TOKYO -- Global banks such as HSBC and Mitsubishi UFJ Financial Group along with local players like Japan's Resona Holdings and Bank of Ayudhya in Thailand are embracing blockchain technology to offer lower-cost services as financial technology companies threaten their dominance.
This disruption comes amid rapidly expanding trade and inbound tourism in Asia. Opportunities are ubiquitous for those that provide cost-competitive, easy-to-use services. Blockchain, the technology underpinning cryptocurrencies like bitcoin, often provides the answer.
A group of 12 banks including U.K.-based HSBC and Japanese megabank Mizuho Bank is going to change the centuries-old, paper-heavy business of trade finance by adopting blockchain. They think their electronic system will be ready to digitize trade in Asia in about a year, something experts say is long overdue. The blockchain-based system can cut transaction times to 24 hours from five to 10 days, according to HSBC.
The conventional system requires the recording and verifying of shipments and payments with signatures and phone calls. Couriers are often involved.
Cross-border shipments are getting smaller and more frequent, and trade finance needs to be digitized and simplified in order to adapt, said Takahisa Yano, head of global trade and receivables finance in Japan for HSBC.
Blockchain uses a shared digital database to verify transactions, eliminating the need to maintain paper trails or conduct third-party verification. Financial transactions can be made without going through banks or even using a government-backed currency.
Blockchain is starting to crack money transfer, another staple banking service.
Japanese lenders Resona Bank, Suruga Bank and SBI Sumishin Net Bank have teamed with SBI Holdings, a Tokyo-based online financial services company, to launch a smartphone-based low-cost money transfer service as early as this autumn.
Japanese banks have been reluctant to adopt blockchain or cryptocurrencies for everyday transactions. The country's well-developed banking network has limited demand for these technologies and products.
Domestic transfers in Japan are currently made through the Zengin system, a computer array that records cash movements in and out of the banks. At the end of each day, Zengin settles the withdrawals and deposits at accounts the banks hold at the Bank of Japan.
The massive system is responsible for everything from depositing workers' paychecks into their bank accounts each month to making pension payments and handling credit card transactions.
But some lenders including Resona and Suruga are working to bypass Zengin to address the risk of getting cut out of the process as cost-efficient fintech services take hold. The value of transfers not routed through banks in Japan surged 45% to more than 1 trillion yen ($9 billion) in the year through March.
Fintech companies have been allowed to conduct transfers of up to 1 million yen since 2010. Their share of the transfer market, worth tens of trillions of dollars, remains small. But their rapid growth has some banks scrambling for their own fintech solutions.
The conventional Zengin system is reliable but expensive. Sending money between banks in Japan costs anywhere from 108 yen to 864 yen. That renders the service too expensive if an account holder wants to make a small payment, such as to reimburse a colleague for taking care of the check at the pub. It is easy enough to repay a co-worker the next day -- in cash and in person. But this is not the case if the drinking session was a reunion among old college friends who rarely see one another, or an outing among acquaintances following a PTA conference.
Pressure for change is even stronger when it comes to international remittances.
"Demand is expected to grow as more Japanese live and work overseas," said Junichi Kanda, a senior official at fintech company Money Forward and a former Bank of Japan official.
Sending money from Japan to another country via banks costs at least 4,000 yen to 5,500 yen, and takes up to four days. International money transfers are handled by the Society for Worldwide Interbank Financial Telecommunication, or SWIFT. The service is secure, reliable and not conducive to money laundering.
But the high cost leads some people who make international remittances to bypass SWIFT. U.K.-based Transferwise helps them save money when doing this. In most cases, the fintech company completes transactions within 24 hours and charges less than 1% of the amount sent.
Sending money across borders costs even less with cryptocurrencies. Tokyo-based cryptocurrency exchange GMO Coin allows its users to send digital currency to another exchange at no charge. The service cannot be used in countries that ban cryptocurrencies, such as China.
Some Asian banks have built their own blockchain technologies to develop money transfer services that do not rely on SWIFT.
The Bank of Ayudhya, Thailand's fifth-largest lender, conducted a successful pilot in May for real-time international remittances in partnership with Japan's MUFG Bank and Standard Chartered Bank Singapore, the multinational financial services company.
The test followed a similar initiative in which the Thai bank used blockchain technology to transfer money between an oil company in Thailand and its business partner in Laos.
Blockchain "could make cross-border transactions faster and less expensive," analysts at Moody's Investors Service said. But it "would leave banks with less room to charge transaction fees and commissions on foreign exchange transactions amid mounting competitive pressures."
Other industries are much further ahead in adopting blockchain technology. Royal Dutch Shell, for instance, is working with other energy companies to develop a digital platform for energy trading. Some think the platform could be expanded to cover other transactions, such as those for the construction and maintenance of power plants.
A.P. Moller-Maersk, the world's largest container shipping company, has created an electronic ledger that records details such as the cargo's contents and location as well as legal documentation for cross-border movements.
Digital platforms like these could reduce the need for traditional trade finance services.
Banks have no choice but to embrace blockchain technology if they want to stay in business, Moody's analysts say.