Blockchain in Banking

When the word blockchain is mentioned to bankers, most would think of Bitcoin and other cryptocurrencies and the price volatility observed in recent days. The underlying blockchain technology may have gone under the radar but the various real-life applications may come sooner than expected for the banking industry.

Blockchain and Syndicated Loans

One area of my work scope which has seen the initial influence of blockchain application is in the syndicated loan space.

R3 (a company that develops and transforms blockchain into useful applications for corporations) has been piloting a blockchain-powered platform for syndicated loans with 7 international banks since early 2017. The solution (called Fusion LenderComm) streamlines and digitises information exchange in the syndicated market, which was traditionally done manually over fax or email. Agent banks can now easily share and distribute detailed loan information, such as credit agreements, notices, accrual balances, interest calculation and deal positions / ownerships to various lenders.

At the moment participating banks can only view the data but subsequent releases are expected to enable the exchange of information amongst banks and ultimately include smart contracts which are aimed to facilitate the execution of transactions.

Tip of an Iceberg?

There are multiple articles / information sources suggesting that blockchain can be (or may even have been) applied in the following areas:

• Payments: the payment industry is worth billions of dollars and has historically relied on a lot of intermediaries in the system. A successful blockchain transformation will “dis-intermediate” the industry, enhance security, lower costs, and most importantly increase speed of the transactions.
• Clearing & Settlement: millions of transactions go through the banking system each day, some of which are still done manually or require manual reconciliation by back office or offshore hubs. There are plenty of areas, be it home mortgages, derivatives, or equity trades, where a blockchain system can enhance efficiency and reduce costs and errors.
• Trade finance: trade finance today is still mostly based on papers and faxes which are very labour intensive. Some banks have been trying to “digitise” their trade finance platforms but the rest of the ecosystems (e.g. the ports, the customs, the insurers) will also need to catch up in order for Blockchain to work.
• KYC: often a big headache for bankers and road blocks to final closing. Blockchain could potentially allow the independent verification of one client by one organization to be accessed by other organizations so the KYC process wouldn’t have to start over again. Dozens of start-ups are already working on building blockchain systems for customer identification, including Cambridge Blockchain, Tradle, Credits and Blockstack.

Loss of revenue?

To some, the arrival of blockchain applications resonate the loss of “intermediary” revenues which have been providing a stable streams of income to banks. However, technology is always evolving and new opportunities will also arrive, with the optimistic belief that the pie is only going to grow bigger. At the end of the day, whilst blockchain has huge potential in the banking industry, the ability to craft deals, convince others, and think critically would still remain highly valuable for years to come.