Bitcoin and blockchain: Financial services phenom or meltdown in the making?
by Steve Gilde, Director of Global Product Marketing, Paragon Application Systems
Over the past couple of years, blockchain technology, bitcoin and other cryptocurrencies have dominated conversations throughout the financial services industry.
Although adoption has been slow, as most financial service companies are hesitant to invest time and resources into such an unfamiliar territory, these emerging technologies continue to attract attention. In fact, key players in the industry are even starting to plan for how these technologies might fit into their future strategies.
But are blockchain and bitcoin here to stay, or are they just a passing fad? Do these technologies really have the potential to transform the financial services industry, as some are claiming?
Blockchain in particular has characteristics that shouldn't be ignored. Blockchain and distributed ledger technology provide a shared, comprehensive and unalterable ledger of transactions, offering the ability to streamline previously cumbersome back-office operations, such as loan origination.
Even though there has been a sustained period of innovation and process optimization since the advent of the internet, the back office has remained largely manual and antiquated. Blockchain has the potential to give the back office a much-needed upgrade.
For example, distributed ledger technology can add new levels of efficiency and speed to certain types of payments. Historically, settlements have required the involvement of third parties such as clearinghouses or regulatory agencies to ensure that transactions are completed correctly and securely — adding substantial time to the process.
But, because distributed ledger technology can't be altered, it eliminates the need for third-party involvement, making it possible to send money more quickly and confidently.
The benefits of distributed ledger technology extend to the cross-border payments process, which has historically been lengthy and complicated due to currency exchange and inefficiencies associated with record reconciliation. Leveraging a shared, reliable ledger with blockchain technology boosts speed, security and trust in the process.
Blockchain technology provides another advantage, as well — especially to large, multinational banks that need to support numerous subsidiaries or branches. With a decentralized, distributed ledger approach, these financial institutions have more comprehensive access to data and can securely move money and information across the globe.
Unlike blockchain, bitcoin seems too risky and unpredictable to become a permanent fixture in the financial services industry. It is likely that the present hype will eventually die down as financial services companies realize that this cryptocurrency can contribute little of value to their operations or bottom lines.
The technology is built on anonymity, often attracting the attention of speculators and criminals instead of legitimate businesses. In fact, a search of the top 100 sites that currently accept bitcoin reveals a myriad of gambling websites and other "interesting" activities.
To prepare for technology advances such as these, it's important for financial service providers to proactively conduct a comprehensive internal audit of their enterprise and evaluate how, if at all, this technology could potentially be incorporated to deliver true impact to their businesses and customers. Investing in and deploying new technology is meaningless if it is done just for technology's sake – there must be true value. No doubt blockchain will be able to help some organizations, but care and due diligence are required when selecting technology and implementation partners.
One specific area that requires specific attention when considering new technologies is testing. The payments landscape is growing increasingly complex and payment options continue to multiply and evolve, but testing methods have not consistently evolved with them. Many financial service providers still operate with legacy processes that provide minimal test coverage.
By failing to properly test and update their current systems, organizations risk system outages, failed IT projects, negative customer experiences and unnecessary security vulnerabilities. These factors put organizations' brands and reputations in jeopardy – two of their most important assets. By proactively updating systems and investing in modern testing strategies, payment service providers not only help protect their brands, they can also reduce overall costs and optimize resource utilization.
While hype surrounding bitcoin and blockchain technologies has no end in sight, it's imperative for financial service providers to focus on determining which technologies will be truly influential in their business and the industry, and what will just be a passing fad (or worse, a disastrous meltdown). Distributed ledger technology undoubtedly has characteristics that will improve payment processing efficiency and security, but there are steps that financial service providers need to take now, in areas such as testing methodologies, that can further mitigate risks involved in utilizing any new technologies.