January 20, 2011
The Blockchain’s Rising Profile
The consumer experience of cash transfers between bank accounts among traditional banks can seem overly complex, with transfers sometimes taking days rather than hours with little in the way of explanation. In addition the traditional systems fail to provide a receipt in the event of a successful transfer, and can be hit with bank fees along the way. Customers could be forgiven for thinking on occasion that their money just disappears.
Changes are coming however, driven by both start-ups and traditional big players in the banking world. They hope to make cash transfer services more efficient, cheaper, and faster by using the technologies that underpin cryptocurrencies like Bitcoin – and an IBM report last year noted that the pace of adoption of these technologies was far faster than anticipated.
The importance of blockchain is that it is a real-time update of a ledger of transactions concerning the currency unit to which it is attached. It is updated by several institutions along the way to provide an audit trail of those transactions – and an estimated fifteen percent of medium to large-sized financial organisations are expected to widely implement the technology this year. The expectation is that within another four years, almost two thirds of banks around the world will be actively using blockchain technology in every day use with fintech companies already developing trading platforms based on the cryptocurrencies backbone technology. Companies like Michael Spencer’s NEX group and The Royal Mint are already testing technologies.
The areas that are of particular interest to companies are those of consumer lending, retail payments, and the reference data that manages the sharing of information about transactions between business divisions and institutions. So far, much of the activity by banks is still at the experimental and testing phases. This is mostly where they are working out the best business applications for the technology in their services and products.
Eight banks tested blockchains successfully last year, with bond transactions between organisations like HSBC and State Street. Cross-border payments are being tested by Santander and UBS, while Microsoft is now partnering with organisations like Bank of America to develop their own understanding of the technology.
The advantage for the consumer is one of speed of transaction, but the business driver for the banks is that blockchain will lead to a lowering of operating costs. This is because they can update the audit trail themselves rather than paying a middle man to do it. This speedier reconciliation of data is what will lead to faster transactions for businesses and consumers alike.