the form of a successful and flexible rewards program.