BY CHRIS FINAN
September was a bad month for Wells Fargo CEO John Stumpf. He was grilled by two congressional panels and forced by his board to forfeit some of his compensation. But no congressional embarrassment, loss of stock options, or even ridicule of a late night Colbert segment can compare to the pain and incalculable financial losses suffered by millions of Americans that placed their trust in Wells Fargo.
Lawmakers will undoubtedly continue to discuss the need for greater oversight of an industry where the opening of more than 2 million unauthorized accounts can go unchecked. However, it is the banks themselves that should take this opportunity to change the status quo and regain customer trust by leveraging innovative new technology.
Stuck at ‘good enough’
The truth is, simply adding more legal oversight or more reporting requirements will not solve the underlying problem. Financial technology is so out of date that it is impossible for banks to implement strong internal controls and accurately track day-to-day customer account activity.
The core settlement infrastructure in many institutions was designed and built over 30 years ago. And, as they have grown and sought to modernize, banks have layered new systems on top of those ancient ones, creating a messy spaghetti-bowl of inter-reliant technologies. Imagine attempting to add the latest banking app to your original Macintosh or PC from the 1980’s—it is truly mind boggling that this is exactly what banks are doing with their software. Their inefficient digital infrastructure and highly-manual settlement processes makes a single view of customer cross-account activity nearly impossible to maintain, and yet their business models increasingly rely on cross-selling new account services.
Two million unapproved fee-generating accounts would not have simply slipped through the cracks.
Financial institutions have cobbled together systems that have become decrepit, but not impossible to fix. Over the past several years, banks have begun experimenting with a new type of technology—blockchain— to mitigate many of their biggest problems with legacy banking systems. However, too few have made any serious strides in implementing this technology at scale, lacking incentives to speed the replacement of legacy systems that are considered “good enough.” Mr. Stumpf may have just given them one.
What is blockchain, and why would it make banking better?
Blockchain is the same technology that underpins cryptocurrencies like Bitcoin. While Bitcoin continues to elicit mixed reactions because of high profile cases of criminal use like the Silk Road marketplace, the underlying technology is undeniably powerful. It independently assures accuracy and prevents tampering by recording and verifying activity with a mathematical proof. Once an activity is recorded on a blockchain it becomes immutable; it cannot be erased or altered without ruining the mathematical proof, making any attempted tampering obvious.
Blockchain adoption would allow banks to provide auditable, real-time records for complete transparency with customers, bank employees and regulators. It offers incredible promise for the banking industry to modernize the way it operates and to improve accountability. Imagine, given the current example, all actions a Wells Fargo employee made on your account were immediately recorded to a blockchain and available for you to privately check. Two million unapproved fee-generating accounts would not have simply slipped through the cracks.
Whether self-imposed or demanded by lawmakers in Washington, banks will undoubtedly be forced to change their practices in the coming years to improve their accountability. Proactive institutions stand the most to gain by enabling their clients to be the ones to hold them accountable. Blockchain technology would allow banks to show each customer (or a third-party monitoring service) every single action he authorized or that was taken on his behalf. This implementation could appear in many forms, but would essentially look much like your current bank statement but with all accounts and all activity in one place, and most importantly, guaranteed to be 100 percent accurate and complete. The cryptographic proof would catch any minor irregularities or negligence that higher level audits often fail to detect. Think how much easier it would be for a consumer to dispute a credit problem if her bank’s blockchain record failed to include proof that she authorized the opening of a particular account? And in the same vein, bank executives could more easily defend employees diligently working on behalf of customers, while identifying and removing the unscrupulous ones.
Change is coming
No one feels bad for bank executives, and ultimately the buck stops with the people in charge. But the reality is, their institutions have become so technically complex that it is nearly impossible for any single person or entity within the bank to properly control all activity. With so many dissatisfied customers and lawmakers demanding change, bank executives intent on demonstrating a culture of honesty should jump at the opportunity to prove their ethical business practices by providing blockchain-based records for consumers to hold them accountable. Banks operate on trust, but unfortunately some have proven undeserving of that trust. Leveraging blockchain technology to remove the need for trust may be the best answer for the future of banking.
Chris Finan is cofounder and CEO of Manifold Technology, a Silicon Valley blockchain startup, and former director of cybersecurity legislation in the Obama administration.