Sector Report

Blockchain in the financial markets

by Mar 4, 2016


The financial-services industry has come a long way in the past couple of years. Two years ago, banks wanted nothing to do with bitcoin. Yet a year ago, the needle moved, and the mantra effectively became “bitcoin bad, blockchain good.” But still, banks were among those least interested in the

technology. Fast forward six months and major financial institutions worldwide have rapidly become blockchain technology’s biggest advocates – ironically, the very institutions bitcoin was meant to displace.

Blockchain technology is emerging with potential disruptive effects, especially for financial services.

Similar to how the internet enabled the secure, instantaneous exchange of information, this technology creates the potential for the immediate exchange of value, whether financial or other. For the first time, two unknown and untrusted parties in different locations can exchange

value without relying upon a “trusted” intermediary, a key role of banks and payment firms. It is no wonder the topic is hot. On conference calls in 2016 so far, the largest US bank and payment firms mentioned the word “blockchain” as much in each month as they did for all of 2015 combined.

Financial firms are playing offense and defense, likely because the range of outcomes is so wide. On the upside, this could be the industry’s “Uber” moment, allowing for better, faster and cheaper outcomes for providers and users. Payment firms may gain new revenue, potentially by better serving thee stimated US$6tn in cross-border commerce facilitated today by small business. Banks can better manage costs (tens of billions of dollars for upgrades of 1960s-type back offices), equity (tied up for shorter periods) and controls (a permanent record creates an audit trail).

On the downside, firms with business lines in trade processing may see margins compress, market share fall and declines in economies of scale, which could become less of a competitive moat. For these firms, blockchain technology could prove deflationary since fees get whittled down as friction is eliminated from the system – as costs get turned into savings for investment firms. There is also a risk that investment dollars are wasted as management teams operate out of fear. Perhaps, ironically, blockchain implementation could help cement banks’ roles as financial intermediaries,  intermediating workflows that increasingly depend on trusted third-party institutions of their own.