From time to time we see on the news that some bank has successfully completed a blockchain pilot. Most often this is an announcement about a transaction between two different offices. Sometimes this is an experiment with several banks participating.
Isn't this an evidence of the successful blockchain integration with the banking system?
We would rather not say so. Effective blockchain integration would result in a deep banking system architecture transformation, which becomes possible only when it is integrated at the very first Core Banking Systems (CBS) level. Only in this case it is possible to benefit from all the advantages of these innovative solutions:
- distributed network operating as physical online;
- blockchain transactions authorisation;
- elimination of transaction day concept, and 24/7 transactions as a result;
- protected against DDoS;
- significantly lower costs.
Example given in the beginning of this article shows blockchain only as a tool allowing transactions transfer, and this does not really add value to the remittance services.
Let us come up with a question, whether the existing banking infrastructure could really be transformed to implement blockchain? Technically yes. In fact, this is questionable.
The reason is, that the banking systems had years of evolution, and transferring them to the new technological basis is a complex and a time-consuming task. Normally, a bank has millions of clients and spends vast amounts of money for its existing infrastructure maintenance. While it is fully functional and active this is extremely difficult to plan and implement its migration.
But while the banks are modernized through this Cyclopic work, it will just take a while for the new remittance services network on blockchain to grow from scratch. They will surpass the existing banking systems with speed, security, and very low costs.
Recently the leading banks' top managers make alarming statements, where they foresee that the existing banking system will cease to exist.
We have to agree to this. Blockchain definitely provides significant advantages for the remittance services. But the banks have a much broader product line: deposits, loans, merger and acquisition financing, work with speculative markets, inheritance management and many other activities.
But the main banks' advantage is their huge clientèle. Rival modern payment systems will have to spend years just to get close to a comparable number of clients.
The most effective strategy would be to use the market players' advantages and bring them together in one project. This could be done through cooperation (including on the equity participation level) of the existing banks with technologically advanced fintech startups.
State-of-the-art automatic multi-currency systems with advanced Application Programming Interfaces (APIs) developed using blockchain and operating through various channels are the ideal partners for the banks. Such a new system could operate alongside the existing one.
Using technologies not requiring manual work, and innovations of fintech startups the bank could offer its customers historically low fees for these transactions, and therefore, to make a difference in the market.
With the new platform, the costs for a large number of operations, e.g. for currency exchange, can be significantly reduced.
Many banks consider the smaller-amount exchange share to be unprofitable, which automatically results in higher and almost prohibitive fees.
But a common remittance business with a fintech provides new opportunities for the bank. For example, the bank will be able to use the startup's cloud platform and embed the platform services into its software. In this case, the bank's clients will not even notice any changes while working with the familiar internet and mobile banking interfaces. They will only see the attractive exchange rates, 24/7 operation, and instant transactions.
There are easier ways as well. It is possible to use a bank-branded web-interface or a mobile app of that startup, which would be available to all the bank's clients.
Further the product line of that online platform would expand. First of all, this would include multi-currency services, including cross-border transfers. The clientèle will grow not only because of the partner-bank's clients, but also through acquisition of other client segments.
Recently it is widely discussed that the banks have to open their own APIs. The European Union has even issued a separate directive allowing to open it for third-party developers. A fintech startup is able to help the banks in this matter allowing access to the clientèle through its API gateways.
A separate point is the USSD customer interaction channel. The fact is, that USSD allows you to use banking services without access to the Internet, and to work using any model of a GSM-phone. It is available in the areas, where the banking services penetration is weaker, and the bank is able to expand its penetration to the "unbanked" markets.
All these strategies lead to a rapid economic efficiency growth for this ideal mutually reinforcing market alliance. And the product line is being brought to a modern level. The bank gets an opportunity to enter the client markets and services markets which were not available previously. Or even to start its operations in a new market, like selling the digital gold linked to the real gold bullions to the end customers.
An alliance of banks and fintech startups grants each participant an access to the other party's advantages. And the main thing is that they will not have to spend years of development to get such technologies. The banks do have a possibility to enter the market with the cutting-edge technologies right now.
Let us refer to the example from the mobile communications industry. From the very beginning the mobile providers had a strong position and profits providing voice and Internet network services. But they have missed their chance on the rise of WhatsApp, or Viber in the internet services market, and now they are driven out by numerous smaller businesses.
Today WhatsApp and Viber's outperform the majority of mobile providers in capitalization being in direct competition with them. And if the mobile providers have noticed this trend earlier and would integrate these innovations with their systems, joining startups like WhatsApp or Viber share capital early, the mobile market situation would now be quite different. The economic efficiency of the mobile providers would also be different now.
We may all soon witness the "smart" banking triumph, and the rigid and close-minded banks slowly leaving the financial services arena.
Chief Academic Advisor, Professor Vladimir Frolov
Chief Technical Officer, Alexey Romanchuk