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ATB Bank recently completed a 20-second cross-border payment to Germany using Blockchain-based technology. The transaction underscores the benefits of Blockchain, and it’s time for CFOs and chief risk officers to ask themselves "Can distributed ledger technology and Blockchain solve problems here?" FEI Daily spoke with Kris Hansen, Senior Principal, Financial Services at SAP on the potential for Blockchain to increase efficiency and security which reducing costs.
FEI Daily: What is Blockchain and why is it so much faster than traditional processes?
Kris Hansen: There are terms that get kicked around in the industry, but they all fall under Blockchain and distributed ledger technology. We have a potentially trustless ledger that everybody shares and they work as nodes on a network. What’s powerful about that is that we have a technology that allows us to create a network of value. And when we think about the network of information we built with the internet, the potential impact for a network of value is profound. I think this is what gets people's interest on the Blockchain.
What's faster about it is because we have potential to disintermediate several stops along the way. As we're moving funds, as we're looking at the settlement process, as we're looking at the reconciliation process right now, and many parties in an interaction will have their own ledger. They'll have their own view of the truth, so we end up spending a lot of time and energy verifying and reconciling our view of the truth with others, and then having to go into a remediation when these truths don't match. This is often the case even within a single organization.
I've worked with large tier-one banks to try to get a single point of truth. Now you take a few of these tier ones and you put them together, and that [challenge] gets exponential. I think this is where we get a lot of the speed from. Certainly there are fast ways of sending money today, and there are fast ways of doing transactions, but it's taking out some of the complexity, and remediation, and reconciliation where the speed really kicks in.
FEI Daily: How does Blockchain reduce errors?
Kris Hansen: One of the things about the protocol and the approach to distributed ledger technology, in this case, is that settlement and reconciliation happen in the same conversation as the payment. So the payment's happening, the reconciliation's happening, the settlement's happening, we all agree and then we move forward.
Right now a lot of payments are sent in a “fire and forget” fashion. The payment is sent and then maybe next day, if there is an exception, or the funds don't clear, or if there is a problem, then we have an exception report, and that gets sent back, and there's a lot of back and forth activity on the payments conversation. That was one of the things that we wanted to understand in this proof of concept and demo: what is the goal and how does that really work for settlement and reconciliation? And that was one of the things we discovered is this bidirectional protocol means that it's not “fire and forget,” and figure out later. It's let's figure it out while we are talking about it.
FEI Daily: What are the implications for finance executives?
Kris Hansen: It's still early in terms of Blockchain technology platforms and I watch this space daily. And every morning I have a tall cup of coffee and I go through my feed and look at what's changed in this space. And every day it's mind-blowing, the amount of velocity and evolution in the space. It's not that Blockchain technology is settled or resolved. But I think financial executives need to really think about the potential implications here and start to think about it in a hands-on way. I think the best way to understand this technology is to look at applying it to a business case. And taking a problem and asking the question "Can distributed ledger technology and Blockchain solve problems here?".
FEI Daily: What is the significance of the Blockchain payment that ATB Bank sent?
Kris Hansen: First of all, SAP wanted to show the industry that we could move quickly. We executed this in about 10 working days. And the way that we did that is we really brought our platforms to bear. We pulled our platforms in, we used them as reference systems, we used our HANA cloud platform as a way of prototyping and building a corporate mobile banking app, and we helped configure and set up the Ripple (a digital fintech company) connect gateways and integrate that into the prototype.
I think it was interesting for us because we wanted to prove to the industry and to ourselves that we can do things really quickly. We took Blockchain out of the labs. And in the case of ATB, they wanted to send this payment in real time as a live demo in front of 500 people in the payments industry. And they wanted that to be a real-value transaction. It wasn't in the lab. We had to have the full schematic on how we would do this in production, so we had to do some real thinking. We couldn't just fake it out.
We did a two-day hackathon and in that hackathon we were designing, we were planning, we were building, we were configuring, and everybody was learning something. And then we had nine days from there to execute, finish the development, and get to the point where we were ready for this live demo. As you can imagine, there was a lot of pressure knowing that this was going to be a live demo. The CEO of ATB also challenged the industry and promoted this event. So all eyes were on this transaction.
They've got [corporations] that are going global and as a mid-size bank they don't necessarily have the counter-party banking relationships in far-flung places like tier ones might. And for them, it's an exploration into "Can this Ripple network help us connect to, and extend our banking relationships globally?" Now with our current relationships sending funds like this is a three, maybe four-day process, and for their customers if they can move money in 20 seconds, they would see that as a customer experience win. FEI Daily: What are the next steps when it comes to Blockchain?
Kris Hansen: There was initially a lot of excitement around taking Blockchain into the labs and kicking it around and understanding it. And most of the banks that I'm talking to have R&D fatigue. Now they want to look at how to apply this to a specific business. There are so many profound concepts and the level of disintermediation that's possible with distribute ledger technology is significant enough that I've seen people in a workshop get sort of paralyzed with this really radical technology.
The first case is to simplify it and this is really what we did with ATB Bank. Money movement is not necessarily the problem that the distributed ledger technology is going to solve but it's a place to start. The next phase is about applying this technology to a use case that people understand, in a way that's achievable and then understand and analyze the results.