Blockchain

Banking on blockchain: there are two sides to the story

Bitcoin and its underlying mechanism the blockchain were invented in 2009 as a response to the financial crash. The original intention was to eliminate not just the middlemen that facilitated the movement and storage of money, but eventually all institutions of trust. The pioneers of the technology were particularly enthusiastic about getting rid of banks.

10 years later the hype around the technology has expanded from a small group of cryptographers to penetrate boardrooms and media outlets alike. Yet banks’ balance sheets are still unscathed. On the contrary, financial giants are the ones pumping most money into exploring and deploying blockchain technology. They are filing numerous patents too.

Does this mean the revolution will be driven by banks? Or is the time simply not yet ripe for disruption? As with most radical innovation, there are two sides of the coin.

Investment in this space is understandable. Estimates by Santander and Oliver Wyman put potential annual savings at $15-20 billion. Asset management, remittances, internal treasury – these are just some of the use cases to which blockchain is already being applied in order to boost operational efficiency. And unlike the more decentralised models used by classical cryptocurrencies, the centralised applications (or DLT) preferred by banks eliminate the problems of energy consumption and scalability.

“In the past it took monolithic IT systems, plugged into a complex ecosystem to perform payments and transactions. To reach the far-flung corners of the world you also relied on numerous local middlemen. Such systems took decades to build, massive pockets to reach a profitable scale, and countless partners. Startups such as Abra demonstrate that things have changed”

At the same time banks, especially in America and Europe, have not yet seen any real negative impact to their businesses. Challengers are still too small and their applications not ripe for mass roll-out. But the technology makes incumbents vulnerable to the entry of new competitors – not so much in terms of storing value as in moving it.

In the past it took monolithic IT systems, plugged into a complex ecosystem to perform payments and transactions. To reach the far-flung corners of the world you also relied on numerous local middlemen. Such systems took decades to build, massive pockets to reach a profitable scale, and countless partners.

Startups such as Abra demonstrate that things have changed. If you install their wallet on your phone you can easily move around crypto-tokens of value to any other user, whether it is your neighbour or a farmer in Africa. Unike PayPal or the usual mobile payment wallets, Abra circumvents the current financial system, thus working with a straightforward back end. Thus, market entry barriers are lowered.

On the other side, the above mentioned operational savings for banks are just the beginning. They do not account for the business that can be added on top by offering new services. The same way competitors can more easily enter the payments sector, banks can leverage the new technology to sell non-financial blockchain services.

10 years after its inception, the blockchain is still in an embryonic stage. What will be the killer app, which industries will it upend, and which new routes will incumbents embrace? It is still too early to say.

Igor Pejic is the author of Blockchain Babel, out 3rd March, priced £14.99.

Scott Thompson

Scott has been working in technology and business journalism for nearly 20 years, with a focus on FinTech, retail, payments and disruptive technology. He has been Editor of such titles as FStech, Retail Systems and IBS Journal and also contributed to the likes of Retail Technology Innovation Hub, PaymentEye, bobsguide, Essential Retail, Open Banking Hub, TechHQ and Internet of Business.

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