Plenty of hype surrounds blockchain’s speculative aspects. What’s often sidelined in discussions of crypto technology is how it can help improve banking.
Banking and payment systems haven’t kept up with the pace of innovation in information sharing and the digital economy. Crypto technology—including distributed ledger technology (DLT)/blockchain, smart contracts, and digital assets—offers an opportunity to reinvent transaction banking and payments and meet the dynamic needs of the digital, global economy.
Crypto technology is showing strong potential to transform payment rails (platforms/networks that facilitate the movement of money between payer and payee) and the underlying account infrastructure. Transformation spans critical functions, including payments messaging, clearing, settlement, and liquidity management.
To gauge the transformational potential of crypto technology in banking, a design thinking framework is highly useful. Design thinking is a process that seeks to understand a problem from the customer lens, explore solutions, and iterate and implement solutions. It enables the evaluation of use cases across three dimensions: value, feasibility, and economic viability. For blockchain, these are:
- Value: the benefits and advantages for end-users and providers. What are the clear use cases for blockchain in banking?
- Feasibility: tech and other factors (e.g., collaboration, governance, and regulatory considerations) that result in successful pilots and launches. How can investments by big tech, fintech, and innovative financial institutions (FIs) help make blockchain a reality, while meeting requirements for security/privacy, scalability, and speed?
- Economic viability: scaling and realizing the network effect. How will adoption by banks, non-banks, and end-users in the coming 5–10 years demonstrate economic incentives?
Taken together, these can identify optimal banking use cases, which span from nascent Internet of Things (IoT) payments to trade finance and payments. The next step is to gauge the adoption stage of these use cases. Today, transaction banking and payments-related use cases are the most advanced.
Crypto Technology in Action
As detailed in Mapping the Crypto Galaxy Part 1: Transaction Banking and Payments, cryptonauts—leading players in this space—are building and delivering solutions that are powering transformation. These players fall into three categories:
- Software: Software providers are pushing the development envelope, with use cases linking crypto and traditional systems. They’re building API connectivity between crypto rails (like Ethereum) and traditional rails (like real-time payments), increasing the utility of crypto rails. They’re also piloting IoT and machine-to-machine payments. Cryptonauts in this space focus on:
- Building blocks, where software is used to build a variety of blockchains and digital assets. Solutions from ConsenSys and R3 Corda, for example, meet clients’ use cases for messaging, clearing, and settlement.
- Targeted use cases. Here, software is designed (leveraging building blocks, as described above) for specific client needs or use cases, such as interbank transfers or treasury transfers. One provider, Adhara, offers a full suite supporting liquidity management and payments, with a blockchain-based API that provides direct connectivity to accounts and payments. Another, Quartz, is providing technology solutions that enable the development and integration of business applications built on blockchain technology.
- Retail networks and services providers: The retail space is relatively mature and scaling up. The dominant use case is for remittances, where blockchain and digital assets have proven their ability to lower costs and increase transparency and speed for customers. Cryptonauts in this space span multiple services: messaging/initiation (payment-related information exchanges), clearing (transmitting, reconciling, and/or confirming payment orders prior to settlement), and settlement (discharging obligations in respect to funds between two or more parties). Leading retail cryptonauts include:
- Ripple, an early mover in launching an enterprise blockchain platform supporting money movement, including payment instructions, compliance checks, fees, and confirmation.
- Stellar, which offers a blockchain-based financial protocol that enables digital credit issuance and asset transfer (including the creation, sending, and trading of digital assets). Designed for financial inclusion, its target market is developers and digital wallet partners.
- Wholesale networks and services providers: Less mature, but gaining traction, the wholesale payments space has use cases spanning four categories: B2B, inter/intracompany, intrabank, and interbank. Cryptonauts at varied stages of development include:
- Onyx by J.P. Morgan, an example of an offering from a traditional player. Onyx was formed to build value-added services leveraging scalable, secure production-grade peer-to-peer blockchain-based networks for commercializing new concepts.
- Fintech Fnality, a pioneer in decentralized financial market infrastructure (dFMI). Fnality is developing peer-to-peer payment systems built using blockchain, supported by central bank money.