There are some schools of thought when it comes to the projected role and impact of blockchain technology on the global financial services space.
On the one hand, some believe that blockchain will disrupt the traditional banking system to the point of breaking and allow money to be moved without the involvement of a financial institution.
Others believe that blockchain can help banks enter a new era in financial services, and this mindset has led to the creation of internal blockchain exploration programs within the banks themselves.
But the collaborative relationships between FIs and blockchain startups have also increased significantly, presumably because traditional financial services are trying to assert themselves against any possible threat posed by this disruption of their market share.
Stellar Co-Founder and CTO Jed McCaleb has been at the forefront of this vortex of fear, excitement and speculation about the future of blockchain and what it means for the future of banks. The Stellar Payments Network provides an open source protocol for payments that provides a track for other institutions to develop their own solutions.
“Almost every bank in the world now has their blockchain exploration department,” McCaleb recently told PYMNTS of the surge in banks’ partnerships with blockchain innovators like Stellar. “You can definitely see the writing on the wall that the world is moving in that direction.”
But the roadmap for the role of blockchain within the financial institution is hardly clear.
Aside from considerations such as future regulatory restrictions on the tool, banks, despite their best efforts, are sometimes in the dark about how this whole blockchain thing will work.
Marketforce, Pegasystems, and Cognizant recently released a report that found that more than a third of financial services companies have never heard of blockchain. Another 23 percent said they’d heard of the term but weren’t sure how it worked.
McCaleb stated that he too had seen the FIs struggle to really understand the concept.
“I think what is difficult for them is figuring out which of these technologies is real and which one works and is solid,” he said. “There are so many options out there; it’s hard to know and understand what they need and what actually works.”
While McCaleb said that this lack of understanding was the “biggest hurdle” facing the area, he also noted that it could be a problem for banks themselves to find out.
“For their part, they struggle the most with trying to understand this space,” he said of FIs. “But I think they all understand the power of these types of blockchain solutions.”
Compliance is another issue that could likely fall into the lap of financial institutions when adopting blockchain-based solutions. While regulatory restrictions on the space have yet to be pending, financial institutions will bear the burden of regulatory compliance if blockchain is to disrupt the banking sector, as many think.
Research says that this is already a struggle for banks today.
The Financial Executives Research Foundation and Robert Half released a joint report last month that found that compliance costs are rising among financial services companies, and the majority of those companies expect those costs to rise towards the end of the decade.
Protecting the funds and data behind transactions completed through distributed ledger technology will certainly be the focus of regulators at some point. Earlier this year, chairman of the International Organization of Securities Commissions, Greg Medcraft, told reporters that the authorities will keep an eye on blockchain and its fraud detection capabilities.
Compliance may be critical for any bank, but Stellar’s McCaleb said he didn’t see FIs with major concerns about the security of blockchain payments.
“Everyone has concerns about technology in general,” he noted. “You want to know how it works and be sure it’s safe.”
However, like training in technology and regulatory compliance, McCaleb said it is largely up to banks to keep transactions secure.
“It’s up to them how they deal with things like this,” he explained of banks making sure payments are legitimate and secure before any transaction is carried out.
Obviously there are many factors that financial institutions need to keep in mind when working with blockchain, be it by developing their own solutions and experiments in-house or by working with a blockchain partner. The burden may be heavy, but according to McCaleb, financial institutions may not be able to afford to ignore the integration of distributed ledger technology.
But the biggest threat to banks in this development isn’t blockchain, McCaleb said. That could be other banks.
“Banking in general is not going to go away; people still want to put their money in a safe place, people still need credit, banks still provide services – none of that is taken away by things like blockchain, ”he said. “I think one of the things that could change is the consolidation in the industry.”
“Banks that fail to adapt and modernize may be left behind,” he continued. “They could be swallowed up by other banks.”
NEW PYMNTS DATA: GENERATION SUPERCONNECTED – THE COMING USER AUTHENTICATION SHIFT
About the course: Super connected consumers use a variety of connected devices to interact, shop, and pay online, but say password-based authentication slows them down. PYMNTS surveyed 2,127 consumers and found that these highly connected, highly desirable customers want financial institutions (FIs) and merchants to give up the password and provide a better, more secure way to authenticate online.
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