Blockchain database technology has the potential to be a major disruptor in the world of banking and financial services over the next few years, with a growing number of companies having either already adopted the approach or made plans to do so.
A system of distributed database collation that involves maintaining a continuously growing list of data records hardened against tampering and revision, the technology has gone from being a niche area of interest a few years ago to teetering on the cusp of widespread mainstream adoption today.
This news will be welcomed by those companies that are ready to take full advantage of the benefits blockchain can offer – but for many other financial institutions, this development could represent a paradigm shift for which they are unprepared, meaning they are at risk of being left behind.
FinTech startups threaten traditional banks
According to research from PwC, 83 per cent of leaders at financial services firms believe dedicated FinTech companies could pose a risk to some aspects of their business. Traditional banks, which tend to operate on a large scale and rely on many complex procedures, are under pressure from start-ups that are able to design their operations from the ground up, operating more efficiently thanks to new technology like blockchain.
The onus is on established retail banks to catch up to the techniques their challenger counterparts are using, and preparing properly for implementing blockchain is crucial to that. Santander is leading the way in the UK, with Reuters reporting that the Spanish bank is using blockchain to record international payments. Around 6,000 staff across its British retail operations are trialling the technology and Santander hopes it will make it easier and faster to move money overseas.
Head of innovation, technology and operations at Santander UK Ed Metzger said the transparency of when payments will be completed is a key advantage of blockchain.
“The main customer benefits are certainty of timing, so you know when the payment is going to arrive and certainty of value,” he stated. However, Mr Metzger acknowledged that until all banks have migrated from legacy systems over to blockchain technology, the “last mile” of its blockchain system will rely on older, slower links between banks.
Faster international payments are not the only reason why banks should be looking to embrace blockchain. PwC notes that moving mortgage data to blockchain will make it easier to keep a full electronic trail of legal agreements, as well as speed up the process in which funds are released to buyers, bringing down the time between contracts being exchanged and a house purchase being completed.
Banking reward schemes for customers will also benefit, with blockchain making it possible for reward points earned – for example on credit card purchases – to become available to consumers instantly. Merchants would also no longer be liable for issuing the points, as blockchain would automate the process.
With challenger banks set to benefit from building their operations around blockchain, the race is on for traditional banks to incorporate it into their existing systems.