Banks face “perfect storm” with blockchain
“Banks that are excited by blockchain either don’t have a clue or are happy to be disintermediated.”
Those were the words of Bart Ras, research fellow at Windesheim University of Applied Sciences and managing director of Greensill Capital, speaking at the Supply Chain Finance Community Forum in Amsterdam last week.
His point, he later expounded, is that even though blockchain technology “is great”, its success will result in a lot of losers – chief among them will be banks.
Speaking to GTR on the sidelines of the event, Ras said that banks tend to focus on one optimisation element within the trade chain. While this is a “big advantage” for banks for now, many of them are missing the opportunity to zoom out and take a view of the entire value chain. As a result, they are blind to the reality that many steps before and after this action are still being carried out through old-fashioned processes.
He used the postal system as a metaphor to explain the apparent futility of what banks are doing to digitise their trade processes.
“For example, Royal Mail could say: ‘If you write me a letter, I will type it into an email, then send it electronically to the other side of the world, and then print it off, and deliver it. And by doing so I’ll save seven days, because there’s no shipping involved.’ But, what will happen, of course, is that people will try to write – and send – the email themselves. And then I don’t need my postman anymore; I don’t need my bank.”
This is not to say that banks will disappear entirely, he explained, but rather that they will, in future, function only as pure balance sheets.
“Banks are many different things, but quite a few of [their services] can be better performed by a distributed ledger technology/blockchain solution,” Ras said.
The bigger issue for banks comes with the impact of Basel III on borrowing costs, and whether they will continue to be considered as the best source from which to borrow money.
“They’re being hunted from both sides,” said Ras, referring to the situation for banks as a “perfect storm”.
The good news, he said, is that banks are deeply integrated into governments, meaning that they will be protected by regulatory changes for a long time and “therefore won’t go overnight”.
He ended by calling on industry players to be honest about blockchain’s downside and the potential harm that it could bring to institutions in the trade ecosystem.
This also goes for industries outside of the world of trade. Smart contracts could, for example, be used to find people who violate traffic rules, putting ticket-issuing traffic officers out of work. Likewise, the role of a notary in the property-selling process could arguably be done on the blockchain.
“It’s a cool technology, but not everybody will be happy with it,” Ras said.
The debate over bank disintermediation has stepped up a notch in the past couple of years in light of the strides made in blockchain and its possible use in trade.
“The sector is ripe for disruption because it’s so antiquated. It’s a paper-laden process, there’s still message formatting created in the 70s such as Swift and EDI [electronic data interchange]. It’s pre-internet and it’s not current,” Mark Pryor, CEO of US commodity trading software company The Seam told GTR earlier in the year.
Some blockchain companies involved in trade are already offering downstream financing solutions. Skuchain, for one, offers supply chain financing as an incentive for more suppliers to sign up to use its blockchain solution.
“We have our own special purpose vehicle, a wholly-owned subsidiary of Skuchain. We buy the goods from the supplier, we take title to the inventory. They get immediate working capital relief, at a rate that’s better than the terms the buyer had to offer or that any bank would offer,” says vice-president for business development and strategy at Skuchain Rebecca Liao.
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