Despite talk of Bitcoin’s broad acceptance in the market, retail banks have not yet fully embraced blockchain technology and are less likely to be able to capitalize on its benefits, according to new research from McKinsey & Co. It may be cryptocurrencies like Bitcoin, which have suffered from a declining reputation following the initial crypto craze of 2017, which have made the “retail banking sector nervous and cautious,” says Matt Higginsin, an author of the report quoted in a detailed article by Bloomberg. This skepticism could be preventing banks from saving as much as $4 billion a year through the application of blockchain technology to issues like cross-border payments, as well as an additional $1 billion per year in client on-boarding operating costs. Blockchain could also help to curb losses associated with fraud to the tune of as much as $9 billion annually, according to the report.
Potential Savings From Blockchain Adoption Among Banks (Per Year)
- Cross-border payments ($4 billion)
- On-boarding client costs ($1 billion)
- Fraud solutions ($9 billion)
Source: McKinsey & Co.
Why Banks Avoid Blockchain
While more adventurous investment banks, governments and even infrastructure providers have explored the numerous applications of blockchain technology, retail banks have been much slower to adopt the new tool. There are many potential reasons for this, including a strict regulatory environment in the consumer finance industry, per Bloomberg. The fact that there are already strong alternative payment services in the digital space such as Zelle could also be a determining factor.
The biggest barrier to retail bank blockchain adoption, however, is likely its connections with the cryptocurrency space. Cryptocurrencies tend to have a bad reputation, despite the fact that they are gaining broad acceptance by major mainstream companies like Facebook (FB) and Fidelity. To many, however, cryptocurrencies appear to be an unregulated, Wild West-like industry replete with bankruptcies, fraud, companies going out of business, price collapses and a general lack of transparency.
What It Means
So long as retail banks avoid utilizing blockchain, they are missing out on billions in potential savings, per McKinsey. Banks, with their intense focus on cost reduction, could stand to save as much as $14 billion per year thanks to blockchain applications. Savings like this wouldn’t even require retail banks to go all in on using blockchain to do everything from processing payments to issuing bonds, as some investment banks have done. However, retail banks also have the significant challenge of convincing their customers to change their behavior, a process Atakan Hilal, another author of the McKinsey report, described as “rather difficult.” Further, retail banks would likely need to change the way they see rival firms in order to embrace new forms of cooperation as they work to build trust as a digital entity in a decentralized network.
Some retail banks, like Santander, have begun to explore blockchain solutions to issues like money transfers. However, retail banks remain hesitant to dive in to blockchain applications. So long as Bitcoin and other digital currencies lack a reputation for stability and security, this may continue to be the case.