Why banks are in no hurry to implement blockchain

Banks are one of the main drivers of innovation in the financial sector. However, when it comes to blockchain, noeveryone is in a hurry to introduce this new technology into their business processes. And here are a few reasons.

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With the advent of mobile banking, financialservices have become available from a smartphone. Now you can open an account or transfer money without leaving your home. However, the transfer, say, from Slovakia to Japan, even with the help of mobile banking, is still too expensive and takes a long time. But when the world learned about Bitcoin, it became clear that this process can be significantly accelerated.

The role of blockchain in fintech

Since the essence of the blockchain is mainly inaccounting, it is an ideal tool for working with money. Unsurprisingly, Satoshi Nakamoto called Bitcoin “digital cash.” But, in addition to accounting, blockchain also allows you to transfer assets via the Internet, which is important for financial institutions. In the end, in addition to safe and immutable transactions, distributed registries can exclude intermediaries and thus save a lot of money for the business. And banks know this very well.

One way or another, all financial institutions workwith money. But at the same time, there are various nuances. For example, investment banks primarily serve the securities markets, while retail banks deal with deposits and loans and provide services to individuals and businesses. Investment banks conduct a small number of transactions, but for large amounts; retail – on the contrary. The pace of innovation also varies. According to an analytical study by the consulting company McKinsey &amp; Company, investment banks are more open to experimentation, while retail banks are slower to innovate.

Today, investment banks using blockchainThey strive to build a world where operations occurring after the transaction is completed would take place instantly and without intermediaries. They are also interested in automating settlement processes and therefore are actively exploring the possibilities of smart contracts.

It is worth noting that the use cases,represented by players such as JPMorgan and Bank of America, are still in the testing phase and are not yet scaled to the entire banking system. The reason is that it takes time to evaluate the cost-effectiveness of innovation. And if management decides to introduce new technologies, then such systemic decisions are made and executed in more than one day.

Why do retail banks need blockchain?

Blockchain is also valuable for retail banksinnovation. According to a McKinsey report, distributed ledger technologies can be used in three scenarios: remittances, fraud prevention, and risk assessment.

Currently, the international transfer market is estimated at $600 billion per year.(for comparison, the cryptocurrency market capitalization is $ 280 billion). Moreover, the transaction fee can sometimes be 10%. However, according to McKinsey, using blockchain in international payments can save banking institutions about $ 4 billion a year.

Another problem of the banking system is money laundering.money. During the KYC procedure, personal data is often manipulated. According to Javelin research, banks lose $15-20 billion annually from identity fraud alone.

Meanwhile, according to WealthInsight, globalanti-money laundering expenditures in 2017 exceeded $ 8 billion, which is 36% more than in 2013. And these figures are growing every year. On the other hand, identification on the blockchain, according to McKinsey, will allow banks to save on operating costs another $ 1 billion. And losses due to fraud can drop to $ 7-9 billion.

Another scenario where blockchain can playa key role is the creation of an interbank database with a customer rating system. That is, banks will be able to exchange information about customers, which will allow them to calculate risks and reduce potential losses due to the issuance of loans to insolvent borrowers.

What prevents banks from introducing blockchain

However, despite all the benefitsusing the blockchain, there are still no examples of successful scaling of the distributed registry technology system to the entire banking infrastructure. In addition, the rigid legislative framework for consumer lending and the lack of regulation of cryptocurrencies prevent innovation from developing. Consequently, banks do not want to risk their reputation and play by vague rules.

According to cryptocurrency expert Sergei Sevantsyan, the main obstacle that banks are in no hurry to implement blockchain is their licenses, which strictly regulate any financial activity.

“Banks are in no hurry to enter a new world where there is noregulation and where a year ago there was a real Wild West. Another reason is the high cost of innovation. In addition to developments, a separate budget for lawyers will also be required, ”said the specialist.

That is why, according to Sevantsyan, retailbanks adhere to old business models for which the rules have long been written, and only large players can afford to slowly test the blockchain in their business processes.

Thus, blockchain allows banks to reducecosts of customer identification procedures, makes possible quick and very cheap international transfers, and also gives banks the opportunity to more effectively assess the risks in issuing loans. However, the lack of a legislative framework does not allow banks to take advantage of innovation to 100%.

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