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Blockchain in Banking: Moving from Hype to Reality in 2017

Posted by Pramod Krishna Kamath (View Profile | View All Posts) at 6:44 AM

Blockchain has been a topic of discussion ever since its inception in 2009 as the underlying technology for Bitcoin. The industry has seen intense debate and deliberation on the potential of blockchain, with many claiming, that it is as foundational, as the internet. Some banks state that they have moved past deliberation stage on blockchain, and are starting proof of concepts around this technology. 

As with any disruptive technology, there are questions in its wake - where do we stand as an industry with respect to blockchain technology after eight years? How much of blockchain is still hype and how much of it is now a reality? What is the way forward with this technology? To find answers to these questions, Infosys Finacle partnered with Let's Talk Payments (LTP) on a research surveying more than 100 business and technology leaders from over 75 financial institutions.

When it came to investing in this technology, 50% of the banks surveyed have already invested in blockchain technology, or will do so in 2017. In terms of degrees of adoption of blockchain technology, 15% of the banks are innovators, 35% are early followers. The rest (50%) that are waiting for the technology to mature, are late adopters. While average investment in blockchain projects in 2017 is expected to be $1 million, the innovators have already invested funds over $10 million. These investments not only support blockchain initiatives, but also explore use cases beyond the traditional realm of cross-border remittances, clearing, and settlement.

Banks are now moving towards commercial adoption, and one in every three banks expects to see commercial adoption by 2018. While 50% of the surveyed banks expected to see commercial adoption only by 2020. Cross-border remittances, digital identity management, clearing and settlement, letter of credit processes, and syndication of loans are the most likely candidates for commercial adoption.

Based on preferences for blockchain adoption, private permissioned blockchain is the popular choice with a whopping 69% of banks in its favor. Partnerships come in second as the next preference for blockchain adoption.  About 50% of the banks are either working with a fintech startup or technology company to augment their blockchain capabilities, while another 30% are opting for the consortium model.

A section of the survey also dealt with the banks' expectations from blockchain for the industry.  Based on the responses from the surveyed banks, it can be concluded, that the banking industry should see blockchain projects going into production in 2017 itself - albeit in a small way and for simple use-cases. It is expected that blockchain adoption will start with the most convenient areas, and then it will slowly progress towards transformative and complicated areas. The phased approach towards blockchain implementation is preferred because banks and financial Institutions want to create networks with already established partners in the industry; partners that are already aligned with their process, or internally.

The first use cases that will see the light of the day in the next couple of years are intra bank use cases, or use cases, which can be tested with incumbent inter-bank relationships. These are most likely to be in areas such as digital identification and cross border payments. Furthermore, the next 2-5 years will see more of inter-bank use cases, and cases that involve regulators - such as trade finance. Beyond 5 years, there will be widespread adoption of this technology in the financial services and banking ecosystem. Progressively, by 2020, the adoption of blockchain based applications will increase in several businesses. The larger part of the ecosystem adopting this technology will include players like the government, corporations from other industries, and possibly even end consumers.

Based on the findings of the report, it is no longer a question of whether banks will adopt blockchain; but more of when and how they will implement it. This research reaffirms our belief that banks must experiment with the technology in a controlled environment to discover the value it can bring in their context and based on the outcomes of the experiments commit towards production deployments. We hope banks will find this report useful while crafting their organization's blockchain adoption strategy.

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