Banking on Blockchain in Asia Pacific

Financial services organisations in the region see blockchain as a game-changer, according to our recent research, and are working hard to better understand the technology, develop strategies, increase collaborative efforts and address security concerns.

Innovation in and around blockchain is currently concentrated in the US and Europe, primarily focused on financial services. However, application of the new technology is quickly spreading over the Asia-Pacific region. For example, China has explicitly made blockchain a pillar of its economic development strategy, and fintech financing in the region doubled from $5.2 billion in 2015 to $11.2 billion in 2016, compared with $9.2 billion in the U.S. and $2.4 billion in Europe.

As a result, many observers believe Asia will become a hotbed for blockchain innovation — perhaps sooner than most global economy pundits had imagined. Key drivers include a dynamic socioeconomic landscape, solid interconnectivity, massive digitization of payment solutions, a consistent regulatory environment and a large unbanked population.

To find out more about blockchain in the Asia-Pacific region, we conducted a study of 482 banking and financial services senior executives across China, Australia, Japan and Singapore. The vast majority (88%) of respondents said they view blockchain as important or critical to the future of their industry. Additional insights include:

Blockchain embodies the new business value of “trust”

Asia-Pac faces a serious problem: Like elsewhere in the world, established brands are increasingly losing consumer trust. What if we could build better mech­anisms to trust each other? Blockchain introduces the ability to bridge the ”trust deficit” that governments and institu­tions face, both through its consensus-driven mechanisms and the transparency enabled through its collaborative consumption model.

Strategies are still being defined

Only 51% of respondents said their firm had defined a blockchain strategy, and 45% said their organisation was in the process of developing one. In our view, firms need a single blockchain strategy that spans business, operations, IT and security. Financial services organisations need to create a multidisciplinary team to oversee blockchain ini­tiatives, with a leader who can connect with all stakeholders, be a catalyst for change across organisational silos, and create a collaborative culture that is open to new business-technology ecosystems. Moreover, firms should collaborate with educational and fellow financial institutions to understand the social impact of blockchain and how they can integrate it as part of their strategy.

Top blockchain drivers are cost savings, customer experience and the desire for a competitive edge

Seventy-two percent of respondents said they believe blockchain will resolve their industry’s long­standing pain points, such as high operating costs, legacy systems modernization, fraud and poor data management. Study respondents are aiming for a 6% savings in future costs across business processes such as know your customer (KYC), trade finance, international remittance and anti-money laundering (AML) compliance, among others. Further, 70% of respondents cited the ability to gain a competitive edge as a top reason for pursu­ing blockchain-enabled projects, and 53% of respondents believe that blockchain will help create new markets, service lines and customer segments. Meanwhile, 68% of respondents said their organisations are exploring blockchain use cases to improve customer experience. Blockchain gives control back to consumers, allowing them to choose the information they share. The technology can also accelerate transactions, improve transparency and provide customers with real-time access to data.

“Slow and steady” is the pace set for blockchain adoption

Companies must first grasp the complexities of blockchain, and then identify and implant it to start building their blockchain future. To find the best way forward, many companies are taking a two-pronged approach: investing in start-ups, forming alliances and leveraging accelerators, while also setting up blockchain labs (59%) with dedicated resources and putting together a blockchain interdisciplinary taskforce (60%). Nearly 75% of respondents said they have adopted a prototype approach to blockchain and are piloting initiatives.

Nearly every organisation is struggling with defining business cases for blockchain, and how and where to apply their efforts. In fact, 93% of respondents cited the difficulty of identifying and finalizing block­chain use cases while working with external partners or stakeholders. Given this uncertainty, we suggest that firms identify blockchain experts, consultants and thought leaders to help find and build a business case for blockchain.

Heed the trust trade-off: permissioned vs permissionless blockchain.

Given the amount of commercial data that banks use for transactional and interactional purposes, it is difficult to imagine organisations absorbing the risk of participating in a public blockchain net­work. Instead, they are gravitating toward solutions that run on permissioned (or private) networks, where they can maintain greater control over rule design and dispute resolution. In fact, 45% of our respondents expressed greater interest in permissioned blockchain, while 37% favoured permissionless block­chain.

Looking forward, 61% of respondents said their firms expect participation in blockchain networks to span multiple divisions or subsidiaries within their own organisation or to include one or two outside organisations, leading to greater adoption of permis­sioned and private blockchains.

Institutional change is inevitable.

Adding blockchain to an existing busi­ness process introduces a once-in-a-generation opportunity to change the cost structure of the firm. In fact, 60% of respon­dents believe that blockchain will significantly change the way business processes are carried out, and 80% believe that blockchain will either add a new operating model to their existing one or will outperform their existing conventional operating model and eventually replace it.

A flexible strategy will help overcome security and privacy challenges.

As with other new technologies, it will take time for businesses to become comfort­able with blockchain. This could be the reason privacy and security emerged as the number one external barrier (71%) to blockchain adoption. However, with its reliance on public key encryption (PKI) and hashing, blockchain actually has a much stronger defense mechanism than other approaches.

The concerns over blockchain security can be compared to the early days of cloud computing, before businesses realized that the infrastruc­ture provided by cloud providers is typically more secure than their own. We believe blockchain will follow a similar trajectory, with companies concerned about security and privacy first adopt­ing private and permissioned platforms.

Collaboration will be the basis for blockchain innovation

This cannot happen in isolation. Industry-wide collaboration among participants, exchanges and regulators is critical. Forty-six percent of respondents said they believe an industry consortium will govern their blockchain network of choice, whereas 22% believe a third-party will do so.

Blockchain offers a once-in-a-lifetime opportunity for firms in the Asia-Pacific region to provide an example to the rest of the world of how the blockchain revolution will unfold. Leaders that can separate blockchain noise from reality and adopt a flexible strategy in overcoming the inevitable business-technology and cultural challenges that occur along the way will be best positioned to reap significant advantage in business value far into the future.

Download the full report now at The Future of Blockchain in Asia-Pacific.

This article was previously published on Cognitive Perspectives.