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Blockchain in Banking and Finance

Many bankers already know what Bitcoin and Cryptocurrencies are but most of them still do not appreciate that all these run on the Blockchain platform. Not all bankers are readers therefore they remain in ignorance of what lies in the future of banking. One of my brothers works in a major bank in Kenya’s capital, Nairobi. It took him time to appreciate the impacts that Blockchain will create in the Banking sector. If I use him as a sample, in my approximation, about nine out of ten bankers still do not know anything about Blockchain. Banking is a very wide and rich industry that has experienced continuous growth over the past few years.

A report in 2011 by McKinsey Global Institute stated that the global banking and financial services industry was valued at $11 trillion. Although this may only be an average, especially because the industry has experienced more growth since 2011, it reveals the largeness of the share of cake of global GDP that the industry controls. Organization of Economic Cooperation and Development (OECD) mentioned in a report that the financial services sector accounts for between 20% and 30% of the total revenues from the services industries, and approximately 20% of the gross domestic product of the developed countries. With the International Monetary Fund stating that the global economy had a value of $77.7 trillion in 2014, the $11 trillion accounts for a large size of the overall world economy. Whatever will affect this industry will therefore greatly influence the world because it will somehow influence the other industries. I guess now you can see why I chose to handle this industry first before I proceed to the others. I want to help you appreciate the fact that the future of banking may soon be transformed by Blockchain Technology.

“By 2025, 10% of global GDP will be stored on the Blockchains or Blockchain related technologies”

  • World Economic Forum[i]

The proponents of Blockchain technology believe that it can be used to create more secure and convenient tools that will slash the time per transaction and the cost per transaction in the banking sector. Remember reducing the time taken and costs of transactions in the banking sector will greatly increase efficiency. The belief that Blockchain can be used to design more convenient tools for banking has already gained traction in some parts of the world with many of the top twenty major banks testing the theory. According to Business Insider, multiple banks like Goldman Sachs, UBS and Morgan Stanley have already published research on Blockchain Technology via in-house efforts to take part in the ongoing revolution[ii]. So, this is not a strange thing I am trying to bring to fame, rather it is already being embraced by giants in the industry.

All the mega banks you know including Citi Bank, JP Morgan Chase, HSBC, Mitsubishi UFJ Financial, Bank of China, China Construction Bank, Wells Fargo, Standard Chartered, Kenya Commercial Bank and the list is endless, will soon substantially integrate their services into the Blockchain, for example via Blockchain-based Fintech applications also known as Finchain. Kenya’s Equity Bank recently launched an independent Fintech subsidiary, Finserve, that is set to disrupt the digital payments services; and which also signals to major shifts expected in the industry. I will talk about Fintech later in this section. The full or near-full adoption of the Blockchain technology may take some time but it is possible that many banks will adopt Blockchain within the next 5 to 10 years. I will discuss these timelines in a later chapter under Blockchain Adoption Timelines.

In this section I will only cover the Blockchain use cases in banking and other payment services companies, but will not cover Insurance Services. I know insurance is categorized as a financial services company, but for the purposes of specificity, I will cover them separately. There are several use cases of Blockchain in the Banking industry that I may not be able to cover them all in this chapter; however, it will be enough to give you the guts to research further.

“Whether it’s payments, settlements or compliance, blockchain’s key properties of decentralisation, immutability, efficiency, cost-effectiveness and security are leading to a growing chorus of support for the technology’s adoption across the entire spectrum of financial services; as such, the industry is now expected to undergo substantial disruption over the coming years.”

John Manning, International Banker[iii]

[[i]] World Economic Forum Survey Report (September, 2015). Deep Shift: Technology Tipping Points and Societal Impact.Accessedfrom http://www3.weforum.org/docs/WEF_GAC15_Technological_Tipping_Points_report_2015.pdf#page=24

[[ii]] Meola, A. (2017, September 20). How banks and financial institutions are implementing blockchain technology. Retrieved from http://www.businessinsider.com/blockchain-technology-banking-finance-2017-9?IR=T

[[iii]] Manning, J. (2017, September 3). How Blockchain Is Changing the Banking Industry. Retrieved from https://internationalbanker.com/banking/blockchain-changing-banking-industry/

 

By Benjamin Arunda 

Author of Understanding the Blockchain

(This article is an excerpt from Understanding the Blockchain by Benjamin Arunda)

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