Blockchain technology adoption decision of banks : a literature study

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Blockchain Technology

Adoption Decision of Banks

A Literature Study

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ACHELOR

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HESIS

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CONOMICS &

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USINESS

Gabriele H.D. Schulting 10995609

Faculty of Economics & Business First supervisor: W. Dorresteijn Date of submission: June 26, 2018

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Statement of originality

This document is written by Gabriele Schulting who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Abstract

Blockchain technology is a controversial topic as it is said to have the potential of transforming the practices and businesses of banks and the financial industry. This literature study aims to explore the impact of blockchain and wants to understand which factors drive the decision to implement blockchain in banks. The study proposes a conceptual model based on the technology adoption framework of Tornatzky and Fleischer. The results show that high initial costs, compatibility issues concerning the implementation, the mechanic organizational structure of banks and their lack of top management support, and most importantly the obsolete governmental regulation, are leading to resistance in banks. On the other hand, the organizational benefits, such as increased speed and lower transaction costs, and customers demanding innovation, stimulate the decision for banks to implement the new technology. These findings present a set of factors for bank executives to consider when adopting new disruptive technologies, such as blockchain.

Keywords: blockchain, Technology-Organization-Environment

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1 Introduction

In today’s financial world, one of the most controversial topics is blockchain technology. Most people know blockchain as the technology behind Bitcoin and other crypto currencies. However, blockchain technology can be used for more applications. Blockchain could be referred to as ‘a public ledger, in which all the committed transactions are stored in a chain of blocks’ meaning that blockchain has complete information about addresses and balances (Accenture, 2016). Basically, it is an infinitely growing record of completed blocks of information that cannot be manipulated and is completely traceable and transparent (Swan, 2015).

This emerging technology is expected to transform the financial industry and solve the problem of regulating and maintaining administrative control (Accenture, 2016; Finextra, 2016; Iansiti & Lakhani, 2017). Researchers argue that its core features de-centralization and de-trusting, have the potential to redefine companies, so that stakeholders would be able to transact and interact with only little friction (Cohn, Fehr & Maréchal, 2014; Swan, 2015). This adoption of blockchain can have many consequences, such as cutting out intermediaries and counterparties. Trusted third parties in the financial industry, like back-office, post-trade settlement, trade finance, insurance, but also compliance and regulation might be affected and no longer be necessary in the future (Raconteur, 2018; Wall & Malm, 2016).

Moreover, banks adopting blockchain technology could benefit from advantages including improved efficiency, advanced data security, recording immutable history, transparency and cost reduction (Swan, 2015). In the future, all transactions in public and private equities, for instance, stocks, bonds or derivatives could be transcripted in blocks, which can be validated by authorities later on. This will make it easier to detect fraud and money laundering (Foroglou & Tsilidou, 2015). However, downsides such as, high initial costs and privacy issue concerns, both identity privacy and transaction privacy is resulting in resistance for adopting the new technology (Deloitte, 2017; Liehuang et al., 2017). Prior innovative

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smartphones, forced companies leaving the market because of their inability to adapt their business models to the changing technological environment. Therefore, it is important for companies to clearly assess the consequences that blockchain technology can have on the industry and react appropriately (Holotiuk, Pisani & Moormann, 2017).

In the past few years, research has been done on the characteristics, applications and possible future applications of blockchain. Yet, little is known about the factors driving the adoption of blockchain for banks. Currently, banks, such as Goldman Sachs and J.P. Morgan, have indicated they are actively investigating various use cases to determine how they can use blockchain for growth opportunities. Still, they are struggling with lack of information on blockchain among managers and employees (Boroujerdi & Wolf, 2015; Loeys & Chang, 2018).

This study aims to provide insights for those decision makers by analysing the technological, organizational and external environments of banks to see which changes and challenges are influencing the decision for banks to incorporate blockchain. The central question of this study is: Which factors drive the adoption decision of blockchain technology in banks?

