Revolutions occur in sudden sparks. The FinTech revolution, however, has been more of a marathon than a sprint. And blockchain’s role in that upheaval seems even more of a relay race — smaller bursts of disruption — than an all-at-once disruption of the global payments sector.
A new report from Citigroup makes the case for this gradual, uneven evolution when it comes to blockchain technology and the banking sector. It’s an important conclusion, especially as banks simultaneously fear and embrace the potential for blockchain to change the way they operate.
One of the more loaded revelations from the report: Banks really only have to worry about disruption from blockchain technology in some aspects of the financial system, like trade finance, and less so in other aspects, like cross-border payments.
The reason, authors Keith Horowitz, Adrien Porter and Michael Cronin wrote, is because banks are needed for the transfer of money, whether blockchain is involved or not — at least, for the near term.
“Large international banks are needed to transfer value across borders since currencies can only travel physically within their respective central bank system,” wrote Horowitz, according to a report covering the new paper in The Wall Street Journal. “Central banks are likely not willing to cede control of the money supply.”
That doesn’t mean major financial institutions, like Citi, can breathe a sigh of relief and altogether forget about blockchain.
“Banks have served as trusted intermediaries,” Horowitz told PYMNTS about the role FIs play in the transfer of money. “The whole concept of blockchain could disintermediate the banks, so this is an important topic to understand.”
These financial institutions seem to be aware of that importance, too. Citi, like dozens of other banks across the globe, is part of the R3 Consortium, a collaborative effort to explore and develop blockchain-based solutions.
Citi has taken its involvement in this exploration a step further by developing its own cryptocurrency, Citicoin, an internal experiment that the bank said it is keeping within its laboratory walls but will still help the company understand the potential of a bitcoin-like tool nonetheless.
But if banks are to understand where blockchain’s disruption could hit the hardest, they must go to the customer. That, explained Horowitz, is what researchers did for their report, adding that the team made calls to corporate clients to identify their top challenges that blockchain innovators might be looking to solve — or maybe already have — that banks haven’t been able to.
For instance, some startups operating in the blockchain sphere are looking at how to disrupt corresponding banking, the strategy used by FIs to complete cross-border transactions.
These companies often cite the fees associated with cross-border payments as one of the largest pain points for payers, as the cost of making a payment internationally goes up with each corresponding bank that touches that transaction.
But Horowitz said the interviews with corporate banking clients suggest otherwise.
“We don’t think the pain point is the fees,” he said. “With corporates, when you get down to the real pain point, it’s on the reconciliation side.”
Blockchain technology could perhaps overtake services, like letters of credit and other aspects of trade finance at the banks, Horowitz said in an interview with WSJ. It’s a far cry from the initial reaction to bitcoin, he told PYMNTS.
“Initially, people viewed this, conceptually, as being able to transfer value over the Internet; on the face of it, that sounds really disruptive for the banks,” he said. “But I think what’s happening right now is that some of the initial use cases are leveraging more of the ledger aspect of [blockchain].”
He added that innovators likely to gain the most traction in the market today are those that are developing ways to integrate data and information along with a payment. It’s easy to see, then, why letters of credit, with the information they carry about a transaction, could see more disruption from blockchain technology than the actual transfer of payments itself.
This argument also suggests that these use cases for the technology could be more beneficial to banks than threatening, with financial institutions still a part of the transaction and more able to solve pain points for their customers, Horowitz said.
One of the most poignant takeaways from Citigroup’s report is that blockchain isn’t a direct threat to the traditional banking ecosystem — yet.
“We don’t view blockchain as an intermediate-term strategic threat to the profitable high-value cross-border payments business for the banks,” Horowitz stated in the report, as reported by WSJ.
But with certain units of banking prime for eventual disruption by blockchain technology, financial institutions need to stay on top of it.
“They have to be looking into it,” Horowitz stated of blockchain technology. And while, as the report laid out, there are “practical challenges” for that disruption to materialize, that doesn’t mean the industry won’t overcome those hurdles.
“We believe [blockchain] is a really powerful technology,” Horowitz added. “But I think there’s also a lot of hype that’s around these huge solutions.”
It’s not a sudden dash to industry disruption. Instead, the author suggested, there will be “relatively small breakthroughs” that force a few cracks in the foundation of banking and payments.
Eventually, though, those tiny fractures can take down a castle, and as Citigroup’s report points out, there are already disruptors that have made a dent in that evolution.
“It’s easy to get caught up in the hype, but we do think it’s not all hype,” said Horowitz. “We do think there are some real pain points for customers, and we think there are some really good companies out there that are solving real problems using this technology.”