A collection of bitcoins stand in this arranged photograph in London (Photographer: Chris Ratcliffe/Bloomberg)

Banks Experiment With Blockchain But A Winner Is Yet To Emerge

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  • Blockchain is the new buzzword in Indian banking circles. The technology itself has been around for close to a decade now and has been the driving force behind the cryptocurrency bitcoin. But over the past year or so, Indian lenders have latched on to it, projecting the technology as the next big thing in banking.

    The process of experimenting with the technology was institutionalised last month when State Bank of India Ltd. (SBI) set up a consortium, including other public and private sector lenders and firms like IBM, Microsoft and KPMG, to use it to fight banking fraud.

    A fortnight after SBI’s announcement, fintech startups came together to form the Digital Asset and Blockchain Foundation of India. The association aims to research and develop technologies which can be leveraged by both industry and banks to improve efficiency.

    Simply put, a blockchain is a public ledger that collects all transaction records between a group of people involved in a transaction. The book is open for all parties in the group, with each one adding an entry -- or in other words a block -- when they conduct a transaction. No retrospective edits are permitted.

    In theory, the technology can be used in many ways to transform banking. In practice, a clear and commercially viable use is yet to be found by banks.

    Yes Bank is among those experimenting with the technology. Applications being tested range from blockchain-based supplier credit management to international payments.

    The private lender seeks to use the technology in supply chain, and dealer and trade loans, Anup Purohit, the chief information officer at the bank, told BloombergQuint over the phone. It may start trials of blockchain-based trade financing in April, he said.

    The other target is international payments. We are talking to players like Ripple (payment settlement company). We could send rupees into dollars in real time. The other uses are in loan mortgages where you could keep them intact. 
    Anup Purohit, Chief Information Officer, Yes Bank

    Axis Bank, a part of the SBI-led consortium, has been offering blockchain-based international remittances to its customers since January 7, according to a media statement. The bank is also testing out other solutions such as building a negative list of loan defaulters using the technology.

    “It addresses traditional problems with features like upfront visibility of conversion rates and charges and confirmation of exact amount credited to a beneficiary account,” Amit Sethi, chief information officer at Axis Bank said in an email response to BloombergQuint.

    While banks are betting big on blockchain, fintech companies are less optimistic about the benefits it can bring to the financial world.

    For instance, Hashcove, a blockchain products company, that was building products based on this technology for banks and financial institutions till last year, stopped development on such projects when it realised that none of those were viable.

    Kunal Nandwani, founder and chief executive officer of the company spoke to BloombergQuint and said that the technology doesn’t suit the requirements of banks or financial institutions in most cases simply because it’s a decentralised technology which is not meant for highly centralised and regulated institutions.

    In my opinion, blockchain has been overhyped. There are things which cannot or should not be done on blockchain but people are trying it out. The idea was to use it for bitcoin which is a decentralised form of currency as opposed to banks, which are inherently centralised, using it.
    Kunal Nandwani, CEO, Hashcove

    According to Nandwani, there are limited use cases for the technology such as cross-border remittances where money can be transferred faster by converting it into bitcoins. However, even that is not possible in India as the Reserve Bank of India (RBI) discourages using bitcoins in any form.

    Ankit Ratan, chief executive officer of Signzy, which offers automated KYC and other products based on the technology, shares Nandwani’s view.

    Ratan said that his company is working with multiple banks and non-banking finance companies to test various applications of blockchain but a clear winner is yet to emerge. “There’s a lot of proof of concepts across banks where they are experimenting with it for settlements etc. But we are yet to see a strong business case coming out of it,” Ratan told BloombergQuint over a phone call. Signzy’s solutions based on artificial intelligence such as automatic KYC are getting a lot more traction than its blockchain offerings, Ratan said.

    Meanwhile, a white paper on the subject was published in January this year by the Institute of Development and Research in Banking Technology, which is a subsidiary of RBI. In its paper, the organisation highlighted possible uses of blockchain for the banking sector and said that scalability of these systems as well as their interoperability is the most crucial aspect that needs to be addressed.

    Industry representatives agree.

    Yes Bank’s Purohit said that cost and standardisation are major challenges when it comes to deploying the technology commercially. While about 60 percent of the initial cost can be recovered in a year or so of deployment, standardisation and interoperability among banks remains a concern.

    “The challenge here is standardisation. There are major players and sub-players as well. Till the time, a regulator or a central body comes into the picture, it will remain limited in its scope,” he said.

    Rajiv Ahuja, executive director of RBL Bank, said that while one large use case for the technology may not emerge quickly, it is important that banks keep looking for ways to use it.

    “My own view is that no big thing will suddenly have a one billion dollar enterprise built around it. We have to find a killer app for this technology and that’s what the consortium is doing,” he told BloombergQuint. Ahuja added that it may be a few years before blockchain technology matures enough to be adopted by banks.

    “It is a longish process and the killer application will be industry-wide. It won’t be an advantage or disadvantage to a particular institution. One fine day, blockchain will happen and nobody will care about it,” he said.

    BloombergQuint