Some weeks ago I was talking with some well-connected and experienced bank manager about this and that and suddenly we jumped into the new hype of blockchain and had a quite interesting conversation. He told me about the tremendous hope his institution puts in this new founded technical wonder. And I agree upon his opinion, things like the blockchain can give banking a completely new shape.!
New approach from outside banking - as usual?
So blockchain is the very sophisticated technology behind the BitCoin approach or to describe it in one sentence, it is the sequential transaction database which is derived from the set up of cryptocurrencies. It is a distributed storage and verification tool for all transactions in a system. For a deeper insight please have a look at a great article in Financial times.
The biggest thing that comes with this blockchain approach is, that there is no central management system or kernel for organizing all the transactions. Based on a clear identification and decryption protocol every transaction can be confirmed on itself and will be stored in a decentralized but always up-to-date storage, the famous blockchain. This gives a major jump in how banking works as you don’t need the mass investment of a core banking system with all the maintenance aspects and you dot need any more all the intermediaries between sender and receiver of funds. And this comprises all kind of funds, money, stocks, bonds – simple anything can be exchanged securely between two players.
So today, if someone wants to buy some shares he is asking his bank to take the order and send it to the market. As typically there are some few intermediaries in between until the order reached the broker. From there it goes back through the same long lasting and fee consuming chain of intermediaries. And that happens on the other side with the seller. Behind this process are reasons like that the market should be transparent, governments want to secure and oversee the transactions and so on.
Tomorrow you have a direct connection between all sort of buyer and seller and both can be assured that the transaction is valid, but all players on the market get an update in their shared database, the blockchain. So all can see the trade and government can monitor and control. And let’s assume a not so open world. I mean, that nor everyone but certified players can become banks and follow some from banking authorities or governments agreed reasonable rules for being part of this money system, we have still the advantages and possibilities are tremendous.
Disruption from the backbone
Every new player can be part of the system and grab his place in the industry. The barriers for market entry are no longer that high in terms of necessary investments. And this can disrupt banking much more than all the new ideas for better look & feel or client convenience. For me still the biggest gain comes from an efficient and smart set up of the core banking facilities. If a bank reaches there significant automation and finds smart ways to change for new requirements, than banking has reached the era of digitalization. We will see!
Your K-Street6 team