Tulip Crisis or Revolutionary Technology
As Bitcoin hovers around $7,000 in November of 2017, up from less than $1,000 at the beginning of the year, sceptics (including financial institutions) are no longer ignoring the megatrend of digital and crypto currencies[i]. Jamie Dimon, CEO of JPMorgan, sent waves through the financial services community when he dubbed Bitcoin as “a fraud”, even likening it to the Tulip Crises of the 17th century[ii].
While Dimon may be a skeptic of Bitcoin, he also vehemently supports its underlying technology, the blockchain, as an undeniable force in the financial services industry. The blockchain is a decentralized, cryptographic record of every transaction, which can be accessed by any node on the network and unchangeable. Blockchain technology will impact several existing functions of banks, including clearing and settlement, payments, trade finance and even identity[iii]. The structure of the blockchain will help to reduce risk and transaction costs, and improve speed, efficiency and transparency[iv]. For example, as estimated by Accenture, banks could save $10bn by using blockchain to improve the efficiency of clearing and settlement[v]. The future of digital payments – particularly cross-border payments, is less clear and banks, along with others in the ecosystem, are in a tussle as to what the future of the payment chain will look like.
Cross-Border Payments – Since the 15th Century
The current cross-border payment system, also known as correspondent banking where one financial institution executes a transactions on behalf of another which has no local presence – is a lucrative one for financial institutions “that has been around since the time of the Medicis[vi].” A 2016 report by McKinsey estimates cross-border transfers to account for over 20% of the $800tr in annual transfers, but over 50% of the $570bn in revenues in 2014[vii]. This business line is at risk of disruption from emerging technologies and services including Paypal, Transferwise, and blockchain-enabled services like Circle and Ripple. Banks are facing increasing pressure from consumers, who view the new technologies and services as less expensive, fast and transparent on cost and delivery times compares to traditional cross-border payments. In addition to the loss in revenue as a result of lower customer transfers, banks are facing pressures on their margins. According to the McKinsey Report, if “the emerging pressures were to drive cross-border revenue margins down to domestic levels, industry revenues would drop by 70 percent, inflicting losses of $230 billion on banks globally[viii].”
The Process Needs Rethinking
In the short term, J.P. Morgan should focus on the customer promise, to deliver cost-efficient timely and secure cross-border transfers. The first step would be to optimize the current internal process for completing a cross-border transfer. About 60% of B2B transfer need a form of manual interference, according to a 2015 study by Traxpay[ix]. J.P. Morgan started in the right direction when it launched a new payment processing network, The Interbank Information Network (INN), that utilizes the blockchain to reduce the number of partakers needed for compliance and other data-related inquiries that often delay payments[x]. “IIN will enhance the client experience, decreasing the amount of time – from weeks to hours – and costs associated with resolving payment delays,” said Emma Loftus, Head of Global Payments at J.P. Morgan “Blockchain capabilities have allowed us to rethink how critical information can be sourced and exchanged between global banks[xi].”
In the medium to long-term, J.P. Morgan must redefine core processes and realign the customer value proposition. Swift, the bank-owned messaging system used to send trillions of dollars’ worth of payments[xii], is no longer adequate to fulfill the customer process. J.P. Morgan must invest in the digital infrastructure that will cater to (i) customer expectations (ii) new-gen regulatory requirements and (iii) greater efficiencies and margins.
While the digitization of the cross-border payments chain is unquestionably beneficial to J.P. Morgan, some questions remain. Should banks like J.P. Morgan disrupt lucrative businesses that make up large revenues of their existing businesses? Will more customers move towards regardless to the non-bank offer i.e. TransferWise, Western Union etc.?
[i] Coinbase, “Bitcoin Share Price,” [https://www.coindesk.com/price/], Accessed Nov 9th 2017
[ii] Jamie Dimon Interview at Delivering Alpha Presented by CNBC and Institutional Investor, <https://www.cnbc.com/2017/09/12/jpmorgan-ceo-jamie-dimon-raises-flag-on-trading-revenue-sees-20-percent-fall-for-the-third-quarter.html>
[iii] FT Five Ways Banks Are Using Blockchain Oct 2017 <https://www.ft.com/content/615b3bd8-97a9-11e7-a652-cde3f882dd7b>
[iv] “Innovation in Payments: The Future is Fintech,” BNY Mellon, (2015), [https://www.bnymellon.com/_global-assets/pdf/our-thinking/innovation-in-payments-the-future-is-fintech.pdf], accessed November 2017.
[v] “Banking on Blockchain, A Value Analysis for Investment Banks,” Accenture Consulting, (2017) [https://www.accenture.com/t20170120T074124Z__w__/us-en/_acnmedia/Accenture/Conversion-Assets/DotCom/Documents/Global/PDF/Consulting/Accenture-Banking-on-Blockchain.pdf#zoom=50], accessed November 2017
[vi] Olivier Denecker et al., “McKinsey on Payments”, McKinsey & Company Global Payments. 9:23 (June 2016), [http://www.mckinsey.com/paymentspractice/knowledge_highlights], McKinsey & Co., accessed November 2017
[vii] Ibid, Data from McKinsey Global Payments Map
[viii] Ibid, Page 3
[ix] “Dynamic Payments for Dynamic Commerce,” Traxpay, [https://traxpay.com/wpcontent/uploads/2014/09/Traxpay_Commerce-Network_FINAL.pdf], accessed November 2017
[x] “J.P. Morgan Deploys Blockchain with New Correspondent Banking Network,” press release October 16 2017, on businesswire website, [http://www.businesswire.com/news/home/20171016005402/en/J.P.-Morgan-Deploys-Blockchain-New-Correspondent-Banking], accessed November 2017
[xii] Martin Arnold, “Five Ways Banks Are Using Blockchain,” The Financial Times, October 16 2017, [https://www.ft.com/content/615b3bd8-97a9-11e7-a652-cde3f882dd7b], accessed November 2017