Banks are not moving fast enough to adopt the Blockchain and this may lead to their quick demise. Recently in an article authored by Glen Williams, David Gunn, Eduardo Roma and Bharat Bansal, the consulting firm Bain said that banking companies are missing out on Digital Currency.
In its article Bain said about Blockchain, “Distributed ledger technology, ﬁrst showcased by the Bitcoin digital currency network, has the potential for such dramatic change—yet most banks have not adequately prepared for the ensuing battles to retain control of customers and of merchant payment interfaces.”
Bain & Company are a management consulting firm who work with top executives all over the world and help them make ‘better decisions’ and convert those decisions into actions and success.
Blockchain is a rare opportunity
Bain & Company think that changes to ‘complex pipelines’ that make payments rarely occur.
They are of the view that removal of intermediaries, simplifying ‘connections’ between counterparties and using an immutable Blockchain holds the key to improving speed, transparency and efficiency of payments systems.
The consulting firm cities Bitcoin as a success story and mentions that since 2012 nearly US$ 1 billion in capital has been pumped into various types of distributed-ledge investments.
Get ready for central bank supported digital fiat money
Bain hold the view that there will be a nonlinear growth in the Blockchain and they expect two waves.
Wave 1, according to them, would result in the development of systems which focus on international payments while Wave 2 would cause a broader disruption of domestic payments and this would be unveiled by central bank supported digital fiat currencies.
Bain foresee a future in which the first wave would be led by financial institutions who seek new innovations and there will be no central counterparty.
However, when the second wave does arrive, then digital money would become a widespread phenomenon. Bain think that central banks have already started toying with the idea of all digital cash.
Banks face oblivion
The effect of a central intermediary supported all digital currency would be felt deeply by the banking industry. Retail banking in particular has a lot to lose as products like credit cards and automated clearing houses risk disappearing.
At the moment banks have direct financial relationships with each other for clearing or they use a correspondent bank where such a relationship is missing. A fully digital currency would completely decimate this present arrangement.
Not only would the now prevalent system face annihilation, the new digital currency would ensure that all parties can track money more effectively.
The Bain & Company article states:
“By cutting the number of middlemen and enabling direct transactions between counterparties, digital ledger solutions speed up transaction times. They also ensure that each participant has a complete view of its customer accounts and balances—the key building blocks of automated payment tracking and notiﬁcation tools. Such improvements would go a long way to meet customer demands for a more responsive, holistic view of their ﬁnancial positions.”
Banks are in a hard place and need to make hard choices
Banks are not doing enough when it comes to distributed ledger systems. According to Bain banks lack ‘clear-eyed strategic’ plans and their ‘wait-and-see’ attitude will not work.
Their postponement of strategic decisions is likely to cost them dear. The article suggests that for super-regional banks establishing relationships with other banks and forming strategic partnerships would hold the key to success. As for global banks, they need to overcome strong organisational inertia and utilise their access to a strong IT department in their midst to use their scale for development.
Regarding big banks, their article says:
“Pragmatic steps entail encouraging exclusive partnerships with the most promising third-party platforms, developing systems internally, lobbying regulators to maintain the tight anti-money laundering (AML) and know-your-customer (KYC) regulations which give incumbents an advantage over new entrants, and carefully building the credibility of distributed ledgers by migrating a portion of their existing payment ﬂows to new platforms.”
Banks can stay relevant
Banks do hold some advantages at the moment and they can stay in the lead if they move quickly. The erosion will happen quickly though as digital payments become the norm rather than the exception.
Banks therefore need to move faster to adopt digital wallets and payment applications according to Bain. They also need to use existing regulatory frameworks like AML and KYC to reinstate their positions as dominant leaders because these pose quite a barrier to new entrants.
Last, but not the least, the article suggests that banks invest in startups and services related to securing digital identities. This would involve banks becoming custodians of digital keys and signatures.
Whether banks will exist in the future or not all depends on how quickly they can move from steel vaults to digital vaults in a way. Inertia though may spell doom for them.