- Key insight: A group of bank leaders are attempting to take the future of on-chain finance into their own hands.
- Expert quote: "We have a lot of senior fraud, and there's always novel transactions that go through their bank account. Imagine a future where there's a smart contract which is associated with a transaction, where there could be a speed bump, and there could be a simple text to a trusted caregiver or family member" who could confirm or deny that novel transaction.—Jim Kisch, CEO, Passumpsic Bank
- Forward look: The group aims to take their new blockchain live sometime in 2027.
For years, U.S. banks below the top five have felt at the mercy of their vendors. The oligopoly of core banking software vendors (Fiserv, FIS, Jack Henry) as well as hyperscalers, foundation model makers and cloud providers have called the shots, and banks that have wanted to innovate have had to take a number, get in line and wait, often for years.
A consortium of 37 state bankers associations and their members hopes to change this and put bankers in charge of the digital asset technology they use — letting them choose vendors, spec out products, set pricing and take ownership.
"We go to these conferences, we sit in these meetings with our peers, and we talk about this technology, and then we get off stage, and every single bank CEO comes up to me and they say, Corey, how the heck am I going to make money off of this thing?" Corey LeBlanc, co-founder and chief technology officer of Locality Bank, told American Banker. "How is this really going to help our customers? Where's the product? We want to be able to build the foundation economically, where all banks can participate and have an opportunity to have some say into what those products look like, and then realize some value out of it without having to pay an exorbitant amount of money or wait in some really long line."
Locality Bank is five years old and still doesn't have opportunities to use some products and services "because I'm too small and too new to get on the list of priorities to get things installed or implemented for my company, so I have to make partnerships that are very, very expensive on seven and 10 year contracts just to get into them," LeBlanc said. "What we're trying to say is, enough is enough. We need to reset."
The group, the BankChain Alliance, models itself against the Federal Home Loan Banks, without the
Several bank on-chain consortia already exist, including the
"We know there are going to be lots of networks out there, lots of options for banks to choose from," Headlee told American Banker. The BankChain Alliance will provide banks a network that is owned, designed and governed by banks of all sizes, he said. "We're building this alliance to ensure that each one of our member banks has equal access to a network they own, where their voice is heard."
Equal access to technology is a theme.
"We can sign a contract with Zelle or any of these other providers with different services today," LeBlanc said. "We can go sign with Cari. But ownership and voice matters more when we're starting to talk about products and services we can build and shape for our customers."
It's not just small banks that fear being left out of on-chain decisions, Headlee said.
"There are big banks that are building really cool technology," he said. "They're worried that they can't get the water to the end of the row — we've built it, who's going to connect to it, and why are they going to connect to it? The way to bring thousands of banks into the network effect is the structure, the governance, the fairness, the equality, the cost base. It's not like we're trying to make somebody rich or benefit a small consortium of banks."
Banks are forming these groups defensively to protect deposit funding from stablecoins while meeting corporate demand for 24/7 programmable settlement, according to Myra Thomas, banking and insurance analyst at Emarketer.
"These emerging networks do not necessarily need to merge, but they will need to become interoperable to prevent market fragmentation and achieve broad adoption," Thomas told American Banker. "Tokenized deposits are likely to lead in corporate treasury and liquidity management, while stablecoins and smart contracts gain traction in cross-border B2B payments."
The BankChain Alliance formed at a conference four months ago.
"After a meeting, several of us were out in the hallway talking about this issue, and discovered that all of our banks were having the same conversation," Headlee said. "So about ten of us slipped into an unused room and started talking about where we saw this going. We've seen this play out in the past, and we decided as state associations, and on behalf of all of our members, large and small, there was a different path forward that we wanted to pursue."
Keeping customers and money in communities
Some bankers worry that current on-chain initiatives will lead to deposit flight.
