After years of anticipation, blockchain-based payment systems are taking hold at a fast-growing number of U.S. banks. Surprisingly, it has been banks outside of the top 10 (by deposits) that have led the charge. This development upends the notion that these banks are technologically conservative.
Efforts from these early adopters have centered around the tokenization of U.S. dollar deposits to modernize B2B payments, which have been slow to evolve. Only a fraction of the $23 trillion in B2B payments made in the U.S. annually are digital. Astonishingly, 42% of B2B transactions are still made by check, according to Deloitte.
Tokenization accelerates the innovation curve for B2B payments. It eliminates many of the existing limitations of slow, antiquated payment rails such as cut-off times, overnight or multi-day processing and restrictions on transaction sizes.
Tokenization accomplishes this by creating a digitized representation of an asset. For each dollar deposited at the institution, a token is created that represents that dollar. These tokens are backed 1:1 by cash deposits that never leave the bank – a feature that has satisfied bank regulators.
These digitized representations are supported by smart contracts – code that makes any token interoperable with other smart contracts and digital wallets. The code automatically verifies the validity of the funds and enables real-time transfers from any one bank customer to another at any time.
This functionality has been especially valuable for digital asset companies that, unlike Main Street or even Wall Street, operate 24/7/365. With this framework, customers of digital asset companies can immediately fund their accounts.
Changing perspectives in the C-suite
The prospect of billions of dollars in new deposits gives any bank executive good reason to consider blockchain-based payments. But what has really piqued their interest is a growing recognition that the future of payments is digital.
Institutions recognize that digital currencies and related rails will co-exist with the likes of ACH and Fedwire. Rather than struggle with integration years from now, banks are instead exploring payment frameworks that can integrate traditional rails with digital rails.
Bank executives are constantly looking at new ways to make their customer base even stickier. Blockchain-based systems are giving business customers the ability to embed B2B payment capabilities into their own systems through APIs, making payments even more direct. In turn, this enables the bank’s customer to offer these services to their own customers, with the effect of bringing in new customers and deposits to the bank.
A superior B2B payment experience is especially important considering the competitive landscape. Bank executives are concerned that the biggest institutions will beat them to market with real-time B2B payments. They’re also concerned about the growing number of fintechs gaining bank charters. In response, banks are playing both offense and defense against their peers.
What’s most notable about these payment systems is that they’re live. Not many blockchain ideations for finance can boast the same result. More impressively, the time-to-market has been rapid – less than a year.
The difference is that these banks have approached blockchain payments with a measured roadmap. They started with basic functionality – such as simple tokenized USD transfers – and once critical mass was hit and customers got used to the experience, they broadened out their functionality in a measured manner.
What’s also helped is that these digital payment capabilities are designed with open APIs and a data-focused model that eases integration with a bank’s core systems. This integration enables the tokenization of dollars from deposit accounts and the redemption of tokens from digital wallets back into the accounts. This provides real-time auditability and reconciliation with blockchain data and the bank’s core systems.
The journey between blockchain curiosity and success for banks is far shorter than many realize, which is why they’re moving along faster than the biggest institutions. Early movers have given others a clear roadmap on how to develop and roll out tokenized payments. The technology is available, the coding is flexible and the frameworks are adaptable.
For banks, blockchain is not a buzzword. It’s delivering on its potential to create efficiencies, modernize payments and attract deposits. This is a combination that’s increasingly difficult for any executive to ignore.
The report includes insights from our recent BAI Banking Outlook: 2023 Trends survey that identified the top challenges ahead: gaining new customers, providing a more compelling digital banking experience and acquiring and retaining talent....
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