Blockchain projects will pay off – 10 years from now

By Paul Schaus for PaymentsSource

After years of study and exploration, blockchain is set to make its public debut in banking in the coming months through a series of payment-related pilots, though more robust money transfer initiatives may have to wait.

In anticipation of building out full-fledged products based on the distributed ledger technology, recent headlines – with some exceptions – show that banks are expanding blockchain projects. Santander, for instance, said in June it was conducting an employee pilot program for a blockchain-based cross-border payments application that connects to Apple Pay. Bank of America and JPMorgan Chase also recently announced blockchain experiments around transaction processing.

A September IBM survey of 200 global banks found that 15% of respondents plan to roll out blockchain-based products next year, while 65% of them plan to do so within the next three years.

While blockchain inches closer to its entrance into the industry, banks need to temper expectations regarding the returns they will see on initial applications.Because of regulatory uncertainty, banks will initially use blockchain technology for internal purposes and for targeted use cases that – most likely – won’t involve the actual transfer of money.

Instead, initial blockchain deployments will focus on transferring data for compliance reporting, know-your-customer rules, loan documentation, trade finance and other use cases. These internal blockchain projects are unlikely to deliver the full benefits of blockchain technology.

Maximizing the value of blockchain-based products and services, after all, requires leveraging many network participants that can share the cost of building and operating the network. In other words, the true value of the blockchain will come from industry collaborations and consortiums that leverage blockchain for transacting between participants.

These utilitylike use cases could save the banking industry $20 billion per year by eliminating central authorities and clearing mechanisms, a 2015 Santander report predicted. However, there are still major challenges to overcome before such collaborative blockchain applications become a reality for the industry, and that is in addition to challenges that still exist for implementing internal blockchain applications. Simply put: it could take more than a decade for banks to realize true benefits from blockchain technology.

To be clear, this doesn’t mean that internal blockchain applications are not worthwhile. Applications around data referencing and compliance reporting can deliver important benefits, such as greater accuracy in compliance reporting, and improved customer satisfaction thanks to quicker processing of information for loan approvals or account openings.

However, banks will have to provide the resources to run these internal blockchain applications. The resources required to power these applications will also become more intense as banks scale their blockchain-based applications across various divisions and business lines.

Of course, banks can acquire cheap computing power for blockchain applications from cloud services providers. Bank of America, for instance, partnered with Microsoft Azure to build a proof-of-concept for a blockchain-as-a-service for processing corporate treasury. IBM also offers a cloud-based platform for such blockchain-as-a-service offerings. This approach will help defray operating costs, but initial blockchain products and services still have significant hurdles that will take time and money to overcome. Banks will need to integrate these products and services with legacy systems and satisfy regulatory bodies (possibly across multiple jurisdictions) about their safety and reliability.

These costs coupled with indirect benefits like higher customer satisfaction or more accurate compliance reporting mean that initial blockchain applications could take a while to show a positive return on their investment. But, over time, banks will learn how to handle these initial blockchain challenges at a minimum cost. Additionally, if these projects can help prove the safety and benefits of blockchain technology to regulators, then they could open the path to using blockchains for industrywide initiatives that will deliver much greater impact to banks’ bottom lines.

None of these various challenges around blockchain applications are impossible to solve. And, in fact, various organizations – including banks – are already working on just about all of these problems. But banks must take their blockchain efforts with an eye toward the long-term and the patience to weather early challenges, all the while building consensus among the industry and its regulators on how to fully leverage blockchain technology.

First appeared at PS