Blockchain Tech could Save Banks $20B, says new Santander Report

“It is only a matter of time before distributed ledgers become a trusted alternative for managing large volumes of data,” argues Santander Innoventures, the venture arm of the Spanish bank Santander, in a new paper.

In collaboration with fintech venture fund Anthemis and research firm Oliver Wyman, the report, titled The Fintech Paper 2.0, dived into how emerging fintech technologies, including the decentralized ledger behind digital currencies, could affect banks.

One of the more interesting conclusions from the report was that blockchain tech could save banks $15-20 billion by reducing “infrastructure costs attributable to cross-border payments, securities trading and regulatory compliance.”

Many potential applications

The report briefly touched on the commonly recognized potential of the blockchain to store data and messages in a secure form, “Each transaction in the ledger is openly verified by a community of networked users rather than by a central authority, making the distributed ledger tamper-resistant; and each transaction is automatically administered in such a way as to render the transaction history difficult to reverse”

Instead of banks relying on a clearing house to maintain a centralized ledger, they could use a blockchain to do it in a peer-to-peer fashion. Besides being much harder to tamper with, the report also oultined benefits in terms of efficiency and transparency. “The first major application is being seen in payments”, read the report.

“International payments remain slow and expensive and significant savings can be made by banks and end-users bypassing existing international payment networks.”
— – The Fintech Paper 2.0

Diving into some of the more technical aspects of digital currencies a range of applications were described, “In time, distributed ledgers will support ‘smart contracts’ – computer protocols that verify or enforce contracts. This will lead to a wide variety of potential uses in securities, syndicated lending, trade finance, swaps, derivatives or wherever counterparty risk arises. For example, smart contracts could automate pay-outs by the counterparties to swap contracts.”

“Almost any intangible document or asset can be expressed in code which can be programmed into or referenced by a distributed ledger.”
— – The Fintech Paper 2.0

The conclusion goes on to explain the lack of historic disruption in the banking market, highlighting personal finance and payments, “advances in technology and growing investment in fintech set the scene for more radical change.”

Fintech 2.0 is described as a variety of providers combining to deliver cheaper and easier-to-use propositions to end customers, “a seamless specialisation across core elements of the value chain”

“The message to banks and to fintechs is the same: if you can’t beat them, you should join them to achieve Fintech 2.0.”
— – The Fintech Paper 2.0

Financial institutions are actively exploring

Santander is the latest bank to start exploring blockchain technology. UBS Bank recently shed some light on experiments being conducted at its Innovation Lab, revealing projects involving blockchain-based smart-bonds.

“Risk-free interest rates and payment streams were fully automated, creating a self-playing instrument.”
— – UBS Bank

As reported last week, by The Australian Financial Review, Australian banks Westpac and ANZ announced that they have also been experimenting with digital currency technology, to settle payments within the banks and various subsidiaries.

"The solution we’ve developed is faster than other alternatives in the market today, providing same or next-day payment. This technology could be very beneficial to all Australians, providing a low-cost and fast method of sending low-value payments overseas.”
— – Rachel Slade, Global Transactional Services at Westpac Group General Manager

Estonian LHV Bank also announced it was developing blockchain technology through its subsidiaries, Cuber Technology. The announcement coincided with the beta release of a distributed ledger-based wallet that allowed users to send euros to each other for free. The bank also announced it had issued  €400,000 worth of insurance securities using the platform, making it the first bank to ever do so.

“We hope CUBER can […] liberate innovation from organizational borders, truly decentralize it. And true innovation in financial sector will flourish.”
— – Rain Lõhmus, Cuber Technology CEO

The Fintech Paper 2.0 also highlighted that technological giants, IBM and Samsung, were experimenting with blockchain applications within the Internet-of-Things. It was also noted that several emerging blockchain distributed ledger technologies – Eris, Ripple, Ethereum, and HyperLedger – as possible platforms that future apps could be built on.

For the time being however, the regulatory uncertainty around digital currencies, and the relatively unproven nature of blockchain technology, ensures that banks and financial institutions will remain cautious.

"Regulators globally are currently reviewing bitcoin and other cryptocurrencies to better understand the technology and possible implications, and we would need to see the outcomes of any review before confirming future plans."
— – Slade