Blockchain technology has the potential to help end users in a multitude of ways—but for some larger enterprises, the extreme efficiency may lead to lost revenues.
Financial institutions make a lot of money on cross-border transactions, as well as small banking fees and commissions. Canadian banks could lose up to 35 per cent of their revenue if and when blockchain replaces legacy methods that create these revenue streams, the second highest total amount lost of any country in the world, according to a new report from Moody’s.
“The technology could make cross-border transactions faster and less expensive, a credit positive for banks; but these efficiencies could also compress banks’ fees and commissions, a credit negative,” reads the report. “Streamlined cross-border transactions through blockchain would leave banks with less room to charge transaction fees and commissions on foreign exchange transactions amid mounting competitive pressures.”
Swiss banks will be the most at-risk of losing money to blockchain implementation, as they report 50 per cent of their revenue coming from fees and commissions. Canada sits in second at 35 per cent tied with italy and Israel.
The Bank of Finland recently ran an experiment to see how they would recoup lost income if their fees and commission revenue was halved. The data was then extrapolated to see how other financial institutions in other regions would have to react and change pricing structures to make up for the lost income blockchain tech would cause.
North American banks would have to find a way to increase their net interest income by around five per cent in order to cover a scenario where blockchain tech halves incoming fee and commission revenue. Net interest income is the difference between the revenue generated from a bank’s assets and the expenses tied into paying out liabilities.
The international transfer of money is the area where blockchain could save banks the most money and disrupt traditional methods. Right now, it takes up to four intermediaries to vet an international money transfer—a blockchain-enabled transfer would involve just the sender, receiver and one blockchain intermediary, as seen below. Companies like Flinks and TransferWise are trying to streamline the current process, but blockchain will rewrite the idea altogether.
Canada would actually not be too affected by lost cross-border claims, as they fall out of the top 10 countries in terms of transfers from banks in one country to any institution outside its borders.
Blockchain has the power to streamline facets of every industry, and that will result in lost money from additional fees or labour. End-users will be happy, but the companies will have to look for new ways to source income, as it’s pretty certain now that blockchain is here to stay.