Should Community Banks and Credit Unions Worry About Blockchain?



There is more hype, discussion and disagreement about Blockchain than any other technology impacting financial services today.

There has been a lot written about blockchain (or more generally Digital Ledger Technology). There are some good tutorials on what it is. The news media seem to always have some new application that is in pilot. All the large banks are in at least a couple of blockchain consortia.

But should smaller FIs leave all this early activity to the larger banks?

Why should smaller FIs be interested in blockchain?

In the long term, there are likely to be major changes in how banking infrastructure works. This will impact community banks and credit unions. Examples of areas to expect change:

  • Payments clearing and settlement. The much-hyped Ripple solution, for example, aims to take correspondent banks out of payments. And some governments are looking at blockchain-based national and international payment systems.
  • Enablement of digital currencies, such as Bitcoin.
  • Capital Markets. Securities clearing, settlement and custody are all likely to be simplified and made faster.
  • Digital identity management with the potential for globally shared, secure, unbreakable and unstealable personal and corporate identities.
  • Supply chain management improvements may make it easier for smaller banks to participate in payables and receivables management, and in supply chain finance.
  • Regulatory compliance and oversight will change in a number of ways, mostly positive all around.

Core banking vendors will undoubtedly be impacted by blockchain technology. At a minimum they will need to interface with digital ledgers for various interbank transactions and support regulatory expectations. They may also have opportunities ultimately to transform the whole approach to building a core banking system. These things will, of course, impact their customer banks and CUs.

How should smaller FIs show their interest?

That you should be interested, as a long-term watch item, is a given. But how about getting involved in consortia, experiments, pilots and trials? This author answers with an almost resounding “No!” The only exception is if you have a particular business problem that is unique to you – a niche business – that would be best solved by digital ledger technology and could be implemented with appropriate risk. I do not know of any examples, but please let me know if you have one.

Also, do not wait for global rollout of blockchain-based solutions for payments, securities, digital identify, etc. These will take several years, regardless of the amount of hype surrounding bilateral or point solution pilots. You have shorter-term needs to meet customer expectations, address regulatory issues, and grow your non-interest income. For example, in payments there is nothing urgent about Ripple. Community banks in particular need to focus on offering faster payment mechanisms such as same-day ACH and lower-cost cross-border payment capabilities.

Industry consortia

There is one interesting nuance on the “do nothing” approach recommended here. There is the potential for industry-driven initiatives in which blockchain can enable the community banking or credit union industries.

A handful of larger credit unions and CU service organizations are in the process of forming a consortium called CULedger. This is focused on the provision of distributed ledger-driven services for credit unions, intended to drive out cost and enable new and improved products. CUNA is also actively participating. It is too early to say what the priorities will be, but industry-wide action could certainly be beneficial.

Even more recent is the Community Bank Blockchain Alliance. This vendor-led group seems initially to be particularly focused on digital currencies (such as Bitcoin). It isn’t clear that any community banks have yet signed up. However, sooner or later a community banking-focused consortium is to be expected.

The risks of not paying attention

Some very highly hyped technologies require more attention than others. One fruit of hype is FOMO – Fear Of Missing Out. Blockchain has generated a lot of it. For smaller FIs, FOMO is a distraction and a luxury very few can afford.

Nevertheless, there is always risk in completely ignoring new technologies, just as with new market conditions and new customer expectations. It seems like you can’t afford to let it pass you by.

By all means keep your eyes and ears open. It makes sense for someone in the bank to do highly selective reading on blockchain progress. Engage in core vendor discussions. Listen to what is going on in your favorite industry association, including blockchain-specific industry initiatives.

What's next?

But don’t plan to invest in blockchain technology for at least the next couple of years. If you’re looking for new technologies that are ready for prime time and will meet existing customer needs, consider:

  • Artificial Intelligence (natural language processing, machine learning, neural networks) specifically focused on bank and customer decision-making
  • Advanced data analytics to support more targeted marketing and sales
  • Video and voice communications to meet the expectations of younger generations of consumers and business owners.

Even before you consider these, look at your current technology capabilities. Is your data all over the place? If so, clean it up. What does your website look like? Or your mobile apps? Seek advice on digital marketing and delivery.

Most of all, if you don’t have a business strategy-driven technology road map, then build one (with outside help if, like most banks, you need it).

Let the business needs – of your customer, regulators, employees and shareholders – drive the technology. Never let the technology drive the business!