Blockchain technology could someday take a bite out of the fees and commissions charged by Canadian banks, Moody’s Investors Service warned Monday in a report.
The rating agency’s report looked at two specific areas that could be affected by blockchain: cross-border transactions and fee income. Moody’s found that the distributed ledger technology has the potential to cut down on the time and money connected to cross-border banking transactions, but that it also raises risks for some revenue.
And while the banks have other sources of fees and commissions, Moody’s said that source of income as a percentage of revenue for banking systems “can offer a guide to which systems may be most affected by the adoption of blockchain technology.”
Based on this, Swiss banks may be most exposed to a blockchain-related disruption, as 50 per cent of revenue flows from fees and commissions, Moody’s said. But the next most exposed could be Canadian, Israeli and Italian banks, the report claimed, as lenders from those countries derive around 35 per cent of their revenue from those sources.
“The net impact on a bank depends on the margin between its costs and income and its ability to adjust this structure in the face of changing technology,” said the report.
Moody’s said blockchain technology is still at an “early stage,” but the report comes as some Canadian banks are experimenting with ways to use the technology in their businesses.
It has been taken seriously by some chief executives as well. In a January interview, JPMorgan Chase & Co.’s Jamie Dimon praised the technology, declaring “the blockchain is real,” while Bank of Nova Scotia CEO Brian Porter has said blockchain “is going to have a huge impact on the future of banking.”
In addition to the analysis of fees, Moody’s also looked at the potential impact on cross-border transactions, which today involve numerous steps and multiple participants, and have high related fees.
Standard transaction times are often around two days, but blockchain could reduce that, letting banks move resources elsewhere, the agency said.
“In principle, a transaction could now be done without central intermediaries, flowing directly through the blockchain network with an optimized foreign exchange process settled at the lowest rate within the system and at reduced operational costs due to the simplified, streamlined transaction process,” the report said.
But the resulting competition, possibly from new rivals, could “squeeze” the lenders’ fees and commissions, Moody’s cautioned.
“Until now, banks have been able to charge sometimes significant transaction fees and commissions, and the precise exchange rate on foreign exchange transactions is determined by the bank itself (albeit often close to market rates),” the report said. “With streamlined payments processes, domestically and internationally, there would be less scope to charge additional fees under mounting competitive pressures.”
Moody’s said faster and cheaper cross-border transactions would be a credit positive for the banks, but pressure on fees and commissions would be a credit negative.
Banks in countries such as Luxembourg and Hong Kong could be most susceptible to disruption in the cross-border sphere, the report added.
Outside of cross-border transactions, other areas where blockchain could affect bank operations include anti-money laundering processes and trade finance, according to the ratings agency.
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