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Blockchain is like a fast-moving train that is gathering momentum and once it reaches its station, there is no turning back for the financial industry

Banks are embracing technology like never before. You are advised to read the basics of Blockchain here before continuing with this article. In this article, you will see the broad overview of the Blockchain impact in banking.

Blockchain cost advantage

Let us begin with a simple example. Suppose you would like to transfer money from Singapore to your children in the US. You can do this directly with Citibank and DBS with their traditional remittance service, or you can do it through new online technology such as PayPal and Stripe.

Source: WorldBank

According to the WorldBank, the global average cost of remittance had seen a sustained decline. On average, it would have cost you 9.81 per cent in 2008 and this has declined to 7.52 per cent in 2015. In other words, if you have transferred US$200, you will spend US$19.62 in 2008 and US$15.04 in 2015. 

Remember this is the average. The method of remittance would matter too. The WorldBank had calculated that commercial banks like Citibank would cost you 10.64 per cent [actual Citibank fee is SGD$30 minimum] while online platforms like Stripe [actual Stripe fee is 2.9 per cent + US$0.30] would cost you 5.43 per cent on average. Online platforms provide remittances that are 49 per cent cheaper than commercial banks due to lower overheads and better usage of technology.

While these online platforms are the leading edge of technology these days, the cost savings of Blockchain will put these online platforms to shame.

Global Average Cost of USD$200 Remittance (2015)
Method	Commercial Banks	Online Platforms	BlockChain
Total Average Cost (%)	10.64%	5.43%	1.10%
Total Average Cost ($)	$21.28	$10.86	$2.20

Source: Blockchain

As seen on the chart above, Blockchain will cost you a mere 1.10 per cent for each transaction! For Stripe’s Bitcoin Blockchain transaction, it is a mere 0.5 per cent.

The table above would give you a good visual comparison of the different cost for each remittance method. This would give you a good idea of why banks are now racing their way into Blockchain. Currently, we are still in the early stages of commercialising Blockchain, but its potential to change the financial industry cannot be ignored! 

Imagine if Citibank implemented the Blockchain technology in 2030, while DBS is still standing still with traditional remittance of 2015. For the same US$200 remittance to the US, if Citibank were to charge you uS$2.20 for it and DBS were to charge you 10 times more at US$21.28, would you still bank with DBS on the account on national pride?

According to Goldman Sachs, there is an estimated US$550 billion of annual savings if businesses were to swap legacy payment methods for digital payment.

Blockchain in banking

Remittance is one of the many forms where Blockchain can be used in the financial industry. It is also one of the easier method to illustrate how Blockchain technology can be used to facilitate this revolution.

Source: Financial Times

Instead of the current 3-5 working days to remit your money with a commercial banks, this Blockchain method of remittance would only take 10 minutes today. This excludes current research efforts underway to make this a real time transfer. This is important because time is money and as the settlement process moves to real time, banks will need to hold less assets as collateral.

As Blockchain is a decentralised public ledger system, you will only have to pay the computers in your network in Bitcoins to authenticate your remittance. There is very little possibility for fraud as it is time stamped and multiple computers involved simultaneously. Each block cannot be deleted once it is created.

Remittance is a form of permission-less Blockchain technology that is opened to the public. This form of Blockchain can be extended to settlements, security exchanges and other forms of banking that involves the public.

Source: Financial Times

Permissioned Blockchain are then used for the internal functions of the banks such as Fixed Income Currencies and Commodities (FICC) trading. These Blockchain would be used internally for the trading, risk management and settlement before it moves out into the open. 

Accenture believes that banks and other capital market players will start of with internal permissioned Blockchain until they can confident that regulators can police the permission-less Blockchain effectively. With these interplay of permissioned and permission-less Blockchain, Accenture foresees greater customer experience for consumers.

Source: Accenture 

In other words, once Blockchain is commercialised, it will make banking cheaper and better. Who can resist these combinations?

20 year race to widespread acceptance

So the burning question now is when will Blockchain be widely accepted? Experts believe that it would come into the mainstream between 2026 to 2036. Blockchain came about with Bitcoin’s Founder Satoshi Nakamoto’s white paper in 2008. Banks took six years to come up with the proof of concept in 2014. After losing out to peer-to-peer lending platforms like Lending Club and Capital Match while they are sorting out the Global Financial Crisis mess, banks are not yielding ground to Blockchain platforms in the next decade.

They had to first overcome their early skepticism of Bitcoin as there can be no Blockchain if they don’t make token payments (can be the leading Bitcoin or other cryptocurrencies) to the computers in their networks. Different banks move at different speed but the early adapters had their experimentation teams in place by 2014.

We are currently in the proof of concept stage and there are many consulting firms assisting the banks with it. The leading consultancy firms are Accenture and Deloitte. They will study the bank’s existing system and use their expertise of Blockchain to advise the banks on the various conceptual possibilities.

For banks that have moved that that stage, they are now developing the relevant technologies to implement Blockchain. There are generally three methods which banks are using to acquire this technology. Some are using a combination of these methods.

Internal development

E.g. Citibank is developing Citicoin ‘in last few years’. 

Investing directly with technology specialist

E.g. Goldman Sachs invested US$50 million in Circle Financial Partners in April 2015

Engaging external partners

E.g. Goldman Sachs, Commonwealth Bank of Australia and seven other banks collaborate with New York’s R3 for research and development.

These developments are expected to take 10 years before it would mature and be implemented into widely by banks. Technology standardisation and consumer acceptance would be expected to take another 10 years. The mobile phone came about in 1973 but it took the world 30 years to accept it.

Winners and losers

Once again, technology is disrupting businesses as we know it. As with all changes, there will be laggards that will be left behind and be swept away by change. Banks will also face the issue of how to deal with their legacy systems in the face of Blockchain. 

Once the two decades are up, banks will have to present the fruits of their labour to consumers. The victims of this race would be young employees who are currently working in settlement and remittance departments. Their jobs are about to be replaced by machines who can do it better and cheaper than them. 

This applies to current local operations as well as massive investment in outsourced operations centre in low cost countries like India. These people would age in 20 years and would find it hard to learn new skills.

Consumers will be the ultimate winners, as the banks race against each other to implement the Blockchain technology. 

Conclusion

While Blockchain acceptance would take a shorter period in this digital age and probably even shorter time in advanced economy like Singapore, we are still not likely to see it until the next decade. 

However, Blockchain is like a fast-moving train that is gathering momentum and once it reaches its station, there is no turning back for the financial industry.  After all, would you rather pay US$2 for instant remittance or US$21 for a 5 day remittance to the US?

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