Retail financial services have embraced digital technology to provide mobile banking and data-based services to retail customers. Blockchain has gained traction alongside these advancements, but traditional institutions are hesitant to incorporate true blockchain solutions into retail financial services. Some impacts have already been seen in capital markets and wholesale banks, but not as widely seen in the retail sector. We look at some of the use cases where blockchain has already had a mark on retail financial services, and where are the strongest ways in which blockchain could and should be deployed at scale.
Payments and transactions
Sending and receiving payments, using your debit card or your mobile banking - all of these payments and transaction uses can be improved by blockchain. The Potential:
- Security. The distributed nature of blockchain means that single points of failure are eliminated. Intermediaries such as transfer agents or other system operations are stripped back, meaning fewer chances for mistakes or loss of data in the transaction process. Data integrity and protection against fraud increases with the cryptographic nature of blockchain transactions.
- Transparency. A transparent and immutable ledger enhances trust for different parties in a network to collaborate, manage data, and reach agreements.
- Cost. Research in 2023 suggested that blockchain deployments could save banks more than $27 billion annually by 2030, with one McKinsey study estimating $4 billion saved in cross-border payments a year if blockchain is applied.
- Speed. Modern retail banking customers want faster settlement times. A Federal Reserve study from 2023 showed that one-fifth of US-based respondents who used crypto did so solely because they could send money faster. The percentage of people using checks and money orders dropped from 47% in 2022 to 31% in 2023. Americans are clearly eager for more affordable, faster payment times, but currently the US lags behind the European Union - which mandates that instant payments are universally accessible, secure, and affordable.
The Future:
Payments and transactions are one of the areas in which blockchain could have the most useful impact on retail customers. The digital payments market is projected to reach US$11.5 trillion in 2024, with a total transaction value in digital commerce alone projected at US$7.6 trillion. Incumbent technologies are costly compared to blockchain, but it is up to retail banks to incorporate distributed ledger technology alongside their systems - or replace them altogether.
Customer data
The Potential:
- KYC and AML. Blockchain enables shared, decentralized storage of customer information. Know Your Customer (KYC) information allows financial institutions to access verified knowledge of their customers, which helps with more accurate financial services. Anti-Money Laundering (AML) protocols allow more customers to engage with financial products. With blockchain-facilitated KYC/AML protocols, operational risks are reduced and costs lowered.
- Data privacy. Blockchain provides the tools for granular data privacy across every layer. Data kept safe and shared safely between business networks dramatically improves transparency, trust, and confidentiality for retail customers.
The Future:
KYC is an expensive and involved process, and that causes friction in the customer/provider relationship. Customers would benefit from the reduced costs passed on to them and could receive real-time verification based on their information. This secure storage and processing of customer data would mean that retail financial services could make more informed decisions more accurately, and instantaneously.
Rewards
The Potential:
- Tokens and rewards. Retailers can create their own fungible or non-fungible tokens as loyalty programs. Better engagement with customers means better brand narratives and stronger brand loyalty.
- Customer loyalty. Rewarding customer loyalty can also be made easier with blockchain technology. Fungible tokens specific to a retailer are able to mix the concepts of in-store currencies such as loyalty points and real-world currency, by allowing customers to pay with rewards. Blockchain enhances these capabilities and adds a new layer, such as non-fungible tokens (NFTs) which offer a more diverse set of perks for the retailer to choose from.
The Future:
Brand narratives to promote loyalty can be entirely directed and managed on the blockchain in combination with payments. This is similar to the way in which the gaming industry has embraced blockchain, with players able to pay with in-game currencies, mint in-game products, and create immersive, individual worlds. If the same is applied to creating fulfilling retail experiences, retail financial services could unlock a whole new level of rewards and loyalty programs.
Unbanked and underbanked
The Potential:
- Remittances. People have been sending money around the world to support others since forms of payment were first created. In 2023, officially recorded remittance payments to low and middle-income countries were estimated at US$656 billion, according to the World Bank. Remittances are a massive part of the retail financial services industry, but it’s an expensive one. Fees for customers are high and transfer times can be counted in days, not moments - unlike crypto exchanges.
- Currency and market stability. Huge increases in interest and uses of digital assets in emerging economies prove that these markets are looking to cryptocurrencies, NFTs, and asset-backed stablecoins to facilitate easier transfer of value. It is also seen as a potential alternative to volatile fiat currencies vulnerable to inflation.
The Future:
With the adoption of blockchain, retail financial services would be able to provide services to those they couldn’t before. Underbanked and unbanked populations are increasingly turning to digital assets to access financial services that had previously been closed to them. With fintechs able to utilize blockchain for payments, the competition for customers eager to make cheap, fast remittance payments has increased, and incumbents can now see that the costs and efficiency must be lowered to expand their retail financial services. In Latin America, 70% of the population is unbanked or underbanked, and remittances have grown faster in the region than at the global level (10% annually in the last ten years, compared to 4% globally). This goes some way to explain why it is Latin America that is leading the world in CBDCs (Central Bank Digital Currencies) and crypto interest. Retail financial services that want to tap into this market in areas such as Latin America have the tools to do so through the blockchain.
Blockchain and retail
Blockchain technology holds a huge amount of potential for the retail banking industry through payments, customer data management, rewards systems and serving the huge underbanked and unbanked populations through services such as remittances. The benefits of faster transaction times, improved security, and reduced costs are the keys that incumbents can use to opening their future with blockchain and begin to integrate the technology - if they are willing. It’s going to be an essential lesson for traditional banks, with their future depending on more customer-centric solutions, of which blockchain unlocks many.
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