As blockchain takes on an increasingly significant role in e-commerce, the banking sector has been slow to embrace the technology. Still, blockchain and decentralized ledger technology—a blockchain cousin—have “a massive opportunity to disrupt the $5 trillion-plus banking industry by disintermediating the key services that banks provide,” according to CB Insights.
Payments: “Today, trillions of dollars slosh around the world via an antiquated system of slow payments and added fees,” CB Insights writes. By establishing a decentralized ledger for payments, blockchain technology could facilitate faster payments at lower fees.
Loans and credit: By eliminating the need for gatekeepers in the loan and credit industry, blockchain technology could lead to lower interest rates and increase the security of borrowing. Blockchain-enabled lending could also offer a way to provide personal loans to a larger pool of consumers.
John Marsano, president and CEO of Inheritance Advanced, a financial services firm, predicts that syndicated lending through blockchain will become popular in the near future. “Blockchain technology can let a group of lenders, commercial banks in this case, give out loans to several people or other groups,” he says. “Processing of such lending can take up to a month, but with blockchain, it can be shortened significantly and made much more transparent.”
Clearance and settlement: Distributed ledgers can reduce operational costs and bring us closer to real-time transactions between financial institutions, CB Insights notes.
Fundraising: Initial coin offerings are experimenting with a new model of financing that unbundles access to capital from traditional capital-raising services and firms.
Trade finance: By replacing the cumbersome, paper-heavy bill-of-lading process in the trade finance industry, blockchain technology can create more transparency, security and trust among trade parties globally. Using blockchain and distributed ledger technology could also shorten delivery times and reduce the use of paper.
Know-your-customer processes and fraud prevention: By storing customer information on decentralized blocks, blockchain technology can make sharing information between financial institutions easier and safer.
Just how long this disruption will last remains to be seen—though it could end sooner rather than later.
“Blockchain is moving into mainstream prospects, decentralizing many of their functions,” says Sanjay Deshpande, executive vice president and head of banking and financial services, Americas, for Virtusa Corp. “Fintechs are trying to overcome the challenges of blockchain security and bank regulation to raise the efficiency of banking itself. … The rest of the industry is struggling to find their own blockchain initiatives and not be left behind.”
Indeed, Deloitte’s 2021 Global Blockchain Survey found that the financial services industry knows that change is coming. Of the 1,280 global senior leaders and practitioners surveyed, nearly 80% believe that digital assets will be very or somewhat important to their respective industries in the next 24 months. Moreover, 73% of respondents fear their organizations will lose a competitive advantage if they fail to adopt blockchain and digital assets.
“In the last year, we’ve seen a significant shift in how the global financial ecosystem is thinking about new business models fueled by digital assets, and how this is playing a meaningful role in financial infrastructure,” says Linda Pawczuk, principal at Deloitte Consulting, where she leads global and U.S. blockchain and digital assets.
However, a lack of talent, resources and regulation hinders the speed of implementation, says Jean-Armand Figeac, a fintech and blockchain expert based in Zurich. Like other industry watchers, he thinks the COVID-19 pandemic slowed progress. “To some extent, the pandemic played a devastating role, as it had a direct and negative impact on the R&D budget for banks and financial services institutions, cutting down drastically the latter.”
In the bigger picture, Deloitte’s blockchain survey found that about 60% of respondents identified regulatory barriers as one of the biggest obstacles to accepting digital assets. Security concerns were also near the top of the list. Nearly 70% of overall survey respondents say the regulation of data security needs the greatest modification, while 71% of overall survey respondents identified cybersecurity as among the biggest obstacles to acceptance.
Eventually, “the economic implications of blockchain will be felt across micro and macro applications in finance, including, potentially, central bank currencies. The beginnings of these are starting to be seen in other countries and in the Federal Reserve’s own studies,” Deshpande says.
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