By Joram Borenstein, Vice President, NICE Actimize
An increasing number of large well-known banks, stock exchanges, and other financial services organizations are tinkering with cryptocurrencies and the underlying blockchain protocol much more publicly and articulately than they were even six months ago. In fact, it seems that not a week goes by without yet another announcement to this effect. While some organizations are more focused on the currency itself, and others perceive more value in blockchain’s resiliency, transparency, and de-centralized ledger model, we might pause and wonder why this evolution is happening now and what this means for the future of financial services as we know it.
From looking for opportunities to maximize operational efficiencies to addressing difficulties with fee structures, financial institutions (FI’s) know they cannot afford to simply ignore bitcoin and related technologies. The six reasons below explain the recent spike in activity level surrounding bitcoin and blockchain, and all of them address issues tied to FI’s future growth.
Searching for Operational Efficiency: Financial institutions are beginning to realize the potential these technologies bring to improving operational efficiencies and are now trying to identify which elements of this opportunity makes the most sense for them. Examples of these potential improvements include faster settlement and clearing, stronger identity validation, and time-stamping for compliance purposes. In addition, the removal of the human factor in settlement, for instance, may result in lower costs, better quality, and improved customer service. Name a single senior banking executive who dislikes any of those things!
Positive Implications of Transparency: The blockchain’s transparency and decentralized ledger have the potential to hold positive reputational aspects for FIs, such as a scenario in which a bank or other financial provider wishes to provide transparency to someone on the other side of a trade, to a regulator, or to a prospective partner or client. Identity validation is one application of this transparency scenario. Sharing basic identity information with a specific party would not disclose one’s identity to the entire world (the process for which can peruse the entire blockchain’s transactional history as it wishes) but can instill confidence in a specific party or individual who might otherwise not trust a given financial provider or counterparty.
In Search of New Services: Banks and other financial providers know that even partial adoption of cryptocurrencies will put pressure on the banks’ existing fee structures. Familiarity with how this infrastructure works and transacts is key, in case traditional banks need to offer new services, lower current fees for existing services, or possibly even cannibalize existing revenue streams yet to exist. For example, adoption of crypto-currency based (a la bitcoin or another such currency) or blockchain-based services (think of anything requiring a decentralized way to share elements of value), may push banks to embark on new adventures in offering financial services and products. One such scenario might see banks scale fees higher for customers using less efficient transactional payment mechanisms (i.e. cash or paper checks).
Industry Competition: Like any group of competing organizations, banks are constantly comparing, poaching talent, and learning from one another’s mistakes. Cryptocurrencies and the underlying blockchain protocol represent worrisome threats to the banks and they know it. Even though adoption remains small and regulatory guidance is only partially known in some jurisdictions, banks recognize that by making initial forays into this new world, they will maintain a slight advantage on their competitors. In short, they don’t want to be left behind, and the small investment in time and manpower is sufficient to reduce that risk, especially given the chance that something grandiose and dramatic may emerge from these new technologies.
Innovation & Talent Seeking: The more traditional financial services providers are fighting for talent and they know it. The spike in the past few years in “fintech” funding for start-ups and mature companies alike poses a threat to these more traditional institutions. One of the key ways that banks are pushing back against this perception is to launch “Innovation Labs” and “Centers of Excellence” around the globe, particularly in cities with highly educated workforces. Combine the desire to compete for talent against the fintech community, along with the knowledge that working with these new technologies is a “must” to avoid competitive risk from their traditional competitors, and it makes perfect sense that traditional institutions pursue research and further exploration into these technologies.
Keeping Up With The Regulators: Regulators in the major economies have begun to weigh in with regard to how these technologies will be regulated, taxed, and monitored. Banks and other financial services companies have concluded that the regulators are, in some cases, already more advanced in their knowledge of cryptocurrencies than the banks are, leaving the banks no choice but to get up to speed. While the banks recognize that regulatory requirements and mandates may very well change as adoption of these technologies is monitored, they also fully understand that the regulatory environment is something of which they must be keenly aware.
The technical underpinnings of both cryptocurrencies and the blockchain infrastructure protocol represent a potential watershed change in how financial services products and technologies are used, distributed, monitored, and regulated. While the changes that these technologies bring will not happen overnight, it is entirely possible that the way consumers transact, how their identities are verified, and how financial institutions themselves interact, charge fees, and more will undergo dramatic changes before the end of the next decade.
Traditional financial services organizations recognize the potential of these technologies and know they can’t be caught off guard. Those institutions which grasp these changes, speculate intelligently about how to work with them, and ultimately are able to turn these ideas into new profitable business models, will be the ones who ultimately reduce the risk to their institutions and identify new sources of growth.