This Is What Disruption Looks Like: The Coming Shakeout In Transaction Banking

What does blockchain¹ disruption actually look like, on the ground? One hears about blockchain’s potential for disruption all the time, but mostly in generic sound bites that emphasize lower costs, improved transparency, higher efficiency, and the like. But seldom do those discussions get into the nitty-gritty of how disruption actually shakes out.

Now, in transaction banking, we have a small window into that process—what it looks like, how it affects markets, and how it may impact investors.

The consultancy Bain & Company issued a report estimating that blockchain technologies “have the potential to reduce trade finance operating costs by 50% to 80%, and to realize three- to fourfold improvements in turnaround times.” Bain is already seeing price declines in the SWIFT payments network as a result. Most important, according to Bain: “These forces are washing through every region and every product in the transaction banking portfolio.”

Therein lies the rub: all kinds of banks (global banks, local banks, investment banks) are currently piling into the transaction banking business, attracted by its steady fee income and high potential return-on-equity. Yet, as costs and prices are driven downward, thanks to blockchain adoption, that business may actually end up looking very different than it does today—in a few years, it may end up being a low-margin, commoditized business with just a few dominant players. It’s also very possible such operations may get carved out and sold off as profitability declines, splitting transaction banking from credit banking.

For investors, generic forecasts of blockchain disruption are not actionable, but use cases are. Here, that means understanding a portfolio’s exposure to transaction banking, across all its financial services holdings. In my view, one should be skeptical of any banks forecasting high profitability and revenue growth based on transaction banking operations—especially if those are new initiatives or planned expansions. Maintaining that revenue stream clipping fees is going to be very difficult if the cost of a transaction ends up approaching zero—as it may on a blockchain.