Accenture Consulting recently teamed with McLagan, a business unit of Aon plc and a capital markets benchmarking provider, on an in-depth impact analysis of blockchain technology’s ability to improve efficiency for investment banks. “Banking On Blockchain, A Value Analysis For Investment Banks” examined cost/benefit analysis, business applications and ROI.
Blockchain technology allows multiple parties to share access to the same data simultaneously with improved confidence. Because different parties typically maintain their own data, processes are usually plagued with inefficiencies like the need for different parties to send data back and forth.
Blockchain technology can allow more efficient data reconciliation models.
Banks have an opportunity to deploy risk, operational and finance systems to shared data platforms. Large sections of existing processes and data infrastructure could be decommissioned.
Capital market leaders require a more thorough analysis to determine blockchain technology’s business case. It is especially needed for C-level executives tasked to evaluate new technologies.
Accenture mapped McLagan’s operational cost data from eight investment banks against its own proprietary high-performance investment bank model. Accenture gained visibility into the areas where blockchain technology will likely have the greatest impact on an investment bank’s operating metrics and front-to-back processes.
By mapping more than 50 operational cost metrics against Accenture’s model, the analysis revealed indicators that demonstrate efficiency. Examples include:
• 70% potential cost savings on central finance reporting. This resulted from more optimized and streamlined transparency, internal controls and data quality.
• 50% potential cost savings on centralized operations. These included client onboarding and KYC on account of more robust digital identities and client data mutualization among participants.
• 30-50% potential cost savings on compliance. The savings came at both a centralized basis and product level on account of enhanced audibility and transparency of financial transactions.
The analysis determined that eight banks with a $30 billion cost basis could save $8 billion, not including potential costs and investments. The estimate assumes central operations would be fundamentally affected. Cost savings would be about 50% for high performers.
Proof of concepts and early test environments indicate the potential to further improve the savings, moving them to the “disrupter” category. Annual cost savings could translate to 38% ($12 billion).
Regulatory hurdles or other issues could prevent the wide adoption of blockchain technology, the analysis noted.
The rising cost of capital is making it hard for banks to improve profitability using traditional methods.
Aite Group, a financial services research organization, forecasted in September 2015 that blockchain spending in capital markets would reach $125 million in 2016. Nine months later, another researcher, Greenwich Associates, predicted 2016 spending would approach $280 million. These different estimates indicate investment is accelerating, and that the acceleration makes it hard to estimate the sums.
The analysis noted that investment banks spend around two thirds of IT budgets on legacy back-office infrastructure and billions more on cost reduction initiatives. This is why institutions are exploring blockchain technology to change the cost fundamentals to strengthen profits and boost return on capital.
The analysis did not suggest the technology is a panacea for all problems in investment banking. Conventional database structures and processes will produce a similar outcome without the challenges blockchain technology poses. Examples include outsourcing/offshoring, internal automation and staff reduction.
But there exists evidence the technology can remove or radically reduce existing settlement and clearing processes.
Trade confirmations, cash management, reconciliation, asset optimization and other exceptions-based business logic processes cost billions every year.
The technology can also optimize settlement by reducing or removing windows for delivery versus payment, depending on the counterparty requirements and underlying assets. It could allow decommissioning large sections of back-office infrastructure and externalization of operational processes to industry utilities.
The analysis compared blockchain technology’s impact to the rise of the Internet. Players that embraced change produced new business models and products and reaped the rewards. Some business models failed. Blockchain technology similarly challenges the industry to reimage its data sharing processes.
C-suite managers need to consider making well-hedged bets to prevent costly mistakes to position themselves for new benefits.
Image from Shutterstock.