“Changes to the complex pipelines that make payments possible rarely occur, but when they do happen, the consequences can be profound,” states the brief. “Distributed ledger technology, first showcased by the Bitcoin digital currency network, has the potential for such dramatic change.”
Founded in 1973, the Boston-based management consulting firm has 5,700 employees spread across 53 offices in 34 countries. As one of the world's three largest strategy consulting firms by revenue they provide advice to businesses, nonprofits, and governments.
“We've worked with the majority of the Global 500, thousands of major regional and local organizations, hundreds of nonprofits, and private equity funds representing 75 percent of global equity capital. We are proud of our clients' track record, like the fact that our public clients have historically outperformed the stock market 4 to 1.”
- Bain & Company
The report spends time describing “established technologies,” that distributed ledgers combine. The block chain, Digital signatures, A consensus mechanism, and A digital currency.
“The precise features of distributed ledgers vary depending on the situation,” the authors state. “Some systems, such as Bitcoin, allow any participant to validate transactions, while others, such as Ripple, restrict permissions to a small group of trusted parties.”
The brief argues that banks are well positioned to confront the changes triggered by the rise of these disruptive technologies, in theory, while the situation is more complicated in practice.
“More than $150 billion in revenue at risk for banks that cannot overcome technical, adoption hurdles of digital currency,” Bain & Company state in the papers announcement. “Regulatory and other hurdles may have forced most start-ups to partner with, rather than compete against, incumbent banks, but distributed ledgers will create winners and losers within the banking industry.”
“Most banks have not adequately prepared for the ensuing battles to retain control of customers and of merchant payment interfaces.”
- Bain & Company
The report paints a clear picture of a hard choice banks now have to make. The solutions, however, are as varied as the business models. “Different types of banks should consider tailored strategies,” the report reads. “Their current approaches to experimentation—appointing mid-level technology executives to industry consortia, participating in the conference circuit and running limited distributed ledger simulations—may leave banks flat-footed.”
Distributed ledger adoption is then described as unfolding in two distinct waves. Development of specific systems focused on international payments, and broader disruption of domestic payments triggered by central-bank-supported digital fiat currencies.
In the first wave, financial institutions will focus on situations with clear opportunities for improvement, tangible rewards for innovators and where no central counterparty (such as a global central bank) dominates.
“In that context, the most promising starting points lie in international payments services, particularly correspondent banking and trade finance.” SWIFT has indeed been working in this area already.
“We estimate that about $300 trillion of transactions flow through international correspondent banking networks each year, generating $150 billion to $200 billion in revenues for banks.”
- Bain & Company
The second wave is already emerging, the report states, as several central banks have started to examine the idea of issuing national digital currencies under different scenarios.
“Should central banks choose the most extensive implementation and make true digital money available to all (rather than just a mechanism for banks to transact among themselves), the effect on the domestic banking sector would be broad and deep,” the authors claim. “Retail banks stand to lose their privileged position with customers and face much greater competition for funding and for lending products.”
In the longer term, as central banks gain comfort with the technologies, the impact zones will shift towards domestic payment systems, affecting cards and automated clearing houses, “the ‘rails’ over which domestic banks exchange money today.” This will impact all banks profoundly, states the report, not just those with significant cross-border business.
“Ultimately, the credit card and automated clearing house industries risk annihilation.”
- Bain & Company
Bain & Company focus on the financial uses for distributed ledgers throughout, “International payments and trade finance have the strongest potential for distributed ledgers.” This is accredited to customer demands for a “faster, cost effective and more reliable cross-border payment option.”
By cutting the number of middlemen and enabling direct transactions between counterparties in international correspondent banking, the authors state, distributed ledger solutions speed up transaction times.
“Innovation is upon us,” the report concluded, “and doing nothing is not a viable option. Now is the time for banks to move from experimentation to action.”
The firm’s first and only other report mentioning blockchain technology to date, back in May of this year, was in a brief called “Corporate and Investment Banks Search for Light at the End of the Cycle,” about changes to the investment banking industry.
Distributed ledger technology was only mentioned a handful of times, but the report states that digital fiat currencies are only three to five years away. “The eventual development of digital national currencies, such as Fedcoin, could eliminate the need for some of the activities banks do today.”