The IBM Banking and Implications to African Banks

I have written extensively on the implications of Internet on businesses. We are enjoying the tremendous productivity gains which technology has made possible. But in the future, Internet will cause massive economic dislocations in markets and economies. Yes, at maturity level, Internet could enable seamless linkages between sellers and buyers in many industries: the implication is that many companies will disappear. Who needs an accountant when all transactions are powered by blockchain? Many areas we see in fintech (financial technology firms) will go.

While ICT provided unprecedented productivity in the Nigerian banking sector, Internet is seriously “destroying” value. This is a “problem”. ICT made them, Internet could destroy some of them. Internet is bringing the construct of creative destruction in the Nigerian banking sector where values are destroyed and new opportunities unlocked. But those new opportunities are not going to be, exclusively, within the controls of the banks.

What Internet is doing today is expanding distribution of banking services thereby putting pressure on banks to control pricing on their own terms. Before Internet, they could charge huge fees to transfer money for clients to foreign accounts via their treasury departments, but today, with internet, there are options. The customers could simply use their debit and credit cards to settle the bills without first spending money on bank fees.

That future is not going to be very far: IBM has started building the infrastructure, at scale, of the 21^st century banking: the blockchain banking. Yes, IBM and its partners have started making a business on what most thought was just an idea. It is now making it possible to move money across borders, seamlessly and efficiently.

In a breakthrough for payments technology, IBM and a network of banks have begun using digital currency and blockchain software to move money across borders throughout the South Pacific.

The significance of the news, which IBM announced on Monday, is that merchants and consumers will be able to send money to another country in near real-time, accelerating a payments process that typically takes days.

The banking network includes “12 currency corridors” that encompass Australia and New Zealand, as well as smaller countries like Fiji and Tonga. It will reportedly process up to 60 percent of all cross-border payments in the South Pacific’s retail foreign exchange corridors by early next year.

The news also comes as an important validation of blockchain technology, which has long promised enormous efficiencies for the financial sector, but has been slow to move from the concept stage to the real world.

Blockchain, which relies on a disparate network of computers to create an indelible, tamper-proof record of transactions, is most famously associated with the digital currency bitcoin. But it can be used in many other applications such as tracking shipments or, as in this case, to record a series of cross-border transactions.

If IBM gets this right, every bank in the network will be paying IBM tax to use its solution. This also means that the remittance business will likely collapse for most African banks. The very product which no fintech or bank in Africa has been able to build will now be made possible. I have discussed of the need to build a truly pan-African digital remittance/transfer banking product which is agnostic of location or currency in Africa. None of the products we have today meets that standard. Largely, I envisage a situation where all you need to buy and sell across Africa is one bank account in just one African Union country. With that, you do not have to even think about the specific currency of that account as technology will seamlessly make it possible to access other African markets for payments, transfer etc. The banks or fintech companies must still comply with all regulations related to inter-national transfers, forex etc. The only difference is that customers will not see them as they will be hidden with technology. What IBM is doing could potentially fix that friction and that means it will take major revenue base from African banks.

 The IBM Banking

IBM has moved into banking without necessarily being a bank. That is a very good position to be. If it can pipe transactions across its systems, the real banks will pay taxes to use its networks. IBM will become the 21^st century SWIFT (society of worldwide interbank financial telecommunications), a global payment network, assuming that the international payment network and enabler does not evolve.  Many have written on the power of Amazon on consumer commerce, and the implications to markets.

But Amazon’s unprecedented logistics and delivery infrastructure, paired with access to personal data about Americans’ purchasing habits, means it is unique in the history of global commerce. No company has ever wielded this combination of consumer insight and infrastructure, say historians and legal analysts, which means the company grows stronger and less assailable with every purchase.

But what Amazon is doing will be small if IBM can make itself the category-king for blockchain banking. In other words, if IBM can build a system that essentially makes SWIFT irrelevant, IBM will have the highest impact in modern banking and commerce. The influence of Amazon in America cannot even come close because the implication is that IBM can just provide the infrastructure and over time move into other areas like insurance, legal contracts and more. The key thing is becoming #1 to enjoy the network effects and the benefits of invertibility construct.

All Together

This is a total redesign in the structure of digital commerce. Blockchain will have consequential impacts. There is nothing that it cannot power including making it possible for Finnair, an airline, to weigh its customers in Helsinki airport to ascertain that its estimated total weight, fuel, and safety are accurate. Of course, banking is going to be the first area that will be affected because that is where the money is. I do think African banks should work hard to form their own consortium with local technology leaders for intra-African remittance, at least, and get the African Union to charter that blockchain network. We need the regulation that makes transactions on blockchain to be legally enforceable and binding and that means governments may need to make that clear to avoid any uncertainty. This becomes necessary because at the onset of the web, most banks were not accepting email documents as legally binding. But over time, nations upgraded their laws to make it clear that emails and digital documents are valid in courts. We need same for blockchain and I hope Africa Union leads there. If they do, local banks will have the opportunity to build the capacity before the foreign ones define the markets.

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