An IBM survey of 200 banks in 16 countries says a trailblazing group of 30 institutions is moving surprisingly rapidly towards implementing blockchain-based banking solutions, with the pack leaders seen beginning commercial production of the technology as early as next year.
The study, Leading the Pack in Blockchain Banking, says blockchain banking trailblazers are prioritising development of the technology to benefit time, cost and risk in three areas: reference data, retail payments and consumer lending (See Figure 1 below). These early blockchain adopters also expect the technology to enable development of powerful new business models in three areas: trade finance, corporate lending and reference data (See Figure 2 below).
The study says: “Just a handful of banks are operating blockchains today. With 15% of the banks in our study expecting to have commercial blockchain solutions at scale next, 2017 looks to be the year banking on blockchains shifts from zero to sixty.”
The trailblazers comprise a disproportionate number of medium sized banks and are more than twice as likely to be large institutions that number more than a hundred thousand employees: “Defying expectations, these larger banks are proving they have the agility to move fast in the face of change.”
Smaller players and digital fintech start-ups are already highly active in developing blockchain infrastructure with the aim of making themselves more competitive and trustworthy versus legacy players. IBM believes these new competitors pose threats in two areas identified by trailblazers as most the likely areas of banking to be disrupted in the near term: deposit taking and retail payments. Their concerns over deposits are shared more widely though: 90% of the surveyed banks are investing in blockchain solutions focused on the deposit space that are active by 2018 to protect against start-up non-banks.
All of the banks surveyed by IBM expect blockchains to eradicate frictions across the board, including transaction costs, inaccessible marketplaces, restrictive regulations and imperfect information and data. Trailblazers stand apart from other banks in one respect with regards to these drags: they see the most substantial impact being the bringing down of barriers to creating new business models and entering markets.
The pack leaders are also focusing heavily on using blockchain technology to greatly improve the accuracy of the information they rely on to make decisions. Asked to weigh time, cost and risk benefits of blockchain in nine core business areas, the 200 banks overwhelmingly indicated they believe every aspect of banking stands to enjoy a positive outcome by utilising the technology. More specifically, the trailblazing cohort believe blockchain application in reference data operations offers the highest benefits (followed by retail payments and consumer lending).
The attraction to trailblazers of blockchained reference data solutions is not too surprising: reference data is integral to all of a bank’s activities yet unlike other areas of banking it isn’t caught up in complex regulations. The IBM report says blockchain offers reference data operations automatic real time capture of data that can be validated and made available for sharing across business divisions and institutions. Costly and time-consuming reconciliations can be eliminated while an instantaneously verifiable audit trail can discourage bad actors and potential for fraud. The end result is data integrity being assured and banks gaining a superior platform for up-to-the-minute analytics.
Blockchain for the payments and lending spaces are seen by banks as also amenable to significant efficiency gains, with the study noting transactions on chains not only eliminates the time and labour required for reconciliations, they also minimise errors and significantly reduce the time needed for settlement, which in turn lowers risk and capital requirements.
Trailblazers are 43% more likely than other banks to expect significantly less risk as retail payments move to blockchains. Furthermore, nine of ten trailblazers foresee blockchain delivering substantial cost savings in the consumer lending space.
Blockchain solutions for consumer lending also holds potential for accessing new markets: “Lack of credit history and identity fraud has made it difficult to grant loans to unbanked customers. On blockchains, as new kinds of verifiable transaction data is captured, enhanced identity and KYC data could open up emerging markets to banks.”
Looking ahead, the report notes banks surveyed regard regulatory complexity and constraints as a big barrier to blockchain adoption. The study authors are therefore encouraged regulators and legislators the world over are already participating in consortia to determine how regulations might change and examining how regulators themselves can directly benefit from participating on blockchains. The study adds: “Leading banking institutions are collaborating with regulators on blockchain projects to earn approval for implementation and regulators have on the whole been supportive in their responses. Banks have here an opportunity to influence both the future regulatory environment and how fast new blockchain initiatives are approved to enter the market.”
A critical factor that will determine the success of blockchain banking is scaling of the underlying infrastructure and creation and adoption of standards. “Once blockchains have scaled across multiple parties, they can begin to achieve the kind of network effects that drastically reduce frictions that curb growth,” says the study, adding that “trailblazers are already working on the new business and technology standards that are required to scale”.
IBM urges other mass adopters of blockchain to join the trailblazers and begin building strong partnerships, including with consortia and other groups that have begun establishing business standards. It adds: “More than half of organisations still view immature technology as a barrier and 7 in 10 cite the need for robust mechanisms to establish identity and a high degree of control over access. Security and privacy standards will bring more participants into blockchain networks and drive scale.”