"We're a mutual that's been around for 173 years, and it's really important for us that we remain relevant to the communities that we serve, Vermont and New Hampshire, for another 100 years," Jim Kisch, president and CEO of Passumpsic Bank, and a self-described BankChain Alliance enthusiast, told American Banker. "So when our customers come to us and they have a need, either a business need or something in their personal lives that they can't overcome without the help of their banker, we want to be there for them."
As his bank seeks to keep customers happy, and continue to make loans in local communities, "it was extremely important for us to be able to to participate in a network where we can design products and solutions that are always on, instantly settled and programmable, and we need an opportunity to participate in something that we have some collaboration in and control over, and it isn't coming down from a core system or somebody else that has a different set of aims."
Customers aren't asking for tokenized deposits or instant settlement of transactions today, he acknowledged.
"They don't know what to ask for," Kisch said.
One on-chain finance use case he thinks about is elder fraud. New Hampshire and Vermont are the second and third oldest states per capita.
"We have a lot of senior fraud, and there's always novel transactions that go through their bank account," Kisch said. "Imagine a future where there's a smart contract which is associated with a transaction, where there could be a speed bump, and there could be a simple text to a trusted caregiver or family member" who could confirm or deny that novel transaction.
"It isn't about us; it's listening for the things that we can help with, and then pairing them with these modern tools," Kisch said. "Sometimes it's going to be reskinning the same kinds of tools that we've used for a long time, but building them in a highly modern and much more effective way to the benefit of the people that we love to serve every day."
LeBlanc pointed out that although customers may not be asking for blockchain products, "you do have customers who are sitting around on a Thursday night at 9 p.m. and they need to be able to move money to make payroll the next day. As banks, it's our job to go figure that part out. And this technology gives us that opportunity."
Interoperability
The leaders of this group all acknowledge that they will need to work with the other bank blockchain networks that already exist.
"It is still very early days," Kraninger said. "Which of these networks is going to win? We think many of them will, probably not all. Our focus has been on the network effect of what really does serve banks of all sizes and the needs that they've identified."
Some banks are building their own solutions, Kisch noted.
"They're free to join and participate," he said. "So there's a lot of freedom here. It's an open market. It isn't a pressure play. This is just a place to come and innovate for the common good. It's more akin to an open source model than it is a closed pressure play or buyers group."
The group is seeking a technology partner that it would have an ownership stake in. It's aware that any new blockchain to be used by banks has to connect to banks' existing core systems.
"Every one of our banks is on a different core system, so we've got to make it simple to connect to the cores," Kisch said.
The BankChain Alliance just completed phase one of its request for proposal, which takes into consideration security, privacy and compliance issues, Kraninger said.
"This is a trust industry, so there's a real responsibility to protect our customers and to make sure there is a secure ecosystem," she said. "So while I am a blockchain enthusiast, we also recognize that there are dynamics around security, around privacy. And as we get into deeper due diligence, one of the reasons to do deeper due diligence is the security aspect of things. What is the capability? Who's behind it? What are the contractual arrangements? What are the responsibilities amongst the technology players that are involved in this solution?"
The RFP weighted compliance higher than any other factor, LeBlanc said. "Because we're banks, regulation and safety can't be an afterthought, so it's at the forefront of the research and due diligence we're doing right now, and it will be a huge factor in the decision we make. Obviously, everyone wants to say they're going to build everything. Sometimes that's not economically feasible, and sometimes someone's already built a really good wheel, you don't need to reinvent it."
In Kisch's view, this whole initiative is about letting banks continue to lend to their local communities.
"It's fundamentally important for us to preserve these long-time, loyal relationships with business customers and personal customers," he said. "We have generation after generation of families that have been with the bank over a long period of time. The money that they deposit in our banks we lend it out into our local community. If we're not doing our job and continuing to innovate, then we could lose some portion of our capacity to lend at great market rates. If we have to borrow or if we have to do some things of that nature, that could diminish our capacity.
"We're so close to It's A Wonderful Life and George Bailey," Kisch said. "This banking system of ours is completely different from anything else in the world. And what it does really effectively is it moves capital to all sorts of markets, even into rural communities, in a highly effective way. That's what this is about."
