HSBC is pioneering blockchain in financial services—don’t find yourself playing catchup!

Since the advent of blockchain, banking and financial services (BFS) has been one of the technology’s leading industries in terms of applications.  Exhibit 1 leverages data from the HFS Blockchain Case Study Treasury, showing BFS as the most popular use case… and it’s not a close race! However, despite the interest shown by executives and the amount of prototyping, blockchain has thus far been unable to make a significant impact in the BFS industry. But this could all be about to change; HSBC announced recently that it would move $20 million worth of assets to a blockchain-based platform by March 2020. It’s time for BFS firms to stand up and realize that the race for blockchain is getting serious, or they risk becoming old news as their competitors benefit from new efficiencies while offering an enhanced product to their customers.

Exhibit 1: Banking and financial services is the leading application of blockchain technology

Source: HFS Research, 2019

Despite a range of value-adding use cases, blockchain has thus far struggled to reach the production stage in the BFS sector

Exhibit 2 shows the current stage of respondents’ most advanced blockchain initiative in the BFS sector. Less than 20% report that their projects have reached production, while almost half remain in the advisory phase. Outside of the traditional challenges for blockchain adoption like public perception, a lack of talent, and a failure to understand complex platforms, BFS firms also have to battle intense public scrutiny and tight regulations. But, this must not be an excuse to ignore blockchain as a solution; it has the potential to offer significant efficiencies for both banks and their clients.

Exhibit 2: Almost half of BFS blockchain initiatives are currently in the advisory phase, with less than 20% in production build

Source: HFS Research, 2019

HSBC has already showcased its appetite for blockchain, demonstrated by the firm’s involvement in the Voltron consortium

Voltron is a consortium aimed at streamlining the Letter of Credit process by leveraging a blockchain platform built on R3 Corda; its founding members are NatWest, HSBC, and ING. The goal is to leverage distributed ledger technology to lighten the load in this paperwork-heavy process, allowing all stakeholders complete visibility of all trade documents in real-time and enabling swift, accurate decision making. HSBC has since used the blockchain, and one of the earliest examples includes a shipment of wool from Australia to China.

But this isn’t the bank’s only involvement in blockchain in recent years. Throughout 2018, HSBC announced that it had settled $250 billion worth of forex trades using blockchain—this is a firm hungry to drive blockchain adoption in an industry that traditionally shies away from digital transformation.

Now HSBC believes it can overcome more obstacles as it plans to move $20 billion worth of assets to a blockchain-based custody platform by March 2020

Even more recently, HSBC announced a further commitment to blockchain—moving significant assets worth an estimated $20 billion to a new blockchain-based custody platform, Digital Vault. This is no small change. These records have historically been held in paper form, meaning any queries from customers were time-consuming and human-intensive. Given the speed in which circumstances can change in the financial service industry, any improvement in query response time could have significant benefits for HSBC’s customers while potentially driving down operating costs for the bank.

But this certainly isn’t the only blockchain project in the BFS space. Service providers are armed and ready to help, as proven by the broad range of projects. For example, Wipro, in partnership with R3, has developed a blockchain solution enabling digital currency for interbank settlements for a consortium that includes Bank of Thailand. Meanwhile, Infosys Finacle has recently completed a global trial that saw numerous banks conduct trade finance transactions across a range of products on a blockchain platform built with help from R3.

The Bottom Line: HSBC has proven that incumbent banks are capable of driving their blockchain initiatives into production. Competitors must take notice; otherwise, their customers will jump ship in pursuit of new efficiencies.

Previous research from HFS analysts has called on banks to improve their offerings; however, they are notoriously unwelcoming of digital transformation. Intense public scrutiny, crippling legacy systems, and strict regulations make it incredibly difficult. As pioneers like HSBC drive their blockchain initiatives into production rather than remaining stuck in the piloting and advisory phases, they allow their customers near-instant access to their investments. This means the clock is ticking for competitors before their customers make the switch. The time to act is now. Service providers are ready to support any bank in their blockchain initiative, or firms could think outside of the box and consider partnering with academia to accelerate the process. It doesn’t matter, as long as you get the ball rolling on your blockchain initiative.