The bank of the future... block by block

Independently written by guest writer Bird Lovegod, Fintech journalist and consultant.

Banks are already incorporating blockchain into some of their systems … but will a 100% blockchain bank ever happen? It may do, but if it does, it’ll happen incrementally.

It’s hard enough for banks internal systems to be compatible with themselves. The layers of different software systems compacted down over decades form strata of complexity a geologist would find both familiar and confusing. Delving into banking software is system archeology, complete with dead bones and dinosaurs. Had blockchain technology been conceived 50 years earlier, perhaps it would’ve become the standard operating system for a globalised banking network by now. A very different creature that would be, albeit serving the same purpose. So what’s the problem of blockchain in banks? Is there any?

Banks are not stand alone things. Let’s use an analogy of the human water cycle.

Water mystically appears from the sky and is stored in reservoirs, whereupon it’s distributed through a series of pipes to varies pumping stations. From these stations it’s sent to every household and enterprise that requires it, some using a huge amount, some just a little. The water is then moved onwards, through another series of pumping stations, where it is processed, impurities removed, before being pumped back into the system. It’s cyclic, topped up from on high. Water flows like digitised money, irrigating everything, bringing life and vitality.

The Global financial plumbing has to fit together nice and tightly. Leaks are preciously guarded against. The retail banks are like the water companies with supply contracts to houses and businesses. A pipeline from 1900 has to be connectable to one from 2020. It’s all about compatibility of systems. The old with the new, and the new with the newer. Within banks, the story of technology is the story of system upgrades.

One of the issues with blockchain is the perceived compatibility with non blockchain systems. This doesn’t have to be an actual problem, it’s no different to compatibility of any new software system with existing ones within an institution, but it is a question mark that needs answering on a case by case basis to everyone’s satisfaction. It’s more a fear of the unknown than anything else.

The main issue is the cultural reluctance of some less progressive banks in exploring new technologies and adopting new practices. This has always been the case. Some banks have seen the fintech digital transformation revolution as a huge opportunity to be embraced and and run with. Barclays is an example of this, their Techstars fintech accelerator programme attracts high calibre companies from all over the World, each cohort bringing a new batch of cutting edge technology and visionary entrepreneurs.

At the other end of the scale some banks are so far behind they have done nothing meaningful and are satisfied to carry on as if the digital revolution is happening somewhere else, which as far as they’re concerned, it is.

But this is just the adoption curve and it happens in all technology. Some get in at the beginning and not only ride the curve, but help drive it forward. Other people still have a old style mobile phone from the last millennium.

The mantra of ‘if IT isn’t broken don’t fix it’ has merit, but there’s a problem with this attitude. It prevents incremental progress. IT might not be broken, but it is definitely becoming ever more outdated and inefficient in comparison to the competitive alternatives. That’s just the fact of IT life.

And that’s the problem with late or non adoption of new technologies. It’s not that the old is broken, it’s just slower, more expensive, less efficient, and gradually heading for obsolescence. And in the technology driven world of finance, if the technology is heading that way, it’s hard not to assume the company itself is on the same trajectory.

Exploring a new blockchain technology in a banking environment may be a small step. But it’s a step forward, into the future, and as more and more components of the system are able to be modernised in this way, the whole system becomes ever more efficient and workable.

That’s how progress happens. Step by step. Bit by bit. Block by blockchain.