Previously I’ve warned banks against buying into much of the hype surrounding blockchain. Instead of being seduced by visionary long-term benefits, they should focus on areas that also offer short-term gains. And banks should be aware of the technology’s limitations and how to overcome them.
But there is one area where banks should completely embrace blockchain to compete with fintech challengers and to expand their market share: payments.
Security, speed and cost
The existing payments infrastructure used by banks faces multiple challenges relating to security, speed and cost. Headline news stories about cyber attacks on major banks in Russia, Turkey and Bangladesh that exploited vulnerabilities in the SWIFT system will have eroded consumer confidence in traditional payments services.
Many people have already turned to non-bank entities like Paypal, Transferwise, and Xoom. These services offer an alternative to the existing foreign payment transactions system, which is slow, expensive and unreliable. Instead they deliver real-time and automated payment services that are required by 21st century consumers and corporates.
No wonder, Santander Group executive chairman, Ana Botín believes that her bank’s biggest threats are not traditional Wall Street competitors, but the startups and tech titans in Silicon Valley. When a recent survey reveals that one-third of people would switch their account to Amazon, Google or Facebook if those companies offered banking services, the incumbent banks should be worried.
Yet, most of the fintech upstarts have built their capabilities on the back of the old infrastructure. These are stop-gap solutions that straddle multiple institutions to internalize their own payment processing and cash management systems. Once internalized, they build API-driven payment services that get around the banks’ batch-and-file processes.
Blockchain-derived technologies, like Ripple’s Interledger Protocol, allows interbank payments to move away from batch-and-file to real-time APIs. It’s the best solution for banks looking to build products that will pull the rug out from under their non-bank challengers, by allowing them to deliver modern payment processing services while differentiating on their wholesale cost basis.
The Internet of Value
I’ve spoken before about how focusing on the right short-term benefits of Blockchain will also help banks lay the foundations for long term gains. This is especially true for payments. Banks that develop innovative ways of processing previously tricky foreign transactions, will also be well placed to take the lead in micropayments, or what is becoming known as the Internet of Value.
According to Accenture, by 2020 there will be 50 billion connected devices, including cars, thermostats and fridges – the Internet of Things. Your connected fridge will soon know when you’re out of milk and automatically order you some more. For banks, the most interesting aspect of this connected experience is the monetary transactions that will happen with Things talk to each other.
This is just the first wave in what will be a tsunami of micropayments powering the Internet of Value. Musicians could self-distribute songs and charge fans a nickel for every stream or your car might pay the parking meter. The power of blockchain will make it possible.
Banks should be building services now that facilitate the anticipated huge volume of micropayments. By starting with blockchain technology that enables them to move past outdated batch-and-file systems and compete with their new fintech challengers, forward-thinking banks will gain in the short term and set themselves up for continued success.
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