Innovate or die: Blockchain technology becomes a hot technology trend in the banking industry

Whether it’s social unrest or economic downturn, banks are easy targets for criticism when things aren’t going well. Yet banks have managed to thrive and survive for thousands of years — the earliest prototypes were created in the Assyrian Empire in 2000 BC — simply because we need banks to meet our business and personal needs.

At some point, we have to accept that we humans are unstable creatures living in an unstable environment. This makes it impractical for us to stuff millions of dollars (or at least hope to have that much money) into a pillow or a safe, so we choose to put the money in a stable institution that we believe is safe. In this way, we create a business engine because the money stored in the institution can be loaned out and used as start-up capital for a business, thus creating more wealth.

In modern society, we will still need banks or similar institutions, but if existing banks hope to survive and prosper, they will need to continue to evolve (or change?) to meet the needs of development.

As with most industries, the internet and mobile have created opportunities to disrupt traditional banking. For example, traditional banks are at risk of being disrupted by a wave of financial technology (FinTech) startups that are using new technologies to provide innovative financial services.

These FinTech companies are “unbundling” traditional banking services by offering a wide variety of individual services (rather than the bundled, expensive services that traditional banks offer you that you don’t use). In particular, millennials and underbanked countries (such as Kenya or the Philippines) are gravitating toward these new financial technology services because they are less expensive for many people.

Traditional banks still hold some key advantages over new entrants into the market – such as low funding costs and privileged customer acquisition. However, this advantage has been eroded by the new regulatory agenda following the financial crisis, and new technologies have enabled smaller players to compete for customers.

As a result of these trends, banks are still struggling to remain relevant and necessary. To avoid being disrupted, traditional banks are also incorporating the same cutting-edge financial technology services, both by creating their own products and by partnering directly with financial technology companies.

Here are five ways banks are adapting and innovating:

1. Blockchain

Blockchain is a distributed database of an ever-growing ordered list of records (blocks). Once the data content is recorded in a block, it cannot be reversed. This makes blockchain a system with built-in security. Therefore, blockchain can be a powerful technology for banks looking to innovate because the technology itself creates trust.

In an age when banks are rarely trusted and are beset by regulations, this could provide a critical advantage: Blockchain could provide an automated proof trail that a bank is operating in compliance with regulations.

Some banks have already begun experimenting with the possibilities of blockchain. For example, ABN AMRO recently piloted a blockchain real estate transaction.

2. Robo-Advisors

Robo-advisors are web-based financial advisory programs that use cognitive computing to understand, analyze and solve client problems, all without human intervention.

Historically, consumers have needed to invest $500,000 or more to hire a financial advisor and pay 1% to 2% in annual fees. Robo-advisors allow clients to manage their assets with a lower net worth, a fraction of what traditional advisors charge, and JPMorgan Chase CEO Jamie Dimon has even said their robo-advisors will be free.

While the technology was pioneered by startups like Mint, Betterment, and Robinhood, banks have also entered the robo-advisory market. And rightfully so, as robo-advisors challenge banks’ control over the wealth management industry while also offering a way to improve the user experience by eliminating the need for customers to visit a financial advisor in the first place.

3. Peer-to-peer payment

Peer-to-peer (P2P) payments allow customers to easily and cheaply transfer funds to each other, sometimes even internationally.

According to Barry Sommers, CEO of Chase Consumer Banking, these types of payments accounted for 80% of all payments in 2015. The global market opportunity for these P2P payments is worth more than $1 trillion. The P2P market has been fragmented into a variety of different platforms, including: LendingClub, Zelle, Venmo and PayPal as well as platforms like Facebook and Snapchat.

If banks can combine customer trust with the convenience of competitors, they could dominate the P2P market. In 2017, Bank of America, JPMorgan Chase and Wells Fargo jointly launched a person-to-person payment system called clearXchange, which covers 7,500 financial institutions and 25 million users.

4. Merchant Data Monetization

Merchant data monetization is being pioneered by companies like Ned Bank. The South African bank has developed a new merchant data service for its clients, Market Edge. The new program gives merchants access to credit and debit card information, including geolocation, demographics, and other transaction data.

This information can give merchants new insights into consumer spending behavior and patterns, which can improve product development, inventory management and staffing. This approach leverages the existing strengths of traditional banks, such as deep dives into budget and consumer data troves, and uses them to match the customer experience provided by other industries.

5. Open API

Open APIs can turn banks into platforms, thus avoiding a war of attrition between fintech startups and banks. Some banks are considering positioning themselves as platforms and offering this platform to their fintech “competitors”.

It will be a challenge for banks – large institutions that by their nature move slower than startups – to compete with the ever-innovating financial technology companies.

Some banks are offering open APIs to fintechs, such as ABN AMRO, as a way to stave off competition and attract customers. Open APIs provide a digital gateway to a business’s data and services. This can be a win-win for both banks and fintechs.

However, these innovations are not a panacea for a challenged banking industry. Rather, they represent a process that banks must embrace in order to attract and retain their customer base by providing the user experience, technology capabilities, and responsiveness that banks expect.

As banks’ traditional advantages are gradually broken down and new digital industry players gain legitimacy, banks have only two paths to go: innovate or die.