By Natalie Lord
Blockchain technology is shaking up the banking industry, creating new avenues and potentially significant cost savings. We look at the changing landscape and the potential positive upside that Blockchain could have on the sector exploring the payments and clearance and settlements systems.
According to Blockchain, the number of confirmed Bitcoin transactions per day has grown approximately six times from just over 50,000 in the summer of 2014 to 290,000 in December 2018. This is a clear indicator of the growing momentum and following that digital currencies and blockchain technology are having around the world.
Trillions of dollars are currently floating around the world in an outdated system of slow payments with added fees. If you work in London and want to send money to a friend in the United States, for example, you have to pay a flat fee to enable the transaction, plus potential additional fees at the other end. You’ll also be charged exchange rate fees or given a likely unfavourable rate so the bank can take a margin. As things stand, your bank gets a cut, the receiving bank gets a cut and you’re charged exchange rate fees. Then there’s the time issue. The whole process could take as long as a week to be processed.
Facilitating payments is highly profitable for banks, which provides them with little incentive to reduce fees. Cross-border transactions ranging from payments to letters of credit generated about 40% of global payments transactional revenues during 2016.
Blockchain technology would rejuvenate this prolonged, expensive practice. It offers a low-cost, secure way of sending payments which eliminates the need for verification from third parties and is almost instantaneous timewise.
According to the European Payments Council, 90% of their members believe that blockchain technology will change the banking industry significantly by 2025.
Cryptocurrencies are built on public blockchains, allowing anyone to send or receive money. Because there’s no need for third parties to verify transactions, people using cryptocurrencies benefit from a fast, inexpensive, borderless payments system.
Bitcoin transactions can take as little as 30 minutes to settle, or as much as 16 hours in extreme cases. That’s an immense improvement on the current processing time for bank transfers, which is three days on average.
With clearance and settlement systems, distributed ledger technology could allow transactions to be settled directly, as well as keeping track of transactions better than existing protocols like SWIFT.
At present SWIFT reconciles the ledger of each financial institution. Instead of this, blockchain technology is a decentralized ledger which could keep a log of all transactions publicly and transparently. This means that transactions could be settled directly on a public blockchain rather than having to rely on a network of custodial services and correspondent banks.
Blockchain also allows for transactions that clear and settle when a payment is made, called “atomic” transactions. This would be much more time efficient as currently banking systems clear and settle transactions days after a payment is made.
Banks have estimated that blockchain innovation could eliminate at least US$20bn worth of costs from the financial sector by providing better infrastructure for clearance and settlements.
This is just the start of savings and efficiency in the sector. Next week we look at how the fundraising, securities and loans and credit could be reinvigorated by blockchain.