Is Blockchain just another fad? (Global Transaction Banking view)
by Christophe Van Cauwenberghe, Head of Payment Innovation, Retail Banking & Anne Claire Gorge, Global Head of Product Management & Structured Trade - Trade Services & Finance - 2016
“A financial institution is not comprised of a single business line, but is made up of many different business lines. Some businesses within an institution may be more affected by blockchain technology whereas others may not. It all depends on which business you are in and the business model you are following.” Christophe Van Cauwenberghe, Head of Payment Innovation, Retail Banking
Consumer expectations and mobile technology have driven take-up of real time payments and implementation has increased dramatically over the last few years. Increasingly, corporates are looking to enjoy the same speed and transparency. What is happening in the real time space across Europe and what challenges does this payment evolution present for market participants, existing payment infrastructures, interoperability and new services?
- The technology behind blockchain is very complex, but essentially it is a token management system. There are many aspects of blockchain that are of interest to the financial industry, for example, in the management of digital assets, a certified data storage and the immutable nature of transactions. At the highest level, this technology could disrupt the financial industry and modify the way we work.
- Once we examine blockchain more closely on a technical level the industry is still searching for use cases. Usually in the financial industry when a use case exists the industry looks to apply technology to it. With blockchain it is another way around. The question for the industry is that while blockchain represents a huge potential on paper, our concern is where it can be practically applied.
- Difficult to day at this stage if blockchain technology will really help to solve particular problems in the financial industry; it perhaps just represents a more efficient or process oriented approach. It is definitely a technological way of doing some processes differently.
- Looking at blockchain as a token management system, it could be viewed as an asset that guarantees the equivalent in real money, this is electronic money. If the token mirrors something that is real such as a share or debit, blockchain becomes more interesting, as long as synchronisation is achieved between the real asset and the digital value; Finally, as a token it could represent the ability to declare you have made something, such as a transaction, to all of the actors in the network. In this instance, it would act as a type of time-stamp.
- There is particular potential for blockchain technologies in trade finance, which is a heavily paper-oriented process. This is an area that requires a more digital approach and blockchain is one of the technologies being seriously considered. Letters of credit, which are a very trusted instrument in trade finance could benefit from a solution where documents are presented in a digital form. Solutions exist but are based on trusted third parties, where Fintechs can raise specific issues. A solution based on a distributed ledger, with the right governance of all parties could attract many actors in trade finance. Also fraud is a major issue in trade finance and the fact that distributed ledgers are deemed to be safer than any other technology represents a possible business case.
- There is potential for blockchain within banks’ internal systems. Back office processes could be improved and more robust audit trails developed. There are challenges associated with blockchain, including questions about governance, scalability and how assets are transferred. One particular concern for banks is privacy and transparency. All transactions are available for all competitors and some complexity has to be be added to resolve this issue. Banks may have to process within their data centres transactions that do not concern them. Blockchain is also massive redundancy not necessarily cost effective.
- Blockchain is not the only disruptive force in banking activities. Banks are also facing new entrants particularly in payments, where it becomes easy to develop innovative services thanks to open minded regulation for payment service providers. But any entrant that aims to uses blockchain to develop payments applications or asset management solutions will be anyway governed by the regulations pertaining to those areas, just as banks are. It will be interesting to see how Blockchain is an opportunity for actors in the industry to reduce costs and complexity associated with regulation by improving processes.
- Whether blockchain technology represents a small wave or a tsunami for the financial industry is not yet clear on many ways, it is difficult to imagine the long-term picture for blockchain in the financial industry but because the technology is moving at such a fast pace we can be optimistic.
- The downsides of blockchain technology are similar to the issues around other areas of financial technology. Using new generations of technology and new processes always represent a risk for any type of business. How disruptive blockchain will be remains the question.
“There has to be dialogue and collaboration between all of the players in trade finance in order to apply blockchain technology. By collaborating with other banks and other actors in the supply chain such as exporters, importers and shipping companies, insurance companies and the like we can develop a truly digital solution for trade finance.” Anne Claire Gorge, Global Head of Product Management & Structured Trade - Trade Services & Finance