Why Credit Unions Need to Understand and Leverage Blockchain

In recent years, the tech industry has been buzzing with mentions of blockchain. As headlines continue to tout blockchain’s world-changing potential, many still find themselves asking, “What is blockchain?” With all the noise surrounding this technology, it’s no surprise that many executives still wonder what it actually means for their credit unions and whether the blockchain is truly here to stay.

Media hype aside, blockchain’s potential continues to be realized daily. To write it off at this stage could be a significant lost opportunity for one’s business. In order to discern how and why a credit union might be able to utilize blockchain technology, the first step is to understand exactly what it is.

What Is Blockchain?

Blockchain is a distributed ledger technology that confirms transactions between two parties. Transaction information is gathered into blocks and recorded in cryptographic chains in chronological order, all of which can be saved in a public or private domain. The ledger is decentralized and distributed amongst the network’s participants, making it difficult for a single point of failure to exist. The computing power needed to facilitate and confirm transactions is shared by the servers connected to the network, eliminating the need for any overseeing authority.

The shared ledger allows for better protection from fraud as it maintains a permanent record of all transactions in the network, which can be accessible to anyone with an internet connection. Given the prevalence and cost of fraud (more than 40% of financial institutions experienced increasing losses from fraud over a one-year period, according to a Federal Reserve survey), the benefit of mitigating these risks is massive.

Is Blockchain Just Bitcoin?

To many people blockchain and Bitcoin are synonymous, and while Bitcoin marks one of the first implementations of blockchain, it is certainly not the only one. Blockchain actually has a large variety of applications including peer-to-peer payments, smart contracts, crowdfunding, governance, supply chain auditing, identity management, and perhaps most importantly for credit unions, anti-money laundering and know your customer (KYC) compliance. Bitcoin is just one of the many applications of blockchain technology.

Why Should Credit Unions Care About Blockchain?

As credit unions race to find solutions to adhere to AML and KYC compliance, blockchain may be the answer. Here’s why:

1. Blockchain technology is growing across all industries – credit unions can no longer ignore it. The financial services space in particular will see a lot of new technology over the next decade as evidenced by massive, multimillion-dollar investments in blockchain technology from large banks, technology firms, venture capitalists (VC) and the public. According to Crunchbase, the first half of 2018 saw almost $1 billion more in global dollar volume raised in VC rounds than the first half of 2017. Additionally, blockchain’s value added to businesses is expected to grow to slightly over $360 billion by 2026, then surge to more than $3.1 trillion by 2030, according to a recent Gartner report. The reason for such growth is because blockchain technology answers current consumer expectations in that it can be considered safer, faster and more efficient.

2. Blockchain creates new opportunities for credit unions. Regulators have increased attention on Bank Secrecy Act and AML programs at financial institutions through regulatory exams. According to Accenture, risk management and other costs associated with AML compliance have increased more than 50% over the last three years. A report from LexisNexis Risk Solutions estimated total yearly compliance costs at over $83 billion for EU banks alone. As assets grow and new customers and members are onboarded, financial institutions are expected to improve risk management practices and policies to reduce fraud and prevent undesired activity. Blockchain technology can add new features and data points associated with KYC and Know Your Transaction (KYT), allowing credit unions to make more informed decisions on new and existing transactions and member activity, thus proactively improving and tightening up risk management.

Additionally, blockchain drastically improves transaction speeds as it can process thousands of transactions per second, allowing credit unions to simultaneously cut costs and increase efficiency. As new services are added that further utilize blockchain technology, credit unions can also differentiate themselves from their competition. Blockchain technology can be a solution for risk management, lending platform efficiency, clearing and settlement, cross border payments and remittances, trade finance, digital identity, data storage, security and more.

3. Strategic partnerships can do the heavy lifting for credit unions. While many credit unions do not have the bandwidth or the resources to tackle blockchain technology development in-house, they can benefit from partnerships with companies that specialize in executing blockchain solutions. This gives them an opportunity to implement solutions customized to fit their individual needs. Additionally, by partnering with an experienced firm, they can reduce research and development costs while concurrently mitigating the risks associated with testing a new technology.

Credit unions serve to benefit immensely from the cost-saving and security enhancing features that come with incorporating blockchain into their compliance systems. Current applications of this technology have the power to immediately reduce costs, hassle and risks, enabling them to better serve their members. Where early adopters choose to implement blockchain, this technology is disrupting old processes and expensive legacy systems. Firms that ignore the opportunities offered by blockchain will continue to face the rising costs associated with increasing regulation for AML compliance.

Ash Shilkin is President of Ivy. He can be reached at ash@ivyproject.com.