Blockchain: Transforming correspondent banking
Posted: 2 February 2016 | Paul Golden, FX-MM | No comments yet
Blockchain’s potential to change the way many banking processes – including correspondent banking – function has created a dilemma for financial institutions uncertain of how best to use the exciting new technology, writes FX-MM’s Paul Golden…
A report published by research firm McKinsey last October stated that the blockchain promises to streamline cumbersome, costly and risky correspondent banking networks and also has the potential to replace existing proprietary ledgers, enhancing transparency, improving the predictability of settlement and reducing operating expenses significantly in securities trading and similar over-the-counter products.
Using blockchain-based smart contracts as advocates or agents, explains Melanie Swan, Founder of the Institute for Blockchain Studies, would enable a number of routine tasks requiring trustworthy remote agents to be outsourced.
“Such contracts might take over many forms of pre-specified contractual relationships,” she says. “Several banks are running pilot programmes to investigate potential implementation cases. These programmes include partnering, which could be with competitors to collaborate in shared blockchain networks, with vendors or with other non-traditional partners.”
Philip Gomm, Capgemini Industry Practice Leader, Financial Services, says that behind closed doors, financial services organisations are hurrying to understand how blockchain and distributed ledger technology is solving fundamental
trust issues in correspondent banking models. However, he believes that the model will remain relevant.
While describing traditional correspondent banking relationships as ripe for change, noting that pressures on banks to serve their customers better, faster and cheaper are mounting and accepting that blockchain is a potential solution to issues of speed, cost and complexity, Daniel Marovitz, European President, Earthport, also observes that “while a tipping point is coming”, banking is a conservative industry and that moving a massive interconnected global infrastructure to new models takes time.
“Banks are simply not set up for innovation and change – in fact they are set up for status quo maintenance – so looking outside for change is logical,” says Marovitz.