Traditional retail banks are lagging behind in terms of blockchain adoption, potentially losing out on customers and competitive advantage.

This is according to a report from McKinsey, which noted that this contrasts with efforts seen elsewhere.

“Governments, investment banks, and infrastructure providers are experimenting with the technology in the belief that a shared electronic ledger will help them cut costs and increase transparency,” read the document.

“Investment banks, for example, envisage a world in which execution, post-trade processing, and settlement are instantaneous, eliminating numerous middle- and back-office processes.”

Across industries, venture-capital funding for blockchains reached $1 billion in 2017, with financial institutions launching hackathons, innovation labs and collaborations with FinTechs.

McKinsey noted that retail banking caution is understandable, as none of the financial industry’s initiatives have been rolled out at scale, and tough regulatory requirements create a high barrier to entry.

The future regulation of blockchain itself remains uncertain, with the UK’s Financial Conduct Authority (FCA) still formulating policy, while in the US, the Securities and Exchange Commission (SEC) has blocked attempts to launch blockchain-based Exchange-Traded Funds (ETFs).

Despite those concerns, a few retail banks have made moves. Santander, for example, worked with Ripple last year to launch the first blockchain-based money-transfer service.

McKinsey stated that there are three obvious retail use cases - remittances, identification fraud prevention and risk scoring - that could eventually be deployed at scale, and which offer most in terms of blockchain’s three key strengths – data handling, disintermediation and trust.

“We estimate blockchain-based solutions for customer onboarding can create up to $1 billion of savings in operating costs for retail banks globally and reduce regulatory fines by $2 billion to $3 billion – in addition, we expect blockchain solutions to reduce annual losses from fraud by $7 billion to $9 billion,” the report stated.

However, the research noted that despite numerous experiments, retail banks face challenges in implementing blockchain-based Know Your Customer (KYC) and anti-fraud solutions.

It cited heavy capital costs associated with switching from individual to shared systems, along with “a significant evolution in culture” which is predicated on the need to share data. There are also practical challenges around customers agreeing to upload digital fingerprints and perform additional authentication steps during setup.

Merchants are also required to upgrade authentication systems at point of sale and adjust online checkout processes, with banks having to create large networks to achieve benefits at scale, requiring data standardisation and collaboration.

Blockchain technology could bring value in core parts of the retail banking business model, stated McKinsey, but the technology faces challenges in terms of scaling, the volatility of crypto assets, and trust. Despite that, the report laid out three things that could help increase adoption:

• A more seamless transition between fiat and digital assets, so that customers do not risk losses as they switch back and forth – one solution would be for central banks to issue a crypto fiat, which would support product manufacturing.
• Regulation so that participants have certainty around the status of crypto assets, rules of engagement and investor protection.
• Consumer identities created on the blockchain, enabling banks to offer real-time loan decisions based on authenticated identity.

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