This paper is structured as follows: Chapter 2 contains the literature review. Here, essential background information about blockchain, the banking sector and adoption models including the TOE-framework is provided. Chapter 3 describes the methodology and the process of gathering data. The fourth chapter proposes the conceptual model. Chapter 5 contains the literature study, including an analysis of the three TOE dimensions. In chapter 6, the results are outlined and lastly, the concluding chapters summarize the most important insights, limitations and practical limitations, and provide suggestions for future research.

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2 Literature review

In this chapter the three main concepts blockchain technology, the banking sector and technology adoption models are outlined. In the first section, the definition of blockchain is given and three different forms of blockchain are distinguished. The second part defines the banking sector and subsequently highlights the relevance of blockchain as a new disruptive technology which can be implemented in the sector. The last section gives a brief summary of commonly used technology adoption models and eventually chooses one that gives direction for conducting a literature study and a conceptual model.

2.1 What is blockchain?

In 2008, the paper ‘A peer to peer Electronic Cash System’ was published under the pseudonym Satoshi Nakamoto. This paper was the beginning for the creation of the Bitcoin crypto currency and thereby the blockchain technology behind it. Blockchain, a form of distributed ledger technology1, is an ever-growing list of records, called blocks. These blocks are linked together and secured using cryptography (Zheng, Xie, Dai & Wang, 2016). ‘A block is the ‘most recent’ part of a blockchain, which records some or all of the recent transactions, and once completed goes into the blockchain as permanent database’ (Neittaanmäki & Ogbechie, 2016). The process of adding blocks to a chain works as follows: it starts by carrying out the transaction after which all participants in the blockchain are being informed. Thereafter, the community members check all information of the operation. Consequently, the network of users confirms each block. Finally, the block is being added to the blockchain (Deloitte, 2017). Each time a block gets completed, a new block is generated (Foroglou & Tsilidou, 2015). This process of adding blocks is called

1_{‘The distributed ledgers are records of transactions distributed to every computer}

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mining. All the blocks in de chain are linked in a chronological order, with every block containing a hash of the previous block (Crosby, Pattanayak, Verma & Kalyanaraman, 2016).

Zheng et al. (2016) identified three different forms of blockchain; private, public and consortium (Figure 1). The main difference is the access of the consensus process. Public blockchain is permissionless, meaning that everyone could join the consensus process. On the contrary, both private and consortium blockchain are permissioned (Albrecht, et al., 2018). All the nodes need to be certificated to participate in the consensus process in both private and consortium blockchain (Zheng, et al., 2016). Further, these three types differ on four other aspects. The first difference concerns the speed and costs of the blockchain. In public blockchain, each transaction is verified and synchronized with every node2 connected with the blockchain before it is added. Due to this redundancy, public blockchains are slower and have higher costs than private and consortium blockchain (Albrecht, et al., 2018; Zheng, et al., 2016). Another difference is the visibility. Transactions in a public blockchain are visible to the public, while in private blockchain or in consortium blockchain the read permission can vary. Here, organizations can decide if the information is visible to everyone (Albrecht, et al., 2018). The third difference is centralization. Whereas, public blockchain is fully decentralized, private blockchain is fully centralized as a single group controls it. On the other hand, consortium blockchain is only partially centralized (Zheng, et al., 2016; Albrecht, et al., 2018).

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Public Private Consortium Access of the

consensus process

Permissionless Permissioned Permissioned

Speed Lower Higher Higher

Costs Higher Lower Lower

Visibility Completely visible Varies Varies Centralization Fully decentralized Fully centralized Partially centralized

Figure 1. Three different forms of blockchain.

2.2 Banking sector

The primary activity of the banking sector is the engagement in the holding of financial assets, and subsequently investing those assets for creating more wealth (OECD, 2013). In the banking sector a core feature is trust. Without trust, no person would deposit money, and subsequently, the bank would be incapable to use that money for providing loans and invest and stimulate economic growth (Guo & Liang, 2016). However, after the financial crisis of 2008, this trust component has deteriorated immensely (Cohn et al., 2014).

