Why blockchain still has potential for banks

Many financial institutions are looking to blockchain, the still-novel distributed ledger technology, as a means to create more efficient and less risky solutions to today’s—and tomorrow’s—challenges.

By Karen Epper Hoffman


It could be said that blockchain’s affiliation with cryptocurrency is both its greatest strength and its greatest weakness.

But blockchain—a digital distributed ledger platform invented roughly a decade ago—is not merely part of bitcoin, or any other digital currency. Instead, it is its own animal: a technology that virtually any organization in any industry can use to create a shared, immutable and decentralized database. That’s why blockchain has the potential to be used not only in a variety of emerging payments and settlement systems, but also to carry and transfer deeds, contracts or stocks, or even streamline the paper-intensive loan process.

While blockchain’s connection to bitcoin has raised its profile, its integral link with the cryptocurrency has also made it infamous, turning businesses across sectors into skeptics.

“The biggest misconception about blockchain is because of its association with cryptocurrency,” says Joe Davey, a director in the technology practice of West Monroe Partners in Seattle. “But blockchain is a legitimate technology with legitimate use cases of its own.”

According to a recent Gartner study, banking industry innovators are increasingly interested in how blockchain can help them save money on operations and processes, conducting far more proof-of-concept development than any other industry. The report’s authors found, though, that industry participants remain uncertain of the true impact blockchain will have on their businesses.

Quick stat

18%

of chief information officers in banking and investment services say they have adopted or will adopt some form of blockchain tech within the next year

Source: Gartner

However, nearly 18% of chief information officers in banking and investment services who responded to Gartner’s annual survey say they have adopted or will adopt some form of blockchain technology within the next 12 months, and another 15% say they will adopt it within the next two years.

“Community banks are still in the process of educating themselves on blockchain,” says Kathy Strasser, executive vice president and chief operating officer of $1.4 billion-asset IncredibleBank in Wausau, Wis. “Like many new technologies, there is confusion of what it is or where to apply it. In the case of blockchain, it requires some sort of application for it to be beneficial, and therefore, like any other project, requires attacking a meaningful business problem [and] finding those processes within our banks that are not working today.”

Slowly but surely

“Blockchain is somewhere between the ‘trough of disillusionment’ with bitcoin and climbing the ‘hype curve’ with enabling payments for interbank transactions and other applications,” Davey says. He’s referring to the analyst terminology for the period when experimentation with a new technology declines—the trough—before it eventually finds its audience.

In other words, despite the technology’s novelty, banks are finally looking to blockchain as more than a bitcoin underpinning. Instead, they’re starting to view it as a means to improve data integrity, quicken transactions, lower risk and reduce labor.

Carlos Arena, the head of Americas business development at R3, an enterprise blockchain software firm, sees two different approaches to this technology. “There are two ways of characterizing banks’ approaches here: those who are leaders and those who are fast followers,” he says.

Strasser says larger banks are doing more with blockchain at this time, both internally and through partnerships with other banks and even competitors. “My understanding of the benefit of blockchain may be to look for business problems where there are many different organizations looking to accomplish something together: the power of multiples,” she adds.

Community banks making a foray into blockchain

That said, some community banks are now becoming links in the blockchain and are considering using the technology to keep their data secure.

“Top-of-mind issues for our bank are fraud and cybersecurity,” Strasser says. “I think those are two key areas where blockchain could play a role for community banks going forward. In both of these instances, blockchain could be used to determine the integrity of data.”

“Top-of-mind issues for our bank are fraud and cybersecurity. I think those are two key areas where blockchain could play a role for community banks …”
—Kathy Strasser, IncredibleBank

For example, she says, blockchain wouldn’t prevent criminal access. However, it could highlight anomalies in the data, raising awareness that there is a problem somewhere within the network.

More recently, $91 million-asset Kirkwood Bank of Nevada in Las Vegas was purchased in July 2019 by Jeffrey Berns, CEO and founder of Blockchains, LLC, an investment firm dedicated to blockchain. Berns owns the community bank through a separate holding company, JBNV Holding Corp., and not under his blockchain-dedicated venture.

At the time of the acquisition, Berns told the Nevada Independent that while he primarily bought Kirkwood Bank to ensure his company’s access to the financial system, he also sees another purpose.

“[It’s] to create an environment where the blockchain ecosystem, the legitimate businesses out there who are trying to build projects that are going to empower the individual and better the world, that they have a bank that understands what they’re doing and isn’t fearful,” he said.

The question for community bankers, says Arena, is when is the right time for their bank to begin looking at blockchain and, if a use case is right for them, when they should adopt it.

He adds that there’s a risk in losing out on opportunities that leader banks are pursuing: “Early blockchain applications are focused on cost efficiency, but we believe they will soon expand to providing new services and products.”


Karen Epper Hoffman is a writer in Washington state.

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