Last year, a blockchain research arm of the South African bank, Rand Merchant Bank's (RMB), stated at the Gordon Institute of Business Science, that the technology could take up to 40% of a bank's revenue if it became a global standard. But what is the appeal and how can banks embrace this technology effectively?
A high majority of the region's population are now using telco for their ﬁnancial services (most famously Safaricom's M-Pesa in Kenya). But these telco payment solutions, and traditional banks usually operate centralised technology. This means that if there is a malfunction in the system, or a failure of the centralised server which sustains the technology, there could be considerable security risks and associated reputational damage. Centralised systems such as these, are what blockchain is trying to move away from. Blockchain is a decentralised, distributed technology that makes it impossible to hack into a system, with no single entity controlling it. Information is therefore secure. This is not to say that telco and traditional banking solutions compete with blockchain, instead, financial services providers need to look at utilising this technology to avoid this.
Approximately 80% of sub-Saharan Africans are unbanked, and blockchain also offers an opportunity to effectively address this. At the moment most payments services only work between two parties if they both have accounts. Similarly, mobile money services often didn't allow for consumers to easily pay each other on separate mobile networks. But the blockchain could expand interoperability to link these fragmented, closed loop services both domestically and internationally. Crypto-currencies solve the payment interoperability problem. This works where the digital wallets are compatible and the participants are using the same crypto-currency, which is just the same limitation as today's credit transfer systems. In addition to enabling more unbanked users to send money to other unbanked users, such a backbone would serve to connect the banked with unbanked users in areas such as cross-border remittances and cross-border business-to-business payments.
Blockchain also offers real benefit to African businesses. Investment capital is limited within the region, due to a high dependence on non-Africans as a source of capital and a relatively small financial services industry. However, as entrepreneur Richard Branson highlighted in October last year at the the "Virgin Disruptors" event in London, "if you take somewhere like Egypt, 90% of people have got houses, they've got a garden, but they've got no piece of paper to show ownership of that ... And without ownership of your property, it's almost impossible to start a business or get a bank loan or anything,". Blockchain, through distributed ledger technology (DLT), can be used to keep an immutable record of ownership which should lead to the ability to more easily obtain the credit that individuals and small businesses need. This is a good use of DLT, but it would have to be permissioned and it would require the legal system of each jurisdiction to adopt it.
The trade finance opportunity
For ﬁnancial institutions that operate across multiple entities and jurisdictions, blockchain's ability to provide a centralized store of data or information offers particular appeal. It can support banks manage liquidity risk. At present, when a corporate makes a payment there is almost no information regarding the recipient, what goods or invoices they are for, or when the funds will ultimately be available. These factors limit the predictability required for forecasting and forces finance and accounting departments to be reactive instead of proactive. This also creates significant risk for the FIs. Blockchain, through distributed ledger technology (DLT) provides a means to reduce this risk. It can securely connect previously siloed trade finance participants, providing transparency of the supply chain and a massive reduction of manual processes and co-ordination between institutions. This is because a blockchain-based trade network allows information and business logic to be connected directly to the payment rails themselves. It overcomes the limitations of a correspondent banking network, where remittance data is limited to the few lines on a Swift message. It allows you to programmatically tie business logic, digital assets and payments together on one platform and automate their transfer based on predetermined digital inputs. And corporates are already realising the benefit. In a recent survey conducted by Ovum and Temenos, to 200 corporate treasurers, 75% of of corporates in Africa and said they were "interested in solutions based on blockchain technology to reduce trading risks".
This complete, end-to-end transaction transparency that blockchain offers can also support customer engagement, to develop long term relationships, create customer intimacy and boost cross-sales. In addition, it is proving to be beneficial to regulators as well as ﬁnancial institutions. DLT technology means institutions would potentially be able to address regulatory requirements around ﬁnancial crime, such as Know Your Customer (KYC), Anti-Money Laundering (AML), and Countering the Financing of Terrorism (CFT).
Blockchain offers a ﬁnancial transaction ledger that is extremely difﬁcult to break or fool, providing details on a transaction or series of transactions. This means computers could sit and monitor the blockchain for suspicious activity without needing to know any personally identiﬁable information. And it's fast enough that it could perhaps provide an accurate chain of events across multiple trusted institutions. It can identify, in microseconds, if something peculiar, like uncharacteristic account activity, raises suspicions.
Preparing to benefit
Blockchain in Africa is gaining momentum. However, the technology is still new, often complex, and evolving so rapidly that it's difﬁcult to predict what form they will ultimately take or even to be sure they will all work. There are working/discussion groups, labs and proof of concepts from service providers that that are available for banks to explore and develop technology to support their needs. Banks are also working with providers who have easy access to Fintechs with blockchain functionality through platforms such as the Temenos MarketPlace, which is a community of over 100 fintechs.
Despite all that blockchain offers the region, most acknowledge that the blockchain is only an opportunity for banks from a permissioned perspective. But, until blockchain technology matures and the regulatory environment advances, the best option for market participants is to ensure they have an agile core banking platform that will support both easy interaction with other platforms. In addition, banks could also look to automate manual processes for a truly real-time solution. In preparing your systems today, banks should be able to have the 'pick of the crop' and be ready to benefit from blockchain technology if it becomes the norm tomorrow.
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