The blockchain technology could be an answer to the deteriorating trust and other challenges that the bank industry is currently facing. These challenges include changes induced by technological, and social and economic developments. For instance, banks need to become more customer-centric organizations, and let themselves being shaped by customer demand (KPMG, 2017; OECD, 2013). Secondly, banks have to compete with FinTech companies, which are using software for providing financial services. In addition, there is an increasing regulatory pressure from governments since the financial crisis with which banks have to cope (KPMG, 2017). Consequently, banks need to transform and look for new growth opportunities using new technologies like blockchain.

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2.3 Technology adoption models and theories

In the last three decades, technological changes lead to the publication of many studies containing models and theories about technology adoption (Lai, 2017). However, the most common theories are the Technology Acceptance Model (TAM) (Davis, 1986), the Unified Theory of Acceptance and Use of Technology (UTAUT) (Venkatesh, Morris, Davis & Davis, 2003), the Diffusion of Innovation (DOI) model (Rogers, 1995) and the Technology-Organization-Environment (TOE) framework (Tornatzky & Fleischer, 1990).

Since this literature study aims to analyse the adoption of blockchain, the analysis requires theoretical background information that covers the key characteristics and potential applications of the technology, the dynamics and structure of banks who want to use blockchains, the highly regulated nature of the banking industry, and the industry and customer pressures.

The TAM model developed by Davis (1986), is used for ‘modeling the determinants for users’ acceptance of information systems or technologies’. Another common used model, the UTAUT model, has four predicting variables of users’ behavioral intention and provides a view of how the determinants of intentions and behaviors will develop over time (Venkatesh et al., 2003). The DOI theory tries to explain ‘the process by which an innovation is communicated through certain channels over time among the members of a social system’ (Rogers, 1995).

Hence, in finding an appropriate framework for this research those three theories are unsuitable. The TAM and UTAUT theories mainly focus on individual behavior and are lacking information on the environmental and institutional factors. Although, researchers have recognized that DOI model enables the identification of perceived key characteristics of technological innovations that may influence the adoption decisions of potential organizational adaptors of new technologies, the theory still does not have the holistic approach that is required (Hoti, 2015). However, the TOE-framework shows the constraints and opportunities of the adoption of a technological innovation and adds an environmental dimension to the framework. This dimension incorporates the relationships of

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organizations or operations with external environments such as government, competitors and customers (Albrecht et al., 2018; Tornatzky & Fleischer, 1990).

Henceforward, the TOE-framework is the best-suited adoption framework. For this reason, this study is using the bases of the TOE-framework to analyse adoption decisions of blockchain for banks. The TOE-framework, like the name reveals, contains three dimensions, the technological, organizational and external environments. Despite the fact that the TOE-framework has not been adjusted in the last three decades, the framework has shown to be useful and is able to provide insights for managers and researchers involved in adoption of upcoming technologies (Hoti, 2015). Hoti (2015) argued in his research that the framework has been widely supported in former empirical work and remains among the most widely utilized theories of organizational adoption since its invention.

3 Conceptual model

In a research published by Accenture (2016), the main finding was that banks were highly interested in blockchain and that they were exploring the potential of this disruptive technology. Yet, they indicated that there was not enough information to have an opinion on blockchain (Appendix A). This conceptual model is aiming to provide a framework that covers important decision-making factors that banks need to consider, which enables them to search for information in a directed manner.

As outlined in the previous section, this study conducts a conceptual model based on the TOE-framework developed by Tornatzky and Fleischer (1990). The dimensions of the proposed conceptual model are the technological, organizational and external environments. Below, figure 2, provides the conceptual framework. The technology characteristics, part of the technological dimension, are expected to influence the adoption decision of banks. These characteristics are relevant to banks as an analysis on these characteristics can be conducted to see if the new technology is fitting

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the applications, for which the bank wants to use it. Other factors of the technological context that are expected to influence the adoption include the availability and compatibility of the blockchain technology (Accenture, 2016). These factors are concerned with the employees and the banks’ current resources, such as technologies. These existing technologies are important in the adoption process because