Blockchain reaction: will it change everything?
Blockchain technology could help banks cut costs and boost client security, but will the notoriously slow-to-change financial services industry get on board?
Blockchain – an often discussed but rarely understood technology – is a rising topic on the C-suite agenda, offering myriad opportunities to reshape and advance digital infrastructure.
While the technology’s earlier uses lie with trading the cryptocurrency Bitcoin, these too have evolved, and many now argue it is the panacea financial markets have been waiting for.
“You should be taking this technology as seriously as you should have been taking the development of the internet in the early 1990s,” says Blythe Masters, CEO of software company Digital Asset Holdings. “It’s analogous to e-mail for money.”
Blockchain works as a decentralised ledger, recording transactions on multiple computers, making it very secure and resistant to hacking or manipulation.
According to information technology research company Gartner, the technology is gaining traction for two reasons. One is because it promises to add trust and transparency to complex or sometimes misunderstood markets. The other, because it reduces friction points for businesses by providing open access to the information in the chain.
You should be taking this technology as seriously as you should have been taking the development of the internet in the early 1990s
According to a recent estimate by management consulting company Accenture, blockchain technology can help banks cut costs by up to $12bn annually in back-office processes such as settlement, regulatory and cross-border payment costs. It removes the need for intermediaries and takes only a fraction of the commission charged by banks and unions.
“Firms are dealing with greater requirements for reporting, transparency, and dissemination of data," says Ms Masters. "Costs have gone up and revenues have gone down. This technology really gets to the core of all those issues.”
Indeed, while the technology is still in testing stages, the World Economic Forum is forecasting its potential “to disintermediate almost every process in financial services” changing the way financial players trade loans, bonds and other assets.
In wealth management, HNW clients could be made to feel much more secure if their personal information is stored and used via the blockchain method, especially as they have so much to protect and are often the target of hacks or scams.
From smart contracts and identity management, to gold, diamonds and property titles – the technology allows institutions to transfer assets beyond just the digital currency and could therefore be a resource applicable to and leveraged by many industries.
The UK government could even use it to track money involved in student loans and international aid. Its use of multi-party involvement makes it an unbiased and secure way of making and recording transactions.
However, while the vision of a superefficient world is enticing, financial services is an industry that is heavily regulated and consequently notoriously slow to change.
Getting regulators and institutions on board to uproot decades of legacy IT systems and practices will be a colossal, complex and expensive task.
Sceptics doubt to what extent blockchain will be the panacea it promises to be, and whether one technology can really recreate markets to become more transparent and efficient.
So while blockchain certainly has the potential to improve both the operations and the customer experience sides of business – changing its underlying ecosystem will be no small feat.
Persuading financial players to place their bets on a technology not yet fully understood or trusted by many market participants will therefore probably be the hardest part.
Ruohan Wang is senior analyst at wealth management think-tank Scorpio Partnership
