Blockchain tech: Retail banks err on side of caution whilst others experiment

Despite making great strides in developing digital business models, retail banks have been slow to adopt blockchain technology, according to new research from McKinsey & Co.

This contrasts with efforts seen elsewhere, the company’s report notes. Governments, investment banks and infrastructure providers are experimenting with the technology in the belief that a shared electronic ledger will help them cut costs and increase transparency.

Investment banks, for example, envisage a world in which execution, post-trade processing, and settlement are instantaneous, eliminating numerous middle- and back-office processes. They are also focused on the potential for smart contracts to increase automation. Whilst wholesale banks have launched hackathons, innovation labs, and collaborations with FinTechs.

Careful now

Retail banks’ caution is understandable, McKinsey & Co states. “None of the financial industry’s initiatives have been rolled out at scale, and tough regulatory requirements in banking create a high barrier to entry,” its report says.

“The future regulation of blockchain itself remains uncertain. Some regulators, such as the UK’s Financial Conduct Authority (FCA), are still formulating policy. In the United States, the Securities and Exchange Commission (SEC) has blocked attempts to launch blockchain-based ETFs.”

Nonetheless, a few retail banks are circling this space. Santander, for example, worked with Ripple in 2018 to launch the first blockchain-based money-transfer service. Yet further proofs of value will likely be required.

McKinsey & Co, meanwhile, believes there are three retail use cases that could eventually be deployed at scale, and which offer most in terms of blockchain’s three key strengths: data handling, disintermediation and trust. These are remittances, KYC/ID fraud prevention and risk scoring.

There needs to be a strategic watershed, the report concludes. “Executives need to believe that the long-term benefits of blockchain are worth the cost,” it says. “That requires taking a long-term view and working with the possibility that blockchain may lead to cannibalisation of some revenue streams. The key to countering those concerns is to keep an eye on the prize: lower costs, less friction, and a safer retail banking system.”