Banks And Blockchain: Why Financial Institutions Adopt The Technology?

October 25, 2019
Banks and blockchain: why banks adopt blockchain

Lately, we have heard a lot of news about major banks expressing interest in the distributed ledger technology. JPMorgan launched their own digital coin, representing fiat currency.

There have been reports about several central banks (including Bank of Canada, Goldman Sachs and Bank of America) seeking to hire professionals with blockchain-related experience, who are to be responsible, among other things, for ‘overseeing the development of new initiatives that result in an innovative offering.” 

Though banks themselves are often reluctant to comment on this issue, these are clear indicators that centralized financial institutions are trying to adopt the blockchain technology for their needs. Actually, the Bank of America can already boast 78 blockchain-related patents filed or won.

To many, it seems counterintuitive that banking, one of the industries that should be the most opposed to the disruptive innovation, is investing in blockchain solutions.
After all, Bitcoin was aimed at removing control from banks and handing it over to individuals!

Nevertheless, there are solid reasons why banks are trying to leverage ‘the Bitcoin technology’.

Let’s have a look at major points of blockchain applications in the industry.

First, adoption of blockchain would allow banks to increase payment processing speed and accuracy, and reduce the related costs. (Hypothetically, it could help banks to penetrate to the previously unbanked areas).

The primary use-case is intra-bank cross-border transfers, but blockchain is expected to positively affect other services, too, creating new banking products and revenue opportunities. The biggest challenge on the way to this goal is the necessity of collaboration among the banks in order to create a global financial network, capable of supporting the new payment format. As one of the experts put it ‘the technology only works when everyone adopts it’. No bank is an island, no matter how big it is.

The second reason is security. It’s natural that banks, despite their up-tp-date security systems, stay very attackable. Their centralized databases are honeypots for hackers, who evolve very quickly and update their methods all the time. Blockchain solutions integration could help solving this problem, greatly reducing the possibility of data breaches and frauds.

It could also optimize administrative and legal costs. Today, the KYC (Know Your Customer) procedures greatly delay bank transactions, as it normally takes up to 1 month to process a request. The system is imperfect, and many efforts are doubled: thus, if a client changes banks, he must start the KYC procedure anew. It’s apparent that a single source of truth, available to all the authorized parties, could make things lots easier, saving a lot of time and money. According to surveys, an average bank spends over $50 mln annually to comply with the KYC, AML (Anti-Money Laundering) and CDD (Customer Due Diligence) regulations, and failing to comply incurs huge penalties. If all the KYC-related documents are stored in the blockchain, checked, verified and immutable, a big financial and administrative burden will be taken off the banks.

As we see, the inherent DLT benefits that appeal to most crypto users, also seem attractive to banks. At a closer look, their enthusiasm is not really surprising.

Of course, it’s too early to speak about re-configuration of the established system, banks being rather at the early stage of shaping their blockchain strategy and testing related solutions. 

We will be watching this process with great interest.

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