Banks have so far lived essentially from acting as intermediaries in the supply and demand of money, balancing different interests. They are therefore also referred to as financial intermediaries. This “intermediary function” was a lucrative business model for decades. In the Internet age, it is increasingly being questioned.
In fact, there are now a number of competitors from the online world who are advancing into the traditional business areas of financial institutions. From crowdlending to crowdinvesting, from online brokerage to robo-advising to payment transfers via the Internet – the points of attack are manifold. Fintech startups are springing up like mushrooms. Not all potentials have been exhausted yet, but a new threat to the banking world is already emerging – blockchain technology.
Forgery-proof transactions on the Internet
What is it all about? “Blockchain” means “blockchain” in German. This term already describes an essential principle of the technology. It is based on data sets – so-called “blocks” – that are linked to each other via encryption, continuously expanded and stored decentrally on different computers. This procedure allows transactions on the Internet to be carried out very securely without the need for an authority to check legitimacy and security. Security is guaranteed almost automatically by the structure and systematics of the blockchain.
This sounds abstract at first and what this is supposed to have to do with banks is not automatically obvious. This becomes more understandable if you understand the blockchain as a kind of digital account statement that accurately records transactions between computers and stores them distributed on many computers. This makes forgeries almost impossible, because all computers involved would have to be manipulated in the same way. To carry out the transaction, no bank is needed as a processor. Communication and data exchange between the computers involved are sufficient.
Bitcoin use case
The first major use case of the blockchain is the cryptocurrency Bitcoin. Virtual money saw the light of day in 2008 and has since enjoyed an unprecedented triumphal march. Today, Bitcoins are a sought-after object of speculation and are traded in all major currencies. One Bitcoin currently costs around 14,000 euros – around 13,400 percent more than when it was first listed in 2013 – and there are more and more places that accept the currency from the Internet. Bitcoins do not need to be controlled by a central bank, without a banking system at all, which is largely thanks to blockchain technology. Bitcoins are not to be equated with blockchains, but represent only one special use case among many conceivable ones.
Blockchain technology not only relevant in payment transactions
In fact, blockchain technology can be used wherever computer-to-computer payments are involved. Thanks to the blockchains, they work safely and quickly – minutes are needed at most, where often at least another day is needed. Likewise, a complex infrastructure for verification, testing and processing can be dispensed with. This makes blockchain transactions not only good and crisis-proof, but also particularly cheap. Since the various fees in payment transactions represent an important source of income for credit institutions, the potential threat becomes clear from this circumstance alone. If payments are increasingly processed bankless, the corresponding revenues will collapse. This development – keyword: Internet payment services – is already underway.
Since payments are a key factor for banks that entail further business, a weakening of the position in this area would not be without repercussions elsewhere. However, some business areas are also directly affected, for example the commission-heavy securities business – securities transactions no longer require someone to execute and settle the order with the blockchain. Even the granting of loans could be organized without a credit institution in case of doubt.
Not only risks, but also opportunities
Certainly, blockchain technology does not only pose a threat to the banking world. It also offers interesting starting points for making processes more efficient and cost-effective. This explains why well-known institutions such as Deutsche Bank or Santander are dealing intensively with the topic. They not only fear competition, but also hope for great savings potential.
It is also clear that blockchain technology cannot replace all traditional banking functions. Institutions are still in demand as financial intermediaries in the transformation of risk, maturity and lot size. It remains to be seen whether this reduction to the core represents a viable business model in view of the other fintech competition. In any case, institutions that miss the boat with blockchain are likely to have a hard time staying on the market in the long run. This is ensured by the competition in the industry itself. The conclusion is that banks may not become superfluous as a result of the blockchain, but they will become more susceptible to attacks from outside.
What opportunities and risks do you see in blockchain technology? We look forward to your comments.
Image source: Fotolia.com, Photographer: monsiti
