By Conor Waldock, Associate Consultant at Capgemini Consulting

In thirty years, names like Morgan Stanleyor Goldman Sachs could be confined to the history books. Take Kodak, who thirty years ago was unassailable in their dominance of the camera industry and was responsible for 90% of global camera film sales with almost 200,000 employees. Today, you would struggle to find a Kodak camera anywhere, so why is it impossible to envisage a bankdecliningin exactly the same way? Defeated by a technology they failed to overcome or incorporate.

Flaws and inadequacies

Banks are oftenfeatured in the media and often for the wrong reasons; HSBC made front page news before therecent Bank Holiday weekendby delaying 275,000 payments due to an IT glitch,and shortly after the NatWest and RBS customers were venting their anger on social media as they were unable to use their card or withdraw cash in branches. Think about the cumulative effects an error of this scale could have on the economy.

“It is increasingly clear that most, if not all, of these banks’ IT payments systems need a good deal of investment, and there is a lot to put right”,said AndrewTyrie, chairman of the UKTreasury Select Committee. However,banks are also starting to wake up to the fact that there is an alternative method of transacting available in the form of a distributed ledger called the blockchain.

A potential game-changer

The blockchain is fundamentally the compiled transaction history of a currency, like a digital line of bank statementslaid end to end which has accurately and permanently recorded the previous exchanges of that currency. Large global financial organisations, such as NASDAQ, UBS, Goldman Sachs and many other financial powerhouseshave already or are considering the adoption of this powerful underlying technology into their day-to-day banking operations.

A US Federal Reserve consultation paper stated that legacy IT systems are not fulfilling end-user requirements such as real-time validation, assurance, and faster, cheaper cross-border payments.The infrastructure and man-power needed to maintain legacy systems are considerable and there is significant scope to reduce spend through using the blockchain.This saving could then be passed to the customer viaenhanced and better value services.

Blockchain work as a decentralised account book whose technology lets bitcoin users buy and sell without revealing their identities or needing to go through government agencies. The encryption removes the need for a retail bank to act as a guarantor. Melanie Swan, author of Blockchain: Blueprint for a new economy,saysthat “it is like a giant interactive spreadsheet that everyone has access to and updates and confirms that the digital transactions transferring funds are unique.”

The traceability of transactions being performed remotely from multiple locations reduces the need for ’trust’ in the legitimacy of the master ledger held by financial institutions. As an example, under current banking systems,a conventional payment to a supplier in Zimbabwe from a manufacturer in the UK would be reliant on trusting the accuracy and robustness of a bank system it had no history of dealing with. However, a blockchain driven transaction uses an open ledger which is transparently verified by a large number of networked users through consensus; the blockchain is then irrevocably updated leaving a visible and permanent audit trail through a process called ‘mining’.

A huge threat and a massive opportunity

Blockchain has the potential to erode reliance on expensive infrastructure and allow payment speed and security to be provided without the need for banking IT systems, particularly in cross-border transactions. Proponents of blockchain technology such as Chris Larsen, the founder and CEO of Ripple Labs, envisage value being transferred with the same ease as data is pinged around global networks.Ultimately consumers will realise they can bypass traditional payment methods with their numerous drawbacks, and bank independently of fees, borders and restrictiveregulation.

Consequently, the bank’s role as a conduit between customers is seriously threatened by blockchain technology. Thomas Dapp, research analyst at Deutsche Bank, sees the main advantage of the innovation as “boosting efficiency, and above all, execution times…many intermediary services could be replaced by a p2p network.”The prospect of being circumvented has meant that banks have started to develop their own blockchain capability but intended deployment remains unrefined and rudimentary. UBS is the first global bank to create a blockchain innovation lab at Canary Wharf’s Level39 accelerator facility which is a clear statement of the commercial potential of this technology. Oliver Bussman, CIO at UBS, believes that “blockchain technology will not only change the way we do payments but it will change the whole trading and settlement topic.”Goldman Sachs has also lent their considerable weight to the technology by spearheading a $50m investment partnership in the technology. One of Europe’s largest banks, Santander, issued a report stating that there could be as many as 20-25 uses for the technology that could save up to $20bn in infrastructure costs and regulatory compliance per annum by 2022.

Banks are now viewing alternative currencies and technology as a potential componentto be integrated into their operating model as opposed to an existential threat. It seems logical that financial institutions would take this stance as so much of the industry is focussed on guaranteeing or tracking transactions. Much like duringthe infancy of the internet, the biggest players are yet to emerge as start-ups and established names scramble to develop new applications for the technology.

Fast forward to2045.Has the initial investment by some of the world’s biggest banks secured their future or are they defunct institutions in the same league as Kodak and Blockbuster? Hubris in the face of digitalisation has beleaguered once incumbents who are now languishing in the corporate graveyard. If the initial investments are a statement of intent from major financial institutions then maybe they haven’t had their final Kodak moment.