While blockchain has become a central issue in almost any conversation on banking these days, the real question is what value the technology will provide and how fast it will start being used.
In a recent webinar on blockchain and distributed ledger technology organised by tech giant D+H, insights were shared by Mike Baldwin, executive director for innovation and implementation, global transactional Services at Australian ‘big four’ bank Westpac, and James Methe, principal at consultancy Capgemini.
Managing technology change
Baldwin singled out as his greatest concern the fact that there are now so many new technologies and options to test that it is increasingly difficult to filter them all. The other key issue is how the banking sector can move at the speed managed by fintech start-ups, since “we have a lot of value but we tend not to move as fast.”
Methe reported that the main focus at his firm during 2015 was education and the aim of getting people up to speed on the technologies, this year they’re hiring 100 blockchain developers and will have launched a new practice by the end of the year. For Capgemini, however “the blockchain revolution is moving slower than we expected.”
For Baldwin, the best uses for blockchain are those processes where there is an exchange of value that has traditionally been slow, or where trusted intermediaries are required. One of the biggest benefits he sees lies in freeing up liquidity.
Banks in Australia engaged in domestic clearing that need to make direct entry payments through the central bank, for example, hold hundreds of millions of dollars for settlement. When, for example, a customer wishes to send $50 from Westpac to Commonwealth Bank (CBA), the Reserve Bank of Australia (RBA) will transfer $50 from Westpac’s exchange settlement account to CBA before CBA credits it to the customer.
“If we had blockchain, it would be a matter of debiting one account and recording that on the ledger as a non-repudiated payment and recording the credit on CBA’s ledger,” said Baldwin. “You don’t need the RBA saying we’re going to hold an account for you. Participants using the ledger authorise the transaction and the ledger replicates across the network. Once that transaction is recorded on the ledger, it can’t change.”
Methe added that he’s also seeing blockchain usage in cross-border foreign exchange (FX). One recent example was a pilot exercise last January that involved 11 banks, in which participants reduced both the costs of reconciliation and reserves. “Pricing, document storage, applications – they’re interesting use cases but not the compelling event,” he said. “The key is, where do you want to participate – just send and receive messages, have a differentiating platform, or is the greater value in a utility? That’s where we see the discussions going.”
From a technology perspective, Methe believes that blockchain is ready for primetime, with initiatives such as R3 – an industry-wide blockchain consortium of 42 of the world’s biggest banks – emerging to experiment with ways of implementing the technology into their businesses.
“There are people live on it. There’s lots of activities. R3 group is looking at how to approach it from a ubiquity standpoint.”
What isn’t yet ready, he suggests, is acceptance. Part of the reason is that people are trying to understand what blockchain can offer. The other part is that while they can develop the software, agreement on just what is needed to wrap around it – such as legal frameworks, governance and interoperability – is less certain.
What it boils down to, Methe said, is “how can I improve the service, lock in where I’m strong, reduce costs of reconciliation, speed payments. It’s the next generation of correspondent banking. It’s not a radical change of the business, it’s just a better way to do it.”
Baldwin added that “a lot of people draw analogies to the early days of the internet. We haven’t thought of all the ways to use it. It will continue to be disruptive for a long time.”
The key, Methe concluded, is to start actively working with the technology.
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