Blockchain technology may bring up to US$12bn in annual savings to the world’s largest investment banks, study says

PUBLISHED : Wednesday, 18 January, 2017, 12:47am
UPDATED : Wednesday, 18 January, 2017, 5:43am

Blockchain, the distributed ledger technology behind cryptocurrency bitcoin, could help slash infrastructure costs by an average 30 per cent a year at eight of the world’s 10 largest investment banks, a new study shows.

That would translate to between US$8 billion and US$12 billion in annual cost savings for those banks, according to a joint analysis by global consultancy Accenture and operations-benchmarking specialist McLagan.

Richard Lumb, Accenture’s group chief executive for financial services, told the South China Morning Post that blockchain is a type of database system that organises information in secure blocks that are “chained” together in an essentially unbreakable sequence using encryption.

“What’s unique is how the chain is used; instead of running as one central database, copies of the blockhain are spread out among users and kept in parallel on different computers,” Lumb said. “Users are constantly verifying the accuracy of the information on the growing chain.”

He pointed out that “the underpinnings of blockchain -- a foolproof ledger of data that are easily trackable and transparent – is now attracting the attention of more than just cryptocurrency users”.

“Think about it: from financial services to healthcare, and from energy to education, the ability to safely, securely and transparently record and store data in a decentralised and distributed database is only just beginning to be understood but its potential use is significant,” he said.

The findings of Accenture and McLagan, a business unit of British professional services group Aon, said blockchain technology can help the world’s largest investment banks replace their traditionally fragmented database systems that support transaction processing.

Investment banks have historically maintained their own independent databases of transactions, customer information and other data.

To guarantee the accuracy and integrity of their information, banks must regularly reconcile the information, which is a complex, labour-intensive process and sometimes prone to error.

Accenture and McLagan declined to identify the eight large investment banks that were subjects of their study.

Data from online statistics portal Statista showed that the world’s largest investment banks by revenue last year were JP Morgan Chase, Goldman Sachs, Bank of America Merrill Lynch, Morgan Stanley, Citigroup, Credit Suisse, Barclays, Deutsche Bank, Wells Fargo Securities and UBS.

“Capital markets institutions have faced a perfect storm of regulatory-compliance costs and revenue pressures in recent years, prompting them to invest in emerging technologies as a lever to improve profitability,” Lumb said. “Through this first-of-its-kind analysis of real-world cost data we draw a clearer line under blockchain’s value to investment banks.”

According to the Accenture and McLagan report, blockchain technology would bring significant savings for many of the banks’ so-called middle- and back-office processes.

Those include shrinking their finance-reporting costs by as much as 70 per cent as a result of the optimised data quality, transparency and internal controls provided by a shared, single source of verified data.

Centralised operations supporting functions such as “Know Your Customer” and client-onboarding could bring 50 per cent savings by establishing more-efficient processes to manage digital identities.

Business functions, such as trade support, middle office, clearance, settlement and investigations, could also lower their operating costs by 50 per cent.

Chris Blain, a partner at McLagan, said the joint analysis with Accenture “suggests that blockchain technology could significantly change the cost structure of investment banks over the next decade”.

Lumb added that major Chinese financial institutions’ interest in blockchain was also growing.

“A recently published World Economic Forum report noted that 2,500 patents have been filed in three years to 2015,” Lumb said. “It’s not just multinational companies which are focused on this, China’s banks are looking at ways to use blockchain.”

He said China Merchants Bank and Ping An Insurance Group have both joined the R3 blockchain consortium of 45 global financial companies considering blockchain usage in the financial system.