Blockchain in Retail Banking

About the author:

Sajjad Hossain Chowdhury is a finance professional with an enthusiasm for technology. He has worked in various Banks and Financial Institutions of Bangladesh on various capacities.

He is a passionate believer of implementing technology for financial inclusion. He also worked in implementing South East Asia's First Blockchain-Based Digital Supply Chain Finance Platform.

Currently, Mr. Chowdhury is working with Sheba Platform, one of the leading Fintech companies of the country


When it comes to Retail Banking, some experts say that it is the face of a Bank, which helps it build its customer experience and clientele base. Over the years, Banks have moved away a lot from the traditional form of Retail banking; deploying various technological platforms and digital solutions which help the customers get the services from the ease of their home or on-the-go. However, when it comes to implementing Blockchain in Retail Banking, the issue is a bit off-steam.

Since its inception, Blockchain has been considered as a technology that can change things on the wholesale side. For example, Government Bodies, Investment Banks, Wholesale Credit Organizations and even Infrastructure Funds are investing heavily on Blockchain Technology and experimenting with the belief that a shared electronic ledger will help them cut costs and increase transparency. In addition to Innovation Labs and collaboration with Fintech Firms, Banks are now arranging Hackathon Competitions to understand the benefits through implementing this technology in the retail side. In this context, there are some areas which can be focused on implementing Blockchain technology.

On-boarding through digital KYC: KYC protocols are one of the key areas where Retail Banks are investing more and more. It builds the platform for Banks to fight against frauds, money laundering and combat fraudulent activities. Through digital transformation, Banks are trying to automate and digitize this process by introducing real-time information sharing and building predictive platforms for early alerts. While these efforts have increased efficiency, it has resulted in longer onboarding time and increased costs; which reflects the manual efforts required and change in the operating models.

Implementing Blockchain can be a potential solution. For the unique ID feature, digital fingerprint can be considered which can be taken during onboarding from the Applicant. It can later be stored on a Distributed Ledger and shared with other banks via a shared network. As such the KYC, AML and other compliance-related issues shall be decentralized, eliminating the overlapping requirements of each bank (through a shared network) and allowing Banks to minimize cost by disseminating updated data among themselves (lightening the information load). With this, an Applicant can open an account with a Bank by providing his/her digital fingerprints and later can prove his/her identity universally without being asked for repetitive information in other Banks.

According to a report from McKinsey (published in June, 2019), customer onboarding solutions based on Blockchain can minimize operating costs for Banks to the tune of est. USD 1 Million globally and also reduce regulatory penalties from USD 2 Billion to 3 Billion. Also, it can reduce fraud-related losses from USD 7 Billion to USD 9 Billion annually. There are examples of such implementation by the big names like HSBC, OCBC, National Bank of Canada, Scotia Bank and TD who have collaborated with Fintech firms in this regard, resulting in efficiency and cost reduction in all of the cases.

While there are many benefits, the challenges of such implementation also need to be taken into consideration. First, the operational cost of migrating from individual to shared ledger-based system is high. Also, Banks need to adapt to the information or changes such implementation shall provide. Using a shared network can create questions of shared responsibility, in which case Regulatory issues can put all the Banks in the network into a dilemma. Second, data sharing among banks can create a challenge in terms of providing personalized services to the customers. As mentioned, Retailed Banking focuses a lot on creating an enjoyable customer experience; with shared data Banks will not be able to provide additional support to its customers. Third, customer acceptability of providing digital fingerprint and providing authentication support can be an issue. Till date, this seems to be a relatively alien concept and customers can raise the question over the confidentiality of their data. Fourth, a large sharing network engaging a lot of Banks need to be implemented to achieve the benefits like cost minimization, data standardization and collaboration. This is something which Banks are not known for a lot.

Another area is Remittance payments which have an annual global market of around USD 850 Billion. However, the process is mediated and engages a lot of parties until it reaches the actual Beneficiary. As a result, the cost of a transaction can range from 2% to 10% of the value, a loss for the Beneficiary. Despite efforts from organizations like The Society for Worldwide Interbank Financial Telecommunications (SWIFT) to standardize the payment process, there are inefficiencies in the system.

Instead of the regular currencies in the current system, Blockchain technology can allow the users to transact in cryptocurrencies (digital currencies that do not need a central regulating body). This shall enable to do transactions in minutes instead of days in the current system. The distributed nature of blockchains would ensure transparency and immutability, so the transactions shall be safer than the model we currently use.

McKinsey estimates that blockchains applied to cross-border payments could save about $4 billion a year. This model has already been pilot in countries with great effect. In late 2017, Australia and New Zealand Banking Group, JPMorgan Chase, and Royal Bank of Canada launched the Interbank Information Network (IIN), a cross-border payments service.

There are a couple of barriers in such implementation. For example, the members of the Blockchain network can have clear visibility over the transaction, which can create a threat to anonymity or data privacy of the customer, if required. Transactions can be marked with unique numbers but that idea is still in nascency. Also, the crypto-currencies are highly volatile in terms of value due to which they can not be used for real-world currencies.

It can be confirmed for sure that Blockchain Technology could add a great value to the Retail Banking segment. Lower costs, less friction, and a safer retail banking system is the ideal prize for implanting the technology properly. Despite the slow start as compared to Wholesale Banks, they had a slow start in adoption and implementation. But the challenges are real. To overcome the odds, regulatory engagement from The Central Banks needs to be ensured. Without a regulatory framework, it will always be a challenge to put the ideas into reality.

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