Over the last decade, retail banking has made significant progress when it comes to digital transformation. Millions of people have now moved to mobile-based platforms and retail banks have developed significant expertise in data-based services. However, whilst investment banks, governments, and infrastructure providers have been tinkering with Blockchain technology, retail banks have erred on the side of caution. With question marks around regulation and security, many have stuck to existing models rather than getting too deep into the experimentation of the shared ledger technology.
However, more tests in Blockchain technology through 2019 have set 2020 to potentially be the year we see a boom in deployment. According to Deltec Bank, Bahamas “The ability to improve trust and transparency of transactions whilst reducing costs is very appealing to retail banks and others are starting to join the bandwagon.”
In this post, we will look at why Blockchain might finally start moving towards deployment rather than just hype.
Payment processing costs tend to be high despite totaling around $600 billion annually across borders. FinTech’s in payments is increasing competition and leading to more efficiencies in some parts of the chain. As well as that, initiatives such as that of The Society for Worldwide Interbank Financial Telecommunications (SWIFT) are improving the cross-border payment experience.
However, it is thought that Blockchain could bring in additional efficiencies to the payment process. Payments could be made and settled in minutes rather than days if they were digitalized within a blockchain as well as the added transparency and immutability. A report from Mckinsey estimates the Blockchain could save up to as much as $4 billion per year in cross-border payments costs.
There are already some solutions that have been trialed in this area. Santander rolled out Santander One Pay FX in collaboration with Ripple in 2018. The service allows the customer to complete international transfers in real-time. It was initially launched in four countries, offering different types of payment as a trial. With thousands of people making international payments every day, there could be substantial benefits to their experience through the Blockchain run technology.
In 2017, the Interbank Information Network (IIN) was formed by JP Morgan with other big banks signing up, including Deutsche Bank in September 2019. The blockchain-based cross-border payment service reduces compliance needs and other issues that can delay transactions.
Going into 2020, as we see the advent of 5G connectivity and more powerful processing, Blockchain has a real opportunity to develop in this area. Much of the barriers to date are around too much transparency which could be solved as the technology improves and is deployed. The same applies to added security through quantum computing which is now starting to come into the market, offering amazing processing potential.
Know your customer and fraud prevention
Research by Javelin shows that banks lose $15 billion to $20 billion each year through identity fraud alone. With pressure to improve regulation around customer data such as General Data Protection Regulation (GDPR), it is important that the right frameworks are in place else they run the risk of hefty penalties.
Retail banks tend to have processes in place that deal with customer data and fraud prevention but they tend to be long and laborious. The process needs a high level of resource to be invested in it and even with that, still cannot solve the problem. This is where Blockchain comes in.
It is suggested that for banks, Blockchain could act as a digital fingerprint. For example, a unique identifier could be added against every transaction or customer in the shared ledger which is then seen openly by all banks. Whoever owns the digital fingerprint, once verified, can then do exactly as they need to on any account without being slowed down. When these checks need to be carried out by disparate institutions, it takes a long time, customers get a bad experience and it costs a lot of money.
Bluzelle is a blockchain-based start-up working with three banks. Their initial project in 2017 showed that Blockchain could improve the efficiency of the KYC process whilst reducing the risk of financial crime. It was predicted that costs might ultimately reduce by as much as 50% from using the platform.
SecureKey in Canada has built a digital identity-focused Blockchain service designed to simplify consumer online access. Working with IBM, they are building a digital identity network across Canada that could easily benefit other industries for an open and transparent ecosystem.
Whilst there are challenges such as getting customers to create a digital identity and the cost of creating such a network, the trails above have started to gain consumer trust. Many banks are now using a lot of digital features meaning their customers are far more familiar with the processes required. Open banking has now come smartly into the consumer domain and being accepted as a trusted platform.
Blockchain technology provides a platform whereby large volumes of data can be anonymized and protected within a ledger. All banks within a network can add and verify data as needed. This means, then when making a risk decision, a financial institution suddenly has a wealth of information available to do so quicker than ever before.
As of now, if a customer is applying for a loan, they will need to provide banks with the same information several times. Blockchain would completely revolutionize that entire process for the customer.
To run this volume of data has previously been difficult because the processing power doesn’t exist. Going forward, new technology such as quantum computing will begin to have an impact and make the processing of millions of data points virtually instant.
Whilst Blockchain is being used in retail banking, it is still in a very experimental phase. However, new technology means that going into a new decade, we could finally be on the cusp of a breakthrough (this has been said for a few years now!). Banks need to work to gain consumer trust in the digitalization of data and services if it to be a success.
Disclaimer: The author of this text, Robin Trehan, has an Undergraduate degree in economics, Masters in international business and finance and MBA in electronic business. Trehan is Senior VP at Deltec International www.deltecbank.com. The views, thoughts, and opinions expressed in this text are solely the views of the author, and not necessarily reflecting the views of Deltec International Group, its subsidiaries and/or employees.
About Deltec Bank
Headquartered in The Bahamas, Deltec is an independent financial services group that delivers bespoke solutions to meet clients’ unique needs. The Deltec group of companies includes Deltec Bank & Trust Limited, Deltec Fund Services Limited, and Deltec Investment Advisers Limited, Deltec Securities Ltd. and Long Cay Captive Management.