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While it’s understandable to be wary of new and untested territories, “there are a number of areas where [blockchain] could create value for retail banks,” according to major consulting firm McKinsey and Company.

In the June 2019 article they claim that while retail banks have been quick to adopt, adapt, and develop digital business models, now being providers of data-based services and mobile banking, they’ve been very slow in doing the same with blockchain. The authors Matt Higginson, Atakan Hilal, and Erman Yugac explain that: “None of the financial industry’s initiatives have been rolled out at scale, and tough regulatory requirements in banking create a high barrier to entry”, adding “The future regulation of blockchain itself remains uncertain.”

On the other hand, we’ve seen investment banks, infrastructure providers, even governments testing the blockchain territory, hoping to increase safety and transparency, while cutting costs. Wholesale banks are partnering with fintechs, launching innovation labs and hackathons, while more than 200 institutions work with the software firm R3 on developing blockchain solutions on an open-source platform. Furthermore, venture-capital funding for blockchains reached USD 1 billion in 2017, the authors of the article say.

In his January 2019 article, Higginson wrote that blockchain players, such as Ripple, are “increasingly partnering with non bank payments providers, the businesses of which may be a better fit for blockchain technology. These companies may also be willing to move forward more rapidly with integration.”

In the current article, five months later, the authors claim that, overcoming their regulatory concerns, there are some retail banks who have started experimenting with blockchain. One example is Santander’s partnership with Ripple in 2018, which resulted in the first blockchain-based money-transfer service, enabling international money transfers in euros and dollars. “Still, for the retail banking industry to move forward at scale, further proof of value will likely be required,” the authors state.

For example, Germany’s central bank president Jens Weidmann said recently that a trial project using blockchain to transfer and settle securities and cash proved more costly and less speedy than the traditional way. However, the prototype "in principle fulfilled all basic regulatory features for financial transactions."

Three retail banking use cases

The authors have discussed three retail use cases “that could eventually be deployed at scale and which offer most in terms of blockchain’s three key strengths—data handling, disintermediation, and trust.”

1. Remittances

While the growing cross-border payments total around USD 600 billion annually, the payment process is “clunky, opaque, and highly mediated”, which makes the fees rise. With blockchain, there would be greater transparency and immutability, and estimated USD 4 billion saved annually.

They write: “[…] blockchain may be able to generate value by fixing certain inefficiencies. If counterparties were to exchange cryptocurrency assets (digital currencies that do not need a central regulating body) rather than fiat currencies, for example, payments could be made and settled in minutes via blockchain, rather than in days as with current systems.”

RippleNet is an example here, as is the Interbank Information Network (IIN), a peer-to-peer network powered by blockchain technology, launched by JPMorgan Chase in 2017.

Barriers to adoption at scale include limitations to anonymity and the current impossibility of real-time settlement.

2. Know-your-customer (KYC)/ID fraud prevention

“KYC protocols are critical tools in the battle against fraud”, stands in the article, with banks losing USD 15-20 billion every year from identity fraud alone. There are also intensifying regulatory pressures to protect customer data placed on banks. The current solutions they employ “have increased efficiency but have led to longer onboarding times and higher costs.”

With blockchain, the entire onboarding process is simplified and a lot faster; overlapping KYC and AML compliance checks are eliminated and information burden lightened; banks can disseminate data as it is updated; and it can create up to USD 1 billion of savings in operating costs for retail banks globally and reduce regulatory fines by USD 2-3 billion to USD 3 billion. “In addition, we expect blockchain solutions to reduce annual losses from fraud by USD 7 billion to USD 9 billion.”

Blockchains is being tested in ID fraud detection. One example is the creation of digital identify networks. In 2017, Bluzelle, a blockchain-based data-storage startup, worked with a consortium of three banks in Singapore. They’ve tested a platform for KYC, which showed that a blockchain platform would “improve efficiency, cut the risk of financial crime, and heighten responsiveness to performance and scheduling needs”, with cost reduction of 25%-50%.

Challenges here include heavy capital costs needed for switching from individual to shared systems and a list of practical challenges that have to be overcome in every step of the way, from the customer, over the merchant, to the bank. “In addition, banks must adapt to a significant evolution in culture, which is predicated on the need to share data.”

3. Risk assessment using customer data

Risk assessment is often complicated, there is a lack of information, and “may not have made enough noncash financial transactions for assessing their creditworthiness. As a result, banks tend to be conservative when making credit decisions.”

With blockchain, banks would theoretically be able to see data uploaded by any bank within the network, which would lead to “faster decisions, more efficient processes, and the potential for a more informed credit-allocation process.” Challenges here are both technical and cultural, so it might be more difficult to bring banks and customers on board.

Three things to increase adoption

The authors find that these three things are needed to increase adoption of blockchain:

A more seamless transition between fiat and digital assets; this way, customers do not risk losses when they switch. A solution is for central banks to issue a crypto fiat, which would support product manufacturing, enable real-time peer-to-peer payment, and possibly cross-border interbank clearing and settlement.

Regulation; this way, everybody involved would “have certainty around the status of crypto assets, rules of engagement, and investor protection.”

Consumer identities created on the blockchain; this way, banks would be able to offer real-time loan decisions based on authenticated ID.

Additionally, “there needs to be a strategic watershed”, since executives have to believe that the long-term benefits of blockchain are worth the cost, the article emphasises.

“The key to countering those concerns is to keep an eye on the prize: lower costs, less friction, and a safer retail banking system,'' the authors write.