Blockchain, while still relatively new to the financial space, is seeing interest from around 90% of banking sector executives, according to a new study on the potential of the technology in the industry. 40% of banks find themselves still at the exploration phase, while around 30% are pursuing proof of concepts. Intra-bank cross-border transactions are regarded as the most likely payment system to see blockchain implementation, followed by cross-border remittance and corporate payments.
Developments in the FinTech space – an industry which received $19 billion in venture capital last year – are touted to radically transform the face of financial services, from payment systems and clearing to financial settlements. One of the technologies which has received considerable hype in recent years is blockchain, a distributed ledger technology (DLT) that serves as the backbone of cryptocurrencies such as bitcoin. The technology remains in its formative stages; however, consultancy firms, such as Accenture, proclaim that the technology will come to revolutionise aspects of the financial services industry.
In a new study from Accenture, titled ‘How Banks are Building a Real-Time Global Payment Network’, the consulting firm asked commercial banking professionals across the US, Canada and Europe, about the impact they believe blockchain will have on their operating models and operations.
Of the respondents, nine out of ten said that their institution is currently exploring the use of blockchain/distributed ledger technology in payments – largely because of the myriad compelling benefits blockchain offers. 40% of respondents note however, that, while interest is apparent within their organisation, they are currently in a strategy forming or looking into the technology phase. “In other words, despite their enthusiasm for and interest in blockchain, many banks are still considering where to use it”, write the authors.
30% of the organisations say that they are involved in proof of concepts (POCs) with other companies. Around 30% are more active, with 13% engaged in production implementation and 17% say that they are at the forefront of the developments in the field.
Leading use cases
According to the research, a number of different payment systems will potentially benefit from the technology. Intra-bank cross-border payments ranks the highest, with 44% of the participants defining it rank 1, with no respondent ranking the category below rank 4. Cross-border remittances was cited as the second highest rank 1 category, at 21% of respondents, while 32% of respondents cited it with rank 2. Corporate payments came in third in terms of rank 1, at 20% of respondents, however, it came in first in terms of rank 2, at 45% of respondents.
Inter-bank cross-border payment systems was ranked fourth, with 14% of respondents giving it rank 1, while 24% gave it rank 2 and 33% rank 3. Few respondents placed high ranking to person-to-person payment, at 8% rank 1 and 23% rank 2.
According to a recent study by BCG, the global payments industry will grow strongly in the coming decade, hitting $2 trillion by 2025, up from $1.1 trillion today, highlighting the potential blockchain can have on the market and institutions.
In terms of major anticipated benefits of the technology, there is a clear consensus: blockchain has the potential to be a game changer. “Wherever banks hope to deploy blockchain, executives expect a wide range of benefits, including lower costs, quicker settlement, fewer errors and exceptions, and new revenue opportunities”, state the researchers. Lower financial costs was ranked a number 1 benefit by 37% of respondents, followed by 17% that gave it rank 2.
Lower administrative costs were cited by 35% rank 1, while 15% gave it rank 2. Shorter settlement time comes third, with 34% of respondents placing it rank 1. Reduced errors/exceptions came in fourth, at 33% of respondents, while new revenue opportunities took fifth spot with 31% of respondents ranking it 1. Lower capital costs came in last, ranked 1 by 29% of respondents.
“If fully adopted, blockchain will enable banks to process payments more quickly and more accurately while reducing transaction processing costs and the requirement for exceptions.”
However, as with all major changes that are fed into a complex landscape such as financial services, the adoption of blockchain comes with several challenges. Executives may face a large degree of internal resistance – Accenture’s study finds that half of the banks struggle with generating internal momentum for blockchain integration and implementation. According to executives surveyed, kick-starting blockchain initiatives will require addressing key regulatory and compliance issues, the two biggest factors they believe contribute to internal resistance to blockchain. Security is another reason banks could be hesitant to embrace blockchain.
While resistance is a critical success factor in blockchain adoption, the biggest one is the network. “A lot hinges on the extent to which a formal network emerges to facilitate global accessing and clearing of payments”, state the authors. Accenture highlights that the network should have two defining characteristics: It should include the necessary defined rights, obligations, controls and standards; and it should offer a quick and efficient onboarding process that enables banks to essentially “plug and play” into the network for both existing and future corridors. In addition, standards are seen as especially critical, with the addition that both the network and standards should not be an exclusive club.
Accenture concludes: “Blockchain technology itself works – there’s no debate about that. Now it’s time for banks to look at the bigger picture and work together, and with non-banks, to help define the backbone that can underpin a universally accepted, ubiquitous global payment system that can transform how banks execute transactions.”