Wednesday 22 April 2020 10:54 am BEQUANT Talk

How will Blockchain revolutionise financial services?

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In a recent PwC report, it was estimated that distributed ledger technology could reduce financial services infrastructure cost between US$15 billion and $20 billion per annum by 2022. This would positively impact both business and consumer banking in many unexpected ways.

To truly understand the magnitude of the problem Blockchain can solve, one should look no further than the IT systems employed by global banking.

Legacy Systems

COBOL is not a word you hear every day. For two reasons, one is that it is a coding language that the financial sector, major corporations and even parts of the US federal government still largely rely on and which underpins powerful systems that were built back in the 70’s. Two – is that there’s virtually nobody alive today that knows what it is, or, for that matter, how to fix it.

An estimated $3 trillion in global daily commerce flows through COBOL systems. The language underpins deposit accounts, check-clearing services, card networks, ATMs, mortgage servicing, loan ledgers, exchanges and other systems, research from Reuters shows. The system is both expensive and dangerous to maintain in the long run.

COBOL code is part of what’s traditionally called a legacy system – where old, outdated architecture runs outdated software to perform modern tasks for the financial system of the 21 century. Each bank has its own legacy system and often none are connected or integrated – which means somewhere in the middle they have to reconcile. This makes for a lot of expensive, slow and often inefficient interfacing.

Infrastructure Transformation Under Way

A report by Oliver Wyman suggests, “IT and operations expenditure in capital markets is currently close to $100-150 billion per year among banks. On top of that, post-trade and securities servicing fees are in the region of $100 billion. Significant capital and liquidity costs are also incurred because of current delays and inefficiencies within market operations.”  

The back and middle offices of investment banks, exchanges and payment providers face this every day. Accenture estimates that investment banks spend around two-thirds of their IT budgets supporting legacy back-office infrastructure. 

Accenture outlines the following blockchain enabled opportunities:

  • Finance reporting costs could shrink by 70% as a result of the optimized data quality, transparency and internal controls;
  • Compliance costs are estimated to drop by 30% to 50% at the product level due to the improved transparency and auditability of transactions;
  • Centralized operations supporting functions such as Know-Your-Customer and client onboarding could see costs reduced by 50% by the establishment of more efficient processes;
  • Business operations such as trade support, middle office, clearance, settlement and investigations could see their operating costs being lowered by 50%.

BNY Mellon has launched US treasury bond settlement BDS360 with blockchain technology.

Santander launched One pay FX in 2018 to roll out a distributed app (Dapp) offering same day International transactions for customers in Brazil, Spain, U.K, and Poland. The traditional system takes three-five days.

Exchanges alone stand to benefit massively, because of the efficiency blockchain would introduce. 

“When compared to the costs NYSE incurs for example and what a digital asset exchange would cost to run – Blockchain technology offers savings of more than 90 percent” says Mark Berger, leading BEQUANT’s Exchange Services sales strategy.

NASDAQ has already started to implement blockchain enabled efficiencies.

The Australian Stock Exchange (ASX) began to evaluate replacement options for the Clearing House Electronic Subregister System (CHESS) in 2015. Eventually, ASX selected a company to develop a distributed ledger solution for clearing and settlement of trades.

Japan Exchange Group (JPX) and IBM are working towards testing the potential of blockchain technology for use in trading in low transaction markets.

In Germany, Deutsche Börse and Deutsche Bundesbank presented a prototype for blockchain based settlement of securities in November 2016.

Human Capital

Industry experts also believe that between 2 – 6 million jobs will be lost to digitization of finance, according to a report by Citigroup. 30 percent of banking jobs are at risk. Automating the reconciliation and operations cycles alone would lead to changes in the makeup and size of banking teams. New opportunities provided by Blockchain will lead to big reshuffles in the workforce. The inefficiencies are obvious.

In the first quarter of 2018, Deutsche Bank posted net profits of $146M. The bank has 97,000 employees, meaning each one was responsible for approximately $1,505 in revenue.

In the same period, Binance posted profits of around $200M, with an estimated 200 employees. That makes for – $1M each.

Profit centres that leverage financial inefficiencies will be hard pressed, and considering most of banking is plagued by similar problems, this means that shareholders will be pushing for quick changes. HSBC has already announced last week, that it will be cutting 30,000 jobs and investing in digital finance

Goldman Sachs CEO Lloyd Blankfein has once stated “We are a technology firm. We are a platform,” back in 2017. Goldman is taking huge steps to automate and increase efficiencies. To put things in perspective, when Goldman automated its US cash equity trading desk in the 2000s, its headcount of traders went from 6‬00 to 2. In it.s report Goldman calls Blockchain “the technology of trust.” In February 2020, Goldman and Citi quietly conducted a historic transaction – the first equity swap on Blockchain.

Blockchain will change the way banking is perceived and alter the financial services landscape. Just like the Internet changed the way we access services, Blockchain will disrupt and transform the way we look at them. Tech enhanced efficiencies will play a pivotal role. Shareholders looking to maximise profits in an increasingly competitive industry will be looking for better, faster, more efficient, and ultimately pass the savings to the industry and customers.