In the push toward the successful implementation of same-day transactions and real- time payments, splashy technology may not be the right fit for our financial institutions. As banks make a concerted push toward real-time payments, one industry expert believes it is increasingly unlikely that FinTech innovations like the blockchain will be viable to serve as the backbone for an integrated solution.
Although our venerable financial institutions can learn lots from independent technology players as they develop their own secure, regulated real-time offerings, they will likely need to work atop existing infrastructure to rein in risk and meet regulatory compliance requirements. Innovative, independent FinTech options potentially open windows for risk (mostly unforeseen) that just seems too great for risk averse financial institutions and their customers to take on.
As for the blockchain itself, which has generated tons of press and general heavy breathing, MPD Founder Dr. David S. Evans offers an interesting comparison. The blockchain, Evans posited, “is the Kim Kardashian of financial technology.” People love to talk about sexy technology, he said, and the blockchain sure seems sexy, but financial institutions may not find that it is so practical to live with. The blockchain is a technology that was first used for bitcoin and requires a distributed decentralized group of “miners” to run computers to process transactions.
There are many other software innovations in financial technology beyond the blockchain, Evans pointed out. He added, “The thing that should make everyone nervous about the blockchain is all of the problems that the bitcoin itself has had using the blockchain.” In other words, the blockchain is high-maintenance.
If banks were to actually utilize the blockchain, which seems unlikely, Evans said, the blockchain would need to be divorced from bitcoin itself. While it’s not out of the realm of possibility to create a blockchain that doesn’t depend on bitcoin, the cost of implementing and organizing a new distributed group of miners may be prohibitively costly and complicated. Creating a governance system and standards has proven challenging for bitcoin — and would likely be a problem for anyone who tried to create their own blockchain.
According to Evans, when it comes to faster payments, the banks are going to be central players. “We may complain about them, but we actually like putting our money in heavily regulated institutions,” Evans said. “And central banks and governments like the fact that there is some control over the financial system. So the notion that we’re going to go to something that is not connected to the financial system, that’s just not going to happen.”
The vast majority of Americans keep their money in depository accounts, Evans pointed out. And many who don’t would like to, if they could afford it, he noted. As a practical matter, he added, the odds are stacked against the possibility of the current financial system being displaced by something else outside of the system.
So then why does it seem that banks are paying legitimate attention to FinTech innovations like the blockchain? According to Evans, a few million dollars’ investment from individual heavyweight financial institutions doesn’t mean a seismic shift is imminent. Banks, like other companies seeking to retain customers and grow, need to invest in innovation research. “But it’s not like it’s a big deal,” Evans said. It’s only millions of dollars, which are, “tiny, tiny, tiny investments being made by massive institutions,” he noted. It’s sort of like people buying lottery tickets, he said. In other words, it’s a small investment to make to potentially hit the technological jackpot.
Along with the cost and complexity of removing cryptocurrencies from technologies, there’s also the tall task of ensuring control and the highest security standards. When it comes to banks and technology, three things inextricably intertwine: technology, security and regulation.
“It is inevitable that technology and regulation will continue to change, and security processes will therefore also evolve,” said Janet O. Estep, president and CEO of NACHA – The Electronic Payments Association.
“We have seen this with the ACH Network, which has continuously evolved since its beginnings – adapting as the environment changes. The next change for the ACH Network will be moving its payments and information to same-day clearing and settlement cycles. The tools and processes that are developed around the ACH Network to support end users and mitigate fraud will be helpful as the U.S. moves to even faster payment cycles.”
In order to ensure new technology is properly developed to solve banks’ faster payments needs, existing rails that underpin the payments must work more effectively than they do today. “Everyone talks about faster payments and real-time payments and so forth,” Evans said. “But what’s really going on is there is a desire to come up with a better set of rails.”
The solution to clearing the hurdle to develop an industrywide software layer may well be inspired by current technologies, but it will likely need to be custom-made for the financial industry, perhaps taking learnings from multiple platforms and creating an entirely new technology.
Just because financial institutions are popping the hood on innovations like the blockchain, doesn’t mean they are going to start using it.
So, what’s next? Whatever the solution(s) may be, they’ll need to be developed to work with banks’ existing software systems and, as we put forth in the first 2016 Faster Payments Tracker, a massive effort is underway, led by the Fed, for real-time payments ubiquity by 2021. And as NACHA begins to rollout its Same Day ACH solution this year, the ride could get interesting.
Buckle up for faster payments!