BankChain promises to develop industry-owned blockchain technology to give even small banks the ability to offer instant payments to customers. iStock illustration
The American banking industry is ganging up to build its own blockchain and put banks back in control of their technology and growth.
The Mass Bankers trade group – along with 38 other state banking trade groups – announced the formation of the BankChain Alliance earlier this month. Banks that join the group will be able to access a range of new software that could offer a new way to compete against payments companies and other fintechs.
“We’re so reliant on third parties for our technology,” said Catherine Dillon, COO of Fall River-based BankFive, which helped launch the alliance. “We’re rolling up our sleeves to see what we can do within our industry to serve our customers.”
Banks would have to receive permission to join the blockchain, which would also come with joining the alliance. Instead of relying on third-party vendors to meet their needs, small banks can gain access to more impactful support through the network, said Mass Bankers President and CEO Kathleen Murphy.
“This is going to provide a reach for even the smallest bank that does not exist today,” she said. “Where oftentimes they are beholden to vendors, this way they are going to be part of this network. They will have the ability to help to set the rules and the standards, and in essence, set their own destiny, as opposed to being beholden to a third party.”
Those 38 state banking associations have been initial investors in the project along with some banks. Other banks have an opportunity to invest in the alliance by becoming “founding members.” Banks will pay dues based on the size of the institution, according to Murphy.
While right now the alliance is solely for banks, other entities are interested in joining the project, she said.
While an interim board is currently in place, the alliance is building out a structure so that founding members are able to vote for permanent board members, Murphy said. The board will be made up of six banks over $10 billion in assets, six banks below $10 billion in assets and three state bank association representatives.
Faster Payments, Lower Costs
Dillon believes the network can help banks compete in an era when consumers expect faster access to payments and funds.
“We’ve seen a huge positive customer impact through early ACH,” she said. “It just has made customers feel like their money is coming in faster, for sure. Customers are used to being able to move money within 24 hours. They want availability quicker rather than a waiting period.”
A main feature of being on the BankChain blockchain, which will offer programmable payments using tokenized deposits and stablecoins, is the ability for a bank’s customers to add rules or smart contracts to transactions, those interviewed for the story said.
These can allow for payments to flow more efficiently between bank customers, and also strengthen fraud prevention practices.
Rules can be set that can trigger alternate verification methods, such as a text message to the customer or another designated person to confirm a transaction. Then, on the blockchain, an application can look for the response to the verification request. These specific rules can be added onto banks’ payments system.
“Smart contracts could be adapted into organizations’ infrastructure,” said Jim Kisch, president and CEO of Vermont-based Passumpsic Bank, which also helped launch the alliance. “We do a lot of validation today on transactions, but what happens is that there’s so much money movement, it’s difficult to look in real time and stop a whole bunch of different traffic.”
Other areas of bank operations will see different kinds of efficiencies, and possibly hundreds of hours of manpower will be saved through the blockchain and tokenization project, Dillon said.
Banks will be able to build in protocols that will help ensure that transactions are compliant with banking regulations and laws, Dillon said, without time-consuming manual verification.
While there are existing technologies, such as real-time payments apps, that move money fast, it isn’t moved with the help of blockchain-based smart contracts or other features, said MassBankers’ Murphy.
An Aid to Smaller Banks?
Most of BankChain’s advantages won’t be obvious to consumers, Murphy said.
Banks will see the impact on the back end, instead. The speed at which payments occur will be quicker and more secure thanks to blockchain technology, and institutions will also be able to ensure regulatory compliance more efficiently.
All this, the BankChain Alliance’s organizers hope, could aid smaller institutions as they try to compete against big banks and fintechs, by helping smaller community banks like $934 million-asset Passumpsic Bank gain access to and afford technologies they otherwise wouldn’t be able to.
“Our bank can’t do it on its own because, at this point, it’s too big of an investment, and we don’t have the scale,” Passumpsic Bank’s Kisch said.
“It’s all about interoperability. I could build something – and banks used to do this. They all had their own [bank]notes, but they had to negotiate those notes between each other, and that was really extraordinarily difficult,” he added, referring to the era, before the Civil War, when private banks and not the federal government printed most of the nation’s money. “To have all the things that we want to provide our customers, we need the cooperation of many, and so that we can have scale, and then we can have interoperability between other institutions.”
Interoperability between banks will be a focus of the alliance, which wants to ensure its blockchain and tokenization projects are operable in existing networks and work with various core providers.
“What we are focusing on with BankChain Alliance is to ensure interoperability with the other networks that are in creation,” Murphy said. “To our knowledge, none has actually been created to do this up until now. There are certain requirements in the RFP for the technology solution provider, and one of those is that it would be core-agnostic as well.”
While similar networks might exist, the “secure, bank-grade environment” is a differentiator, according to Murphy.
Sam Lattof
Consumer Expectations Rising
Consumer expectations have also risen regarding technology. While costs continue to climb, even small institutions are expected to have serviceable, if not impressive, digital offerings. Through the blockchain, smaller institutions will be able to access technological tools it otherwise might not be able to on their own, said Carey Ransom, managing director at BankTech Ventures, a community bank venture capital investment fund.
“Customers today still value relationships but have a much higher bar of digital experience, response and transaction times, which all mean much better technology,” Ransom said. “Banks also need to become much more efficient to keep competing profitably as funding costs and lending rates continue to compress. That also requires automation and intelligence from better technology.”
The move is also being made to further protect banks who could be concerned about money leaving the banking system, according to Pasumsic Bank’s Kisch.
“There is a lot of risk that traditional financial institutions, and us as a group, are considering,” he said. “We’re considering this potential mass migration of money out of the banking system if there isn’t any changes and I believe there will be [changes]. I believe the banks will remain competitive, and that competition in keeping our customers happy and engaged will mean more lending.”
There is a need for more of these partnerships and groups, according to Ransom.
“There should be more community bank consortiums to give smaller banks better capabilities where scale matters,” he said in an email. “Data for better fraud and crime prevention; loan participation/syndications; data model/schema standards to do better analysis, targeting and customer personalization; and hopefully this alliance helps address better money movement and settlement standards. If a group of them are together and effectively working together, they can help create the solution versus just having it forced upon them.”
The alliance is aiming for the blockchain and tokenization projects to be completed in 2027.
