Blockchain technology has the potential to transform the banking sector by providing a secure and convenient alternative to the expensive and time consuming banking processes. Major banks across the world are experimenting with the technology to reduce the number of participants in a transaction. Some are investing in blockchain startups, and others are partnering with fintech companies that use blockchain. Blockchain technology will transform the banking sector by enabling banks to compete with fintech startups; improve efficiency to save costs; and create new business models. The following are the main areas of transformation.
Clearing and Settlement
Currently, investment banks spend billions of dollars to record loans and securities. According to Accenture, leading investment banks can save up to $10 billion by using blockchain technology to increase efficiency in clearing and settlement. Richard Lumb, head of financial services at Accenture, believes that clearing houses such as the Australian Stock Exchange, Deutsche Borse and Depository Trust and Clearing Corporation which are currently dominated by manual reconciliation will be the first to be restructured using blockchain technology. This has already started with the Australian Stock Exchange in the process of shifting its post trade clearing and settlement onto a blockchain system.
The Financial Times reports that central banks across the world are considering the possibility of using blockchain technology in their payments systems or using the technology to launch digital currencies. Central banks are realizing the challenge that standalone cryptocurrencies like Bitcoin pose to their control of monetary policy and the potential benefits that could be realized by integrating blockchain technology into their payments systems. Commercial banks are also pressing on with their own blockchain projects. The UBS of Switzerland, for example, has come up with a utility settlement coin whose aim is to create a digital currency to be used in financial markets by issuing tokens that can be converted into cash upon deposit at central banks.
Trade finance is dominated by paper such as letters of credit and bills of lading which are sent by fax across the world. Many bankers believe that blockchain technology is the best way to modernize trade finance especially because many participants need to access the same information.
As trusted guardians of people’s money, bankers and lenders have to verify the identity of customers and counterparties. Regulators expect banks to satisfy themselves that customers are not criminals or illicit actors. Previous attempts by banks to set up a shared digital utility to record and keep customer identities updated have not succeeded due to conflicting demands. Today, there are some startups working on customer identification blockchain systems. They include Blockstack, Tradle and Cambridge Blockchain.
Emmanuel Aidoo, head of blockchain at Credit Suisse says that syndicated loan is an area that needs blockchain innovation. This is true because if you take the example of the U.S, if your company raises money through a syndicated loan, it will take an average of 19 days for banks to settle the transaction. If the loan changes hands or you repay it early, much of the communication is by fax.