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Zero One: Should Banks Board the Blockchain Train?

Last year ended with a bang for blockchain in banking, but now banks need to tread carefully when adopting the technology, Forrester says.

In the summer of 2016, a whopping 93 percent of global financial executives knew about potentially disruptive blockchain technology, while only 3 percent were piloting projects, according to a Forrester survey. Not surprising given the risk-adverse nature of banking.

But signs of adoption have been showing up, especially last fall. Now financial executives need to tread carefully as they enter the hype stage of a technology that’s still maturing.

“The technology itself is nascent, and nobody has yet developed the governance models that form the foundation for a functioning ecosystem,” say Forrester analysts Jost Hoppermann and Martha Bennett in a research note last month. “Nevertheless, many bank executives show a degree of enthusiasm that leads to inflated expectations and high investments that may not create sufficient value.”

Blockchain-based use cases in the finance industry include post-trade processing, payments, settlements and trade finance, also called distributed ledger technology solutions, or DLT.

The second half of 2017 bore witness to a bevy of blockchain activity. Last October, Mastercard opened up its blockchain API for sending money. Blockchain-related announcements from banks and vendors followed on its heels, leading to 2017 being a big year for blockchain technology.

Related: Blockchain Expert Lays Out its Tech and Business Implications for the Channel

There’s no question banks are taking blockchain more seriously than ever, piloting projects and considering various use cases. Others are being even more aggressive.

“Fearful of missing the boat, they are investing heavily in research, proofs of concept, and pilots to gain blockchain know-how,” Hoppermann and Bennett say. “A medium-size regional bank, for example, has not yet firmly determined the best use case but plans to go live with its first operational DLT solution by mid-2018 nevertheless.”

That’s not to say blockchain is a bad idea for banks; with the right use case, banks can find success. “If, for example, a handful of banks create a DLT solution supporting the trade finance processes of the major exporters and importers, business benefits can be immediate,” Hoppermann and Bennett say.

Forrester advises banks to ask themselves a few questions to see if they’re ready for blockchain. Here are only a few of them:

Does the bank’s executive team have the stomach for shaking up culture, redesigning processes, and writing off a chunk of the initial investment? Given the multitude of DLT protocols and solutions out there, is the bank willing to commit the necessary resources? Do you have the right partners to build and implement the technology? Will multiple parties agree?

“If a bank’s organization, culture, and customer and partner ecosystems are not yet up to this journey, decision makers need to accept that they will introduce DLT at their own peril,” Hoppermann and Bennett say.

Tom Kaneshige writes the Zero One blog covering digital transformation, AI, marketing tech and the Internet of Things for line-of-business executives. He is based in Silicon Valley. You can reach him at [email protected].

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