Bain Says Inadequate Response to Blockchain Threat Leaves Banks Exposed

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The slow response of banks to the threats posed by Blockchain and Distributed Ledger Technology (DLT) leaves the industry exposed to a $150 billion revenue shortfall unless they can up their game, according to an analysis by Bain.

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Compared with current payment systems, distributed ledgers offer distinct advantages that meet customer demands for a faster, cost effective and more reliable cross-border payment option. While the technology is still in its infancy, distributed ledgers offer the potential for profound improvements in the operation of the complex pipelines that make international payments possible. And, in the long-run, distributed ledgers may impact all forms of payments including domestic cards and automated clearing houses (bank-to-bank).

In interviews with more than 50 senior bankers, venture capitalists, technologists, international payment association executives and start-up CEOs, Bain & Company found most banks are not prepared to retain control of international payments – a battle for a market worth $150-200 billion today.

Bain’s research shows that in theory banks are well positioned to confront the changes triggered by the rise of distributed ledgers. In practice, however, the situation is more complicated. Regulatory and other hurdles may have forced most digital currency start-ups to partner with, rather than compete directly against, incumbent banks. Yet, most financial institutions remain in ‘experimentation mode,’ wary about the scalability of the technology, privacy issues associated with broadcasting commercially sensitive information about money flows, and the volatility and governance of non-fiat digital currencies. With such a large prize available, faster-moving, more committed banks stand to gain significant share.

“Change will not come easily for banks,” said Glen Williams, who leads Bain’s global payments sector and co-authored the report. “They recognize that distributed ledger technology has the potential to improve the speed, transparency and efficiency with which payments are made, but the current market structure gives them a powerful incentive to stay the course. About $300 trillion of transactions flow through these networks each year, creating significant revenues for banks. Further, network dynamics make it hard for alternatives to scale up: participants will not join a network until it has sufficient reach, but reach comes only from widespread participation.”

Banks’ initial responses to fast-moving developments in digital currency – appointing mid-level technology executives to industry consortia, participating in the conference circuit and running limited distributed ledger simulations – have left them flat-footed.

Lack of a clear path forward is particularly problematic for international payments and trade finance, where distributed ledgers have the greatest near-term potential for disruption.

By cutting the number of middlemen and enabling direct transactions between counterparties in international correspondent banking, distributed ledger solutions speed up transaction times. They also ensure that each participant has a complete view of its customer accounts and balances – the key building blocks of automated payment-tracking and notification tools. Finally, distributed ledgers may also significantly reduce costs, including the capital tied up in the correspondent banking network, and error rates.

Trade finance, although a smaller sector than international correspondent banking, exhibits many of the same characteristics. It generates roughly $23 billion of direct banking revenues worldwide, supports many broader transaction banking relationships and suffers from extensive friction points. For example, about 50 percent of banks’ costs for a letter of credit arises from manual document handling and checking, which creates delays, errors and expense. That opens the door to huge potential improvements from distributed ledgers, though commercial offerings capitalizing on that possibility are still in early stages.

“Despite hesitancy among many banks, we see evidence that companies are finding ways to overcome technical and adoption hurdles to avoid getting left behind,” said David Gunn, head of Bain’s payments team in Europe, the Middle East and Africa and the report’s co-author. “The wave of investment in digital currency start-ups clearly signals that payments channels are attracting a new degree of interest, and new competitors are changing customer expectations. Innovation is upon us, and doing nothing is not a viable option. Now is the time for banks to move from experimentation to action.”

In the longer term, as central banks gain comfort with the technologies, the impact zones will shift towards domestic payment systems – including cards and automated clearing houses (i.e. the ‘rails’ over which domestic banks exchange money today). This will impact all banks profoundly, not just those with significant cross-border business.

Banks’ initial responses to fast-moving developments in digital currency – appointing mid-level technology executives to industry consortia, participating in the conference circuit and running limited distributed ledger simulations – have left them flat-footed, claims the consultancy.

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About Richard Kastelein

Founder and publisher of industry publication Blockchain News (EST 2015), a partner at ICO services collective Token.Agency ($750m+ and 90+ ICOs and STOs), director of education company Blockchain Partners (Oracle Partner) – Vancouver native Richard Kastelein is an award-winning publisher, innovation executive and entrepreneur. He sits on the advisory boards of some two dozen Blockchain startups and has written over 1500 articles on Blockchain technology and startups at Blockchain News and has also published pioneering articles on ICOs in Harvard Business Review and Venturebeat. Irish Tech News put him in the top 10 Token Architects in Europe.

Kastelein has an Ad Honorem - Honorary Ph.D. and is Chair Professor of Blockchain at China's first Blockchain University in Nanchang at the Jiangxi Ahead Institute of Software and Technology. In 2018 he was invited to and attended University of Oxford's Saïd Business School for Business Automation 4.0 programme.  Over a half a decade experience judging and rewarding some 1000+ innovation projects as an EU expert for the European Commission's SME Instrument programme as a startup assessor and as a startup judge for the UK government's Innovate UK division.

Kastelein has spoken (keynotes & panels) on Blockchain technology in Amsterdam, Antwerp, Barcelona, Beijing, Brussels, Bucharest, Dubai, Eindhoven, Gdansk, Groningen, the Hague, Helsinki, London (5x), Manchester, Minsk, Nairobi, Nanchang, Prague, San Mateo, San Francisco, Santa Clara (2x), Shanghai, Singapore (3x), Tel Aviv, Utrecht, Venice, Visakhapatnam, Zwolle and Zurich.

He is a Canadian (Dutch/Irish/English/Métis) whose writing career has ranged from the Canadian Native Press (Arctic) to the Caribbean & Europe. He's written occasionally for Harvard Business Review, Wired, Venturebeat, The Guardian and, and his work and ideas have been translated into Dutch, Greek, Polish, German and French. A journalist by trade, an entrepreneur and adventurer at heart, Kastelein's professional career has ranged from political publishing to TV technology, boatbuilding to judging startups, skippering yachts to marketing and more as he's travelled for nearly 30 years as a Canadian expatriate living around the world. In his 20s, he sailed around the world on small yachts and wrote a series of travel articles called, 'The Hitchhiker's Guide to the Seas' travelling by hitching rides on yachts (1989) in major travel and yachting publications. He currently lives in Groningen, Netherlands where he's raising three teenage daughters with his wife and sailing partner, Wieke Beenen.

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