On the advent of blockchain technology, core banking solutions within banks are going to face major challenges. The quintessential dimensions of core banking solutions such as defining and replicating products, processing transactions, and GL mapping and accounting are in danger of becoming obsolete due to the arrival of blockchain technology. It may take a lot of effort to replace such aspects on blockchain technology, but once they are fully evolved, core banking solutions are in danger of being either gradually redundant or losing their importance.
Here are some of these aspects I feel will be the first ones to face the threat:
Smart contracts are essentially a set of business rules that can be added/modified as per product requirements. Since the concept of blockchain is that it is distributed, it becomes much easier to roll out product characteristic blocks across different locations. Only the set of business rules must be addressed – i.e. for a savings account, there will be business rules to apply interest or limit the number of transactions per month. However, in the case of checking accounts these business rules may not be applicable. Thus, by tweaking the business rules, the roll out of standardized or localized products to different locations will be easier. The loans lifecycle can also greatly benefit from the smart contracts concept. Moreover, the ability to share legal and regulatory documents among various parties will be easier to handle on blockchain. Thus the contracts managed in core banking platforms will be redundant.
Presently, KYC data capture and management are cumbersome jobs. Shared KYC records among banks on blockchain can be a potential problem solver and make life simpler for banks. If different banks trust each other’s KYC process by agreeing to standard rules, then the burden of re-KYC will be drastically reduced, over blockchain. Gradually it will work like a single data source and unify business rules for all banks on the blockchain. Hence shared KYC records will replace individual KYC records by banks.
Syndication for corporate loans is an area that can significantly benefit from blockchain technology. Different steps of syndication can be executed much faster and in a cost-effective manner. Maintenance and servicing of syndicated loans on blockchain technology will be easier to handle compared to the current scenario of each bank maintaining and manging their own records. Moreover, loan servicing on blockchain will be more real time, thereby leading to redundancy of such data managed by core banking platforms
Clearing and Settlements
This is one area where early action on blockchain technology has already begun. The potential benefit is reduction in processing time, a more real time settlement as compared to the current scenario. Other advantages will be the availability of audit trails that are tamper-proof, as well as a reduction in per transaction cost. Under the blockchain regime, the possibility of gross settlement (or the true settlement as it is often called) can be executed effectively and in a time efficient manner than the net settlement. This will result in higher transparency and lesser reconciliation. What it will lead to is core banking platforms losing their involvement in the process.
General Ledger and Reconciliation
One of the most painful areas of legacy core banking solutions is General Ledger (GL) reconciliation. Almost every bank today faces this challenge. The question is: what is the need for reconciliation if a system was handling accounting entry validations? The answer is that there were exception situations of handling accounting that weren’t thought of before, hence entries were passed to some other GL for the time being. Because there was no immediate solution for reconciliation, it was often procrastinated. GLs in core banking solutions are generally defined as sub GLs under the enterprise GL. The sub GLs, as rationalized during the time of chart of accounts set up could not evolve with time. Hence reconciliation became tougher. With blockchain technology claiming advantage of distributed GL will help the reconciliation scenario in an exception situation better, and since it is shared, there are now more eyes watching the situation versus the current scenario.
Core banking systems are going to face tremendous challenges from different disrupting forces, whether it is technology or business related. However, above are some of the challenges they face due to the arrival of “still-evolving” blockchain technology platforms. It may take enormous effort and lines of code for blockchain technology to come up as a replacement, but it is surely going to be a major threat to the legacy core banking platforms and their existence. Legacy core banking platforms may be reduced to keeping transaction history and processing off business hour records processing. Such a scenario sounds the death knell for legacy core banking platforms.