Blockchain, a new-age tontine: OCBC chief

BLOCKCHAINS, widely seen as the future of finance, may take banking right back into the past.

To OCBC Bank chief Samuel Tsien, a true distributed ledger, if ever implemented, will mirror an old form of financing, the tontine.

"If you think about the world right now, you park money with us. In the future, you don't have to consider which bank you parked the money with," he said.

"It's like a tontine, isn't it? You throw the money out, and this person bids for the money, and says, 'I'll give you the highest interest rate'.

And any time you want to take it back, you take it back." Tontines were informal micro-financing schemes where members make regular contributions to a common pool and bid for loans.

Banks today are looking at the blockchain, so named because it is created from digital "blocks" of information of financial transactions.

At its most developed form, trusted financial institutions come together to not just reconcile payments across the global banking network, but use the technology to drive business, such as, in Mr Tsien's example, taking deposits.

In certain cases, it would involve digital currency, as Singapore's own blockchain pilot shows.

The eight banks that are part of the pilot, including OCBC, will deposit cash as collateral with the Monetary Authority of Singapore (MAS), in exchange for MAS-issued digital currency. The banks then redeems the digital currency for cash.

While Mr Tsien is positive on blockchain as a form of payments system, he thinks the idea of the distributed ledger will be hard to achieve.

"Blockchain is in a way, the most threatening technology to the banking industry, because it removes the element of trust in it. The branding no longer becomes important. That's the ultimate. But will we ever reach that stage? I do not think so."

He points out that customers will still require advice on issues such as liquidity risks.

"If you put it there for one year, there will be somebody who will let you know that within one year, you have no flexibility to withdraw the money. So if there's some urgent need, where do you go?

"You still have to go to somebody to provide the advice. Or you go to somebody who is able to tell you that despite you putting it in there for one year, I am willing to lend it to you for the next year, in the event that you need it some time along the way," said Mr Tsien.

OCBC had successfully made its first blockchain payment transaction between the bank and its subsidiaries, OCBC Malaysia and Bank of Singapore in November.

But Mr Tsien also said it would take time for the technology to be commercially available, and with scale.

"Ultimately, if it works, it has to be a big, private blockchain, and maybe there are 8,000 members.

And these 8,000 members represent all of the banks that are necessary to operate a global remittance business," he said.

"I think blockchain will be more extensively used, (but) still as a payment mechanism, and it's a cheaper solution than what we're currently doing.

Because you do not need to do the assessments that you're currently doing."

He expects OCBC's technology expenses to continue rising, with it making up about 12 per cent of total expenses alone.

This excludes salaries for tech-related staff, he added.

Even as technology can make banking more efficient, the disruption to sales of banking products, such as insurance, is not as serious as made out to be, Mr Tsien said.

The bank will have to continue spending on its staff to help them keep up with new ways of banking.

He said that the number of insurance transactions concluded online was very small. And they are very simple, such as for travel.

They are very mundane, low-margin types of insurance. "At the end of the day, it is a people to people business."

This article was first published on December 19, 2016.
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