Will blockchain technology disrupt the banking industry as it stands today? The answer is likely yes. The ability to reduce fraud, and increase processing power, makes blockchain technology a solution that will impact the banking industry. In October of 2020, PayPal announced that it would allow its 27 million vendors to accept cryptocurrency. This announcement was a shot across the bow to the banking industry as the acceptance of cryptocurrency in many PayPal vendors could eventually be required by banking vendors, especially if they want to keep their clients. If banks are not careful, the fallout could impact their share trading prices.
How Will Blockchain Change the Payment Process?
Blockchain technology creates a ledger that generates a way for two counterparts to agree without using an intermediary. Instead of using a credit or debit card, where both parties need a bank to transfer stored wealth from one party to the next, the transaction is done directly.
No administrators are controlling the platform. Blockchain is decentralized and controlled by miners who perform “proof of work.” The proof process is a paid job, as miners are rewarded in cryptocurrency. This process has been accomplished and does not require the use of a bank to make it work. This notion initially drew the ire of the banking professionals.
JPMorgan Chase CEO Jamie Dimon said of the mania generated by Bitcoin: “It’s worse than tulip bulbs,” referring to the 17th-century Dutch tulip market bubble. Lloyd Blankfein, senior chairman of Goldman Sachs, described the volatility associated with cryptocurrency share trading as untenable. Their defensive statement came in September of 2017, but since Goldman Sachs has changed their tune. Goldman, which is a bank and investment bank, opened a cryptocurrency trading desk.
Another benefit of blockchain technology flows through the Ethereum platform. Smart contracts are self-executing agreements placed on the blockchain. As you can imagine, if you want to change the contract, you have to make another contract. Each contract will remain on the ledger in its initial state. The code that is used to generate the smart contract automatically executes. The process is created to automate manual processes from compliance and claims processing. This type of process can eliminate the administration in a bank’s mortgage department. The process of adding a blockchain ledger could help corporations provide better governance and facilitate the process of sharing data.
Banking Department at Risk
The banking departments in their current state are likely at risk. If blockchain is successful, it could change the way people do work. The blockchain will not remove the need for employees to work, but it may change how they work. For example, payments will be decentralized and remain on the blockchain at lower fees than banks can offer. You still might need to perform an offsetting transaction and might need some help in working that through. Clearing and settling transactions will also be on the blockchain, reducing operational costs for real-time commerce.
The process of raising equity capital might completely change. Instead of a bank offering and IPO to a client, corporations who might want to raise equity capital could use ICO (initial coin offerings). The coin offering is similar to a direct-to-the-market concept that has been used in share trading.
Derivative groups at banking firms will also have a new product that is easier to understand and provide direct access to a market. The tokenization of securities like bonds and stocks will become decentralized on the blockchain. Instead of a bank securitizing a block of mortgages, a mortgage company or credit union could issue these products directly. Direct loans can also benefit from a straightforward blockchain and remove the fees that banks charge for loans and credit checks.
Lastly, the fraud units of banks will likely be altered. Since the blockchain is helpful in decentralizing transactions and having multiple areas that show “proof of work,” a hacker would need to exploit thousands of independent groups simultaneously for a hack to work.
The Bottom Line
The banking industry could come under fire as a blockchain in the finance industry perpetuates. The process has already started, but banks remain trusted and have yet to relent. Many profit centers at banks could be altered when blockchain becomes widespread. The changed platform will still provide human interaction, but the responsibilities of employees will likely change. Blockchain technology is in the process of changing how we generate contracts, and this could also alter the way a bank issues mortgages, securities, and payments. Banks have been resistant to the change, but they now have competition from PayPal and Square, leading the charge in blockchain payment processing. If the banking industry does not catch on quickly, they could be left at the altar.