Banks and blockchain - LIBF Digital

Blockchain will have an impact on banking and finance, not seen since the arrival of computers and the internet. Paul Stallard looks at the potential of blockchain to make banks more secure, improve efficiency and reduce costs.

For too long, legacy IT systems have been holding back digital transformation among incumbent banks and other financial services businesses. These systems have been insecure and inefficient, and especially weak at delivering a variety and frequency of services to customers.

When banks comprehensively deploy blockchain technology, it will:

massively improve operational efficiency
cut costs
reduce many of the risks associated with legacy systems, and,
create a world of opportunity for launching new products and services.

What is blockchain?

Blockchain is a shared ledger or database of digital information. It’s often used to drive the process of recording and verifying transactions over a decentralised business network.

When such transactions are duplicated and distributed across an entire network of computer systems, they create a blockchain.

So, a ‘blockchain’ is effectively a public record of transactions that anyone or anything can be connected to, which can’t be altered, deleted, or destroyed. A blockchain doesn’t need a central ledger or authority to validate and verify the transactions it holds. Every transaction is completely secure and verified.

This is only possible because of a ‘consensus algorithm’ – a procedure through which all the players in a blockchain network reach common agreement about the present state of the distributed ledger.

How blockchain will make banks more secure

Banks’ existing databases have proven to be insecure and vulnerable to attack. If the perpetrators of these attacks change or corrupt data, customers can’t recover it.

Similarly, if an attack takes down a bank’s central server, customers can’t access their data or their money. That means they can’t pay bills and firms can’t pay suppliers and employees’ wages.

By holding financial information in a blockchain, banks significantly improve security and reduce their dependence on intermediaries and other third parties.

Because blockchain provides an indisputable and transparent audit trail of transactions, it significantly helps to reduce fraud. And because the blockchain consists of thousands of computers, there’s no central point where hackers can attack and change data without leaving evidence.

How blockchain will improve efficiency

The global banking process relies heavily on third parties and middlemen.

Every cash or ‘automated teller’ machine (ATM) is owned by a single company but accepts cards from a large network of providers. One company owns the database and processing engine which make the whole process work.

If the ATM process was invented today, it wouldn’t need a company to administrate it. Blockchain database technology would do everything necessary to unite the interests and business processes of the member banks in the ATM network. And this would result in massive savings.

How blockchain will reduce costs

International payments

The gigantic global payments sector is notoriously slow, error prone, expensive and not totally transparent. That’s why money laundering can operate on a large global scale.

By providing 24-hour, real-time settlement, blockchain can reduce, if not eradicate these issues and bring about significant cost savings.

Trade finance

Supply chains are often long, complex and require trusted parties, like banks and clearing houses to ensure the smooth transfer of good title to goods and money from one party to the next.

Blockchain removes the need for banks to issue letters of credit to support this process – dramatically reducing the need for intermediaries and so saving money.

Compliance

Regulators require ‘know your customer’ (KYC) but it can be time consuming and lacking in automated customer identification.

Blockchain provides a single source of ID information, and enables banks and third parties to exchange information efficiently. This could result in automated account opening – reducing costs and speeding up the onboarding process, whilst maintaining the level of data privacy required.

Preparing for the blockchain revolution

Blockchain technology has the potential to deliver cost savings to banks and help them serve customers more efficiently. But as the focus of good customer service moves towards ‘consumer duty’ and greater levels of transparency, banks will have to work harder to communicate where they’ve made cost savings.