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For financial institutions anticipating technology changes, blockchain is now the subject of a lot of talk and a little bit of action. It’s far too soon to make even educated guesses as to how revolutionary and disruptive it will become, notes Jonathan Patrick, strategic and innovation analyst and advisor at Jack Henry & Associates, Monett, Mo. “We’re just seeing the first contractions for the possible birth of a new technology,” he says. “There aren’t even real frontiers yet.”
That hasn’t stopped a group of CUs from contributing real money to perform real tests on ways blockchain might support CU operations. The project is called CU Ledger. Blockchain could be “a powerful way to connect consumers, merchants and financial institutions,” observes Rich Meade, chief operating officer and chief of staff of the Credit Union National Association, Washington, D.C., which is spearheading the project along with Best Innovation Group, Tampa, Fla., and Mountain West Credit Union Association, Denver.
Although CU Ledger will start by testing just a few specific “use cases,” the potential is huge, Meade asserts. “It could make communication faster, cheaper and more secure, although the benefits are impossible to quantify at this point.” Some would be back-office benefits. Some could be member-facing. Some certainly could involve payments. It could eventually replace the ACH.
If the potential is huge, the investigation at this point is modest and tightly focused. “Now, through CU Ledger, we’re trying to prove the concept, to find out if it will work in specific applications,” Meade reports. “We already have 60 CUs participating, ranging in size from $20 billion to $50 million, and the four largest CUSOs, all CUES Supplier members: CO-OP [Financial Services, a CUES Supplier member], PSCU, CSCU and CU Direct. We have a $1.6 million budget, of which we’ve raised about half,” he continues. “We’re not building an actual network, just searching for a vision of how it might work. If it leads to an actual network, it will be cooperative, available to all, not just the sponsors,” he explains.
Each participating CU in the proof-of-concept trials will be a node, running test software, detached from the CUs’ core systems, Meade explains. “It will be a CU shared-ledger network. We’re connecting a special set of pipes to run water through to test some use cases,” he says. If those pipes pass the tests, the conversation may turn to building it out for all credit unions. Core systems providers, payments processors and other vendors have not been invited to participate in the test, he adds.
The CUs, not CUNA, are driving the project through a steering committee, composed mostly of CU CEOs and CTOs, he adds.
A member of the CU Ledger steering committee, CUES member Jeff Johnson, SVP/IT at $2.5 billion BCU in Vernon Hills, Ill., says that blockchain has plenty of payments potential because it already handles cryptocurrency transactions and could be an alternative network for P2P payments, but he emphasizes that CU Ledger is “not looking at that now. If blockchain replaces the ACH, card payments and bill-pay, it won’t be in my lifetime,” says the 53-year-old.
So the steering committee is looking for more immediate benefits in applications like sovereign ID (having user credentials belong to the individual instead of being tied to various Web sites or application providers).
“Now the providers own your credentials,” Johnson says. “You have to register them on their websites and follow their procedures. We’re investigating whether the member could own his or her credentials and use them where they want.”
Another potential benefit CU Ledger will test for is sharing confidential member identification to make it easier for a member to move from one CU to another—a step from “know your customer” to “know each other’s customers,” he explains.
“Our goal is to kick the tires and report what we find out in May,” Johnson reports. “Anonymity and security are big challenges at this point. We think there’s a chance blockchain could help there. We don’t think we’ll see widespread consumer adoption any time soon, but we think it could facilitate secure communication among financial institutions.”
Bringing together outside tech experts and CU operations managers is critical for CU Ledger, Johnson thinks. “None of us knows the technology well enough, so we have to bring in experts, but we have to marry those expert insights with our operational knowledge of how we run our CUs,” he explains. John Best (Best Innovation Group,) has been engaged as a technical adviser, Meade reports.
A big question is whether blockchain will change payments. It might, but probably not in a disruptive way, suggests Jim Benlein, owner of KGS Consulting, Silverdale, Wash. A payment is a chain reaction with many steps, he points out. Currently, the chain works pretty well most of the time, but disputes can arise as to whether a specific step was taken or taken properly, he notes. Moreover, the payer and receiver lose sight of the steps between the beginning and the end, he notes. With blockchain, the steps wouldn’t necessarily change, but each step could be confirmed throughout the process, and participants would be able to follow the transaction each step of the way. In essence, no link of the chain could be broken (there could be no “repudiation”) and each link would be forged in full view. It would be a stronger chain, with all transactions fully open, transparent and verifiable–from beginning to end–by all stakeholders, he explains.
Benlein modestly sees blockchain as enhancing the status quo in the short run, not challenging it. “It won’t change the processes; it will change the record-keeping,” he suggests. “The traditional players could still retain their traditional roles.” But it’s possible that new players could crop up and take over key roles, he concedes. It’s too early to tell whether traditional players will embrace better technology and crowd out new players, he notes, or whether new players might take the initiative and contend for leadership.
Would CU members notice or care? Maybe not, Benlein says. The initial benefits would be mainly for back-office operations at financial institutions, he predicts. It’s not clear whether member-facing services would be affected, although members could possibly trace payments all the way through the process if they wanted to, much like a consumer can trace the progress of an Amazon order from order entry to warehouse to mailbox.
So what would be the blockchain payoff for CUs? It’s hard to see any material benefit for members in the foreseeable future (e.g., five to seven years), Benlein says, but the payoffs for CU operations could be significant.
“The greater integrity of the chain, the nonrepudiation and the greater visibility could remove uncertainty,” he notes. “There will be no room for any participant to deny what they did and throw the payment into dispute. It’s like a person saying, ‘That’s my card number but I didn’t do it.’ Or ‘That’s my PIN, but I didn’t enter it.’ If it’s your fingerprint, that’s harder to deny. Blockchain payments wouldn’t stop fraud, but they could provide fewer cracks in the process for fraud to creep in. And it could provide an air-tight record, making audits much simpler.”
Richard H. Gamble is a freelance writer based in Colorado.
Also read “Will Blockchain Help CUs? Part 2”
