Why banks are not in a hurry to implement blockchain

LetKnowNews
Jun 14, 2019 · 4 min read
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Banks are one of the main drivers of innovation in the financial sector. When it comes to the blockchain, however not everyone is in a hurry to introduce this new technology into their business processes. And there is a number of reasons for that.

With the introduction of mobile banking, financial services ended up being in every person’s smartphone. Now you can open an account or make a money transfer without leaving your home. However, sending a payment, for example, from Slovakia to Japan, even using mobile banking, is still too expensive and time consuming. Anyway, since the world learned about Bitcoin, it has become clear that this process can be accelerated significantly.

The role of blockchain in Fintech

Since blockchain is primarily about accounting, the tool is ideal for working with money. No wonder Satoshi Nakomoto called Bitcoin “digital cash”. But in addition to accounting, blockchain also allows the transfer of value over the Internet, which is important for financial institutions. After all, in addition to secure and unchangeable transactions, distributed registries can get rid of intermediaries and thus save businesses a lot of money. And banks are well aware of that.

In general, all financial institutions in one form or another deal with money. But at the same time there are certain features. For example, investment banks mainly serve the securities markets, retail banks deal with loans and deposits, and provide services to individuals and legal entities. Investment banks carry out small volumes of transactions, but with high value, retail — vice versa. There is also a difference in the pace of innovation. According to the analytical report of the consulting company McKinsey & Company, investment banks are more open to experimentation, retail banks, however, are more reluctant to introduce innovations.

Today, investment banks with the help of blockchain are striving to build a world where post-trading operations take place instantly and without intermediaries. They are also interested in automating settlement processes and therefore are actively exploring the possibilities of smart contracts.

It is worth noting that cases that were presented by such players as JPMorgan and Bank of America are still at the testing stage and are still not scaled to the entire banking system. This is due to the fact that the assessment of the economic efficiency of innovation takes time. And if the management decides to introduce a new technology, this will not happen instantly, since such system decisions are mostly time-consuming.

Why retail banks need blockchain

For retail banks, blockchain is also a valuable innovation. According to the McKinsey report, DLT technologies can be used in three scenarios: remittances, fraud prevention at KYC, and risk assessment.

At the moment the market for cross-border payments is estimated at $600 billion per year (for comparison, the capitalisation of crypto market is $ 260 billion). At the same time, sometimes the cost of commission per transaction can reach up to 10%. However, according to McKinsey, the use of the blockchain in cross-border payments can save financial institutions about $4 billion a year.

Another problem of the banking system is money laundering. After all, there are often manipulations with personal data during the KYC procedure. According to a Javelin study, banks lose between $ 15 billion and $ 20 billion annually only from identification frauds.

Meanwhile, according to WealthInsight, global spending on combating money laundering (AML) exceeded $8 billion in 2017, which is 36% more than in 2013. And these numbers are growing every year. In turn, the ID on blockchain, according to McKinsey, will allow banks to save another $1 billion in operating expenses. As for the losses from frauds, they can be reduced to $7–9 billion.

Yet another scenario in which blockchain can play a key role is the creation of an interbank database with a scoring system of clients. So, in brief, banks can exchange information about their customers betwen themselves. This will allow them to calculate the risks and reduce potential losses in issuing loans to insolvent borrowers.

What prevents banks from blockchain implementation

However, despite all the advantages of using blockchain for banks, there is still no example of successful scaling of the DLT system over the entire banking infrastructure. Moreover, rigid regulatory framework for consumer lending and the lack of crypto regulation do not allow innovation to develop. Since no bank will risk its reputation and play by unidentified rules.

According to Sergey Sevantsyan, an expert in the field of cryptocurrency, the main obstacle for banks not to hurry to implement blockchain — is their licenses that strictly regulate all financial activities.

“Banks are in no hurry to enter the new world, where there is no regulation, where the Wild West was a year ago. Another reason is that innovations are expensive. Indeed, besides the development, it will demand a separate budget for lawyers,” says the specialist.

That’s why, according to Mr. Sevantsyan, retail banks are following the old business models, for which all the rules have long been written, while major players can still afford some blockchain testings in their business processes.

Thus, the blockchain does allow banks to reduce the costs of KYC procedures, makes it possible to quickly make cross-border payments at very low cost, and also allows the banks to assess the risks in issuing loans more effectively and thereby reduce the costs of financial institutions. But the lack of a regulatory framework does not allow banks to use the benefits of innovation at 100%.

Author: Annabella Lapshina

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