Blockchain Is Banks’ Secret Sauce
By Christopher Langer for Bloomberg
Here’s some good news for bank shareholders: Profits are about to rise. Sorry to inform the hundreds of thousands of people who work in the various transaction-verification processes, but that will come at the expense of your jobs.
UBS, Deutsche Bank, Santander and Bank of New York Mellon are teaming up to develop a new form of digital cash to clear and settle financial trades using blockchain technology, the Financial Times reports. This development has the potential to unleash the kind of profit growth that widespread use of computers had on the industry.
While there’s academic debate on how much additional money banks have made from investing in computers, any CEO will tell you it’s meaningful. The trajectory of the net income of JPMorgan, the largest publicly traded lender in the U.S. by assets, is perhaps a good example. Over the past 15 years, the firm’s bottom line swelled more than 14-fold while the number of employees only doubled.
Sure, there are many more factors involved, such as mergers and acquisitions, but it’s probably safe to assume that the more customers who use internet banking and automated teller machines, the better a bank’s margin on every transaction. That would be absolutely true were it not for a small snag: Electronic transactions still require thousands of people in offices from Texas to Bangalore to check whether they’re valid, and to process them.
Which is where blockchain — the technology used in digital currencies such as Bitcoin — comes in.
The algorithm system allows the number of people involved in verification to be significantly reduced, potentially from dozens to only a couple per transaction. The cost of settling trades in the finance industry runs as high as $80 billion a year. If each transaction that requires human verification is included, the figure is much larger. With digital ledgers, it would be a fraction of that. Not to mention the time taken would drop from days to minutes, or hours at most.
UBS and friends still need regulatory approval to move forward with their digital cash settlement plan. That’s unlikely to be a problem since blockchain transactions are easier to trace and hence make enforcement more efficient.
A lot of back-office jobs are about to disappear. Just look at what happened to bank tellers. While their absolute numberdidn’t drop as drastically as initially forecast when ATMs wereintroduced in 1967, their importance in the financial industry has been reduced significantly and continues to dwindle.
In fact, all kinds of clerk positions have been eliminated from the finance and insurance industry over the past 20 years. According to the U.S. Bureau of Labor Statistics, there were 712,290 people in such jobs in May 2015, 16.3 percent fewer than a decade ago.
For bank shareholders, those are wages that will soon be added back to the bottom line. The median annual salary of finance and insurance clerks is $28,750. A back-of-the-envelope calculation tells you there’s more than $20 billion in potential savings from automating back-office processes in the U.S. alone. Of course, not all those jobs will be lost and some new ones may be created, but the math is clearly in favor of adopting blockchain for financial-transaction processing.
That explains why banks are suddenly so keen to develop systems that will enable it. They started seeing it as a threat to their existence, but with negative interest rates and increasingly taxing regulation, financial institutions are finding it harder make a buck.
Blockchain may be just the secret sauce they’ve been looking for.