A Blockchain Benefit?


A rundown on the future of automated smart contracts

For some time now, banks have been contemplating the potential benefits of blockchain technology beyond digital currencies. Indeed, many large investment and consumer banks are tinkering with blockchains, which hold promise for several unrelated entities to be able to collectively manage a single database.

One potential application envisioned for blockchain technology involves smart contracts. Simply put, these automated digital contracts work like any other computer program’s if-then statements. When a preprogrammed condition is triggered, the smart contract executes the corresponding contractual clause. For banks, conditions met in smart contracts could, theoretically at this point, automatically initiate payments, credit line disbursements or even collateral seizures.

Blockchain smart contracts could prove useful for banks in several particular ways. Using a smart contract could shrink the time between loan approval and loan funding and also initiate a funds transfer. Smart contracts also could potentially streamline escrow services, syndication, counterparty management and other lengthy processes.

“We see several areas of value creation with smart contracts in the community banking space,” says Marc West, chief technology officer of Fiserv Inc., the technology company in Brookfield, Wis. “Single source of the truth, 100 percent audit ability and improved controls are key attributes we see as adding value to complex processes and third-party management needs.”

Some banking industry technology watchers predict that smart contracts on the blockchain could eventually become as common of an operational technology as loan underwriting software. “We are today at a stage like we were with the Internet in the early 1990s,” says Mark Mueller-Eberstein, chief executive and founder of Adgetec Corp., a technology consulting firm in Redmond, Wash. “Nobody could imagine how an Amazon or a Google revolutionized complete industries.”

Others, however, are dubious. They contend that the practical, real-world usefulness of smart contracts is limited due to several technological constraints. There’s also the vexing problem of privacy, which flies in the face of the blockchain technology’s transparent nature.

Say, for instance, that 10 banks set up a blockchain together and want to execute smart contracts this way. This means that each bank can see what the other is doing, which may be useful in limited circumstances but prohibitive in others due to confidentiality concerns, says Gideon Greenspan, founder and chief executive of Coin Sciences Ltd., who works in the company’s Tel Aviv office. The company is developing MultiChain, a free-of-charge platform for deploying blockchains.

What’s more, several industry watchers believe that there are easier ways to accomplish tasks than with smart contracts. “A lot what you need to do can be achieved today with much simpler technologies,” suggests Zil Bareisis, a retail payment analyst with Celent, a technology research and consulting firm. “I would be rather surprised if community banks were big users of smart contracts, at least initially.”

Lack of resources to explore blockchain and smart contract technology is another stumbling block for community banks that are interested in testing the waters. “Unfortunately there are no out-of-the-box solutions today for community banks. They have to roll up their sleeves and do a little bit of work themselves,” says William Mougayar, a Toronto-based author and investor who works with blockchain startups and advises large organizations on blockchain strategy.
Nonetheless, Mougayar predicts that out-of-the-box solutions with blockchain technology, including smart contracts, will emerge for banks within a year or two so they won’t have to think about the nitty-gritty programming. “They may just have to configure it,” he says.

Bottom Line:

Technology laboratories are experimenting with smart contracts from blockchain algorithms.


Cybersecurity and IT Compliance

ICBA announced that All Covered, a provider of cybersecurity and IT compliance solutions, has been selected as its newest Preferred Service Provider. The company’s Virtual Information Security Officer service helps community banks maintain regulatory compliance by separating the roles of the IT team and information security officer.

The vISO service allows banks to use a pool of certified experts and Web-accessed software to implement and maintain a compliant, cost-effective and scalable information security program. Included in the service are multiple risk assessments, support for internal and external IT audits, real-time security monitoring and log management. Monthly reports that confirm the information security operations are in line with the bank’s risks can also be shared with regulators.

Online Mortgage Originations

ICBA Mortgage®, a division of The ICBA Services Network®, has extended its agreement with D+H in Lake Mary, Fla., ensuring that community banks continue to enjoy the most affordable access to the company’s mortgage origination software system.

The D+H Mortgagebot point-of-sale system—MortgagebotPOS—has been offered to ICBA member community banks since 2005. With the extended agreement, ICBA members receive the best available pricing to access to the complete Mortgagebot solution—an end-to-end, point-of-sale and loan origination system that supports retail, wholesale and correspondent mortgage lending.

Faster Chip Transactions

Visa has launched a free chip-card processing enhancement, called Quick Chip for EMV, to speed EMV card authorizations. Addressing complaints from merchants that chip-card authorizations take too much time, Visa reports that the system upgrade for merchants that allow shoppers to complete chip card transactions at point-of-sale terminals at the same speed as swiping a magstripe card.

Visa, which is making the function available free to merchants through their payment processors and acquiring banks, says using the new function requires only a software update to the merchant’s card terminals or point-of-sale system, Visa reports.