For those institutions making large commitments to blockchain technologies, this PaymentSource article paints a more pessimistic view regarding ROI than Mercator’s project with CO-OP Financial Services and TMG did. TMG and COOP publically released the results of that Mercator research here. This article identifies two projects due to be released next year by financial institutions and results of a survey, but then offers this warning:
While blockchain inches closer to its entrance into the industry, banks need to temper expectations regarding the returns they will see on initial applications. Because of regulatory uncertainty, banks will initially use blockchain technology for internal purposes and for targeted use cases that – most likely – won’t involve the actual transfer of money.
Instead, initial blockchain deployments will focus on transferring data for compliance reporting, know-your-customer rules, loan documentation, trade finance and other use cases. These internal blockchain projects are unlikely to deliver the full benefits of blockchain technology.
The article identifies coordination of participating entities as the key challenge:
“Maximizing the value of blockchain-based products and services, after all, requires leveraging many network participants that can share the cost of building and operating the network. In other words, the true value of the blockchain will come from industry collaborations and consortiums that leverage blockchain for transacting between participants.”
The ability to deliver a solution that addresses the requirements of a multitude of financial organizations and their regulators is indeed a key challenge, including the need to address data residency issues and the business structure of the entity delivering the common service. Ripple Labs went through several product and organizational changes, but is arguably now well aligned to meet the needs of financial institutions – but it took 5 years to get there. Cloud solutions can deliver a far more flexible multi-user environment today without blockchain, witness how quickly Early Warning is able to offer banks integrated solutions.
Mercator research strongly suggests that financial institutions first document the use case and the organizational structure required for the solution, and only after these two critical issues have been resolved, evaluate which technology will provide the best ROI – because both blockchain and cloud solutions can deliver secure and reliable interoperability but each has a very diverse set of limitations.
Note that the structure of a blockchain solution is further befuddled when the blockchain is implemented “in the cloud.” A cloud configuration usurps key attributes of a blockchain solution, taking over such important functions as distributed operation and permissions. In a show of sheer audacity, some cloud solutions have even offered a single node blockchain implementation that supports multiple entities, which is clearly an oxymoron since in this environment it is no longer a distributed solution.
Overview by Tim Sloane, VP, Payments Advisory Service at Mercator Advisory Group