It’s not unusual to hear at the moment that blockchain technology could be the next big thing in financial services. Originally developed as the foundation for the digital currency Bitcoin, the blockchain is a distributed ledger system that maintains records of transactions, which are protected from tampering and revision. It has many potential applications in banking – facilitating international payments and settlements, for example.
While it’s likely to be a few years at least before blockchain begins to have a major impact on how banks operate, financial institutions (FIs) that are slow to adopt the technology could find themselves racing to catch up.
Adoption ‘moving rapidly’
A recent report from IBM revealed that adoption of commercial blockchain solutions in banking and financial services is accelerating “dramatically faster than initially expected”. Interviews conducted by the computing giant found that nearly one in six banks and financial market institutions plan to implement full-scale, commercial blockchain solutions in 2017. Approximately two-thirds of banks anticipated production of these systems within the next three years.
Early adopters of the technology are largely motivated by the desire to create new business models and break into new markets. The research also found that current blockchain development efforts are mainly focusing on four areas: clearing and settlement, wholesale payments, equity and debt issuance, and reference data.
Likhit Wagle, global industry general manager in IBM’s banking and financial markets division, said: “There are many advantages to being an early adopter of blockchain technology. To start, first movers are setting business standards and creating new models that will be used by future adopters of blockchain technology. We’re also finding that these early adopters are better able to anticipate disruption, fighting off new competitors along the way.”
Consulting firm Capgemini has also emphasized the potential of this technology, suggesting that the development of blockchain-based contracts could save the average consumer more than $500 in banking and insurance fees. Amol Khadikar, a researcher with the company’s Digital Transformation Institute, said we have reached a point where distributed technology “can, and will, drive a revolution in contracts” in the financial services industry.
Not all plain sailing
Blockchain holds great potential and many businesses are clearly excited about it, but it has also been noted that there are some major obstacles to overcome before distributed ledger technology can be fully and smoothly integrated into the global financial system.
The Securities Services division of SIX, the body responsible for operating Switzerland’s financial market infrastructure, has said that widespread adoption of blockchain is at least six years away. Research by the company found that three-quarters of FIs are experimenting with blockchain and nearly one in five are piloting a specific service, but concerns such as regulatory uncertainty and skills shortages mean widespread rollout is still some way off.
Thomas Zeeb, chief executive of SIX Securities Services, said: “Blockchain has the potential to make a number of business models and intermediaries obsolete, which isn’t necessarily a bad thing. It is however important to question the changes that this would bring to the ecosystem. Until the industry has clear indications on sustainable use cases – including costs and benefits – it will be difficult to convince top managers to bring their trusted systems into these new domains.”
So it seems that we have some time to wait before witnessing the full potential of blockchain in the financial services industry, but with so many businesses investigating and investing in the technology, it seems inevitable that its influence will grow in the years and decades to come.