SouthState Bank NA is evaluating blockchain solutions that could be launched in 2023 to handle larger payments and develop smart contract applications, the director of capital markets at the $46 billion bank said.
SouthState is likely to focus on one blockchain at the beginning to prove the use case, the executive, Chris Nichols, said in an interview at the Community Bankers Conference. Looking forward, the Winter Haven, Fla.-based bank is studying options such as those provided by Tassat Group Inc. and the USDF Consortium to understand whether a bank can focus on one of the blockchain systems or has to work across multiple blockchains for broader utility.
Tassat Group is the technology provider behind Signature Bank's blockchain payment network, Signet, and it has scored other bank clients, including Customers Bancorp Inc., Western Alliance Bank and Cogent Bank
The USDF Consortium uses blockchain provided by Figure Technologies Inc. Its members and participants include Amerant Bancorp Inc., Atlantic Union Bankshares Corp., ConnectOne Bancorp Inc., FB Financial Corp. New York Community Bancorp Inc., National Bank Holdings Corp., Primis Bank, Synovus Financial Corp., Webster Financial Corp., and JAM FINTOP, a joint venture of JAM Special Opportunity Ventures and FINTOP Capital.
Potential payments opportunity
SouthState believes that there are economic benefits for banks to use blockchain compared to their current payment networks, Nichols said, adding that with blockchain-enabled payment and smart contract capabilities, banks could potentially charge $5 per transaction on the low end or $25 to $100 on the high end, depending on the complexity of transactions.
In comparison, the cost for banks to use current payment networks such as the Automated Clearing House or the real-time payment rail RTP is roughly 25 cents per transaction — lower for larger banks — and banks can charge customers 35 cents to $1.00, with lower pricing for customers with higher payment volumes, Nichols said.
The margins could be wider for blockchain payments because the technology would allow banks to bypass card networks, which can take a cut of 2% to 3.5%, Nichols said. While blockchain is more expensive for bank customers, Nichols said, smart contract applications add value for merchants by automating some processes that are now manual, such as synchronizing updates made to account receivables for multiple parties in complex transactions.
In a presentation at the conference, Nichols said it is time for banks to develop strategies for cryptocurrency and blockchain and to educate themselves about a potential central bank digital currency, lest they lose market share as dollars flow out of banks into cryptocurrency wallets.
According to Nichols' analysis of debit transactions in the Automated Clearing House payment system, citing Finserv data, 174 of 191 banks in the analysis saw their consumers sending U.S. dollars to cryptocurrency exchange Coinbase Global Inc. over a 60-day period. The transactions represented $491.1 million in value. During the same period, electronic payments sent to the mortgage lender Freddie Mac from the 191 banks totaled $719.7 million.
Regulatory uncertainty
SouthState's hesitation about large-scale product launches involving blockchain stem from uncertainty about how regulators would react in light of cryptocurrency's high volatility, Nichols said. The price of bitcoin has dropped over 36% year-to-date.
While regulatory guidance so far has signaled that banks will have an advantage as regulated institutions to facilitate cryptocurrency activities, it also means banks have to make time-consuming efforts to comply with anti-money laundering rules in the Bank Secrecy Act, Nichols said.
"The good news is that a lot of the fintechs will take a backseat, I believe, to banks, and banks will now be at the forefront of being able to better handle stablecoin and better handle crypto transactions," Nichols said in the presentation.
Strategic paths that banks could opt for include providing banking, lending and payment services around cryptocurrency tokens and the adoption of blockchain for payments, asset management and other operations, Nichols said.
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