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  • One Big Way Blockchain Technology Threatens to Disrupt Banking

    One trend the $134 trillion global banking industry is increasingly coming face to face with is the rapid growth and acceptance of blockchain technology. Now that we know WHAT IT IS, the question turns to how it will affect change in the industry, because it is something that can no longer be ignored.

    In fact, in the first half of 2017, over $100 million was raised by R3 alone, a consortium of the world’s biggest lenders that is developing a distributed ledger platform for financial services. This is not a commercial venture; they are merely seeking “proof of concept.”

    If that sounds like a lot to invest in a theory, consider that Accenture has estimated that the biggest investment banks could save $10 billion by using blockchain technology to improve the efficiency in clearing and settlement.

    This is the area in which blockchain technology can really disrupt banking.

    The average bank transfer now takes about three days to settle. The system is a convoluted and inefficient one, involving one-way messages, intermediaries and piled-up fees that blockchain technology hopes to streamline.

    I lived in Japan over ten years ago. Sending money home normally took about a week, and the system has not greatly improved since. Because my bank in Japan had no established relationship with my bank here, they each had to find a corresponding bank that they could agree upon. This all happened through a series of one-way SWIFT (Society for Worldwide Interbank Financial Communication) messages.

    While SWIFT does send some 24 million messages a day, it does not actually send the funds; it simply sends the orders. It is then up to a system of intermediaries and custodian banks to process the request and deliver the funds. At each step of this process, fees are applied, and a lot of manual procedures are involved that slow things down.

    In the blockchain world, the decentralized ledger is transparent and public. It has two-way messaging that allows for real-time messaging and settlement, eliminating the need for the complicated network of correspondent banks. As a frame of reference, blockchain provider Ripple claims that my Japanese transfer, if done today on their system, would settle in a matter of seconds.

    Rightfully so, there are concerns about blockchain technology in the banking industry. It is still in its infancy, and the limits of the capabilities and possibilities are still being explored. This will take time. But it has the potential to be a real gamechanger in the industry, and it is something that prudent banking leaders should be taking notice of.