While banks had to fight against falling interest rates and fintech innovations, they now have to deal with blockchain technology and its impact on our economic, monetary, and financial systems.
Indeed, many companies in the financial sector are now using blockchain technology to reinvent the world of finance. They are developing new applications that compete directly with traditional banks' solutions. While it is common to think that the blockchain is an alternative to the traditional banking system, it could, be considered a new tool to be exploited to transform the risk that the blockchain represents for banks into an opportunity.
Understanding blockchain technology
While blockchain became more popular with the Bitcoin white paper published by Satoshi Nakamoto and published in 2008, blockchain technology is much older.
It is based on many years of work and research in economics, finance, computer science, and cryptography.
To define blockchain, let's start with explaining Blockchain France.
The blockchain represents "a technology for storing and transmitting information that is transparent, secure and operates without a central control body."
Therefore, the blockchain, or chain of blocks in French, functions as a large digital account book, grouping all the transactions carried out without going through a trusted third party.
It is open to everyone (in the case of a public blockchain), distributed, decentralized and immutable.
The blockchain works through many computers, validating transactions, securing, and maintaining the network. These network participants are called miners.
The blockchain can therefore be compared to an Excel sheet with all the transactions listed in chronological order and containing data (senders, recipients, types of assets exchanged, for what amounts, dates and times, etc.) that cannot be modified or canceled.
To sum up, the purpose of the blockchain is to secure the transactions made on the network in a decentralized way and to make them more transparent.
For these reasons, the banking system must take an interest in the blockchain to be included.
The Impact of Blockchain on Financial Institutions
Anne-Sophie Luçon, Practice Manager at Michael Page, explains that "the blockchain is shaking up the codes of the banking sector and revolutionizing the way of exchanging and protecting exchanges. It ensures data security during transactions and payments between different users.
Financial institutions need to study and test this technology as a first step. Thus, they will be able to determine important development levers to better understand its true usefulness.
One of the areas of development most recognized by banks is the use of blockchain in payments.
It turns out that many studies show that this technology would make payments safer, more transparent, and faster – not to mention the significant reduction in fees.
A study carried out by the Santander Bank shows that the use of blockchain technology could make it possible to save 15 to 20 billion dollars per year by 2022 for the sector, in particular, thanks to the reduction of "costs of 'international payment, trading, and compliance infrastructure.'
In the long term, the study, testing, and use of the blockchain could apply to areas beyond payments.
It could, for example, apply to:
- Securing sensitive data,
- Improving compliance with customer identification and knowledge (KYC) with the creation of digital identity,
- The reduction in the number of intermediaries in all types of exchanges,
- Improving the application and monitoring of the legal clauses of contracts with "smart contracts" or intelligent contracts,
- Optimization of administration with the automation of certain tasks,
- Reduction of errors and fraud,
- Etc.
So will the blockchain destroy or revolutionize the banking system?
The blockchain is undoubtedly a technological revolution that could significantly impact the banking and insurance professions, depending on how it will be integrated into this sector of activity.
Moreover, the blockchain will profoundly change the relationship between customers and banks, insurers, and other financial institutions, who want to make this technology an ally and not an obstacle.
As they work hard to study, understand, and test it, blockchain technology could enable the following:
- To use an immutable private distributed ledger between specific users,
- More transparent, safer, faster, and cheaper transactions,
- A significant improvement in the process and protection of payments and transfers,
- To facilitate and automate the work of compliance, audit, and reporting,
- To obtain optimized processes with a better digital identity (compliance with KYC procedures), better automation of processes and exchanges, reduction of fraud,
- Cost savings.
The study of the blockchain will also make it possible to better anticipate the impact of this new technology on the trades of the financial sector, in particular in the services of payments, transfers of funds, commercial financing, or the foreign exchange market.
"It is still difficult today to identify recruitment prospects related to the blockchain. Nevertheless, its impact on the very structure of the banks is undeniable," emphasizes Anne-Sophie Luçon.
The integration of the blockchain in the financial sector should therefore make it possible to optimize the processes, the execution, and the profitability of the actors by shaping new financial services based on its technology (micro-credit, micro-payments, transactions almost free of charge, etc.).
Thus, the blockchain should revolutionize the banking sector more than destroy it.
Despite the undeniable advances, let's remember that this technology is still in its infancy. It still has to face many technical, regulatory, and security challenges, considerably slowing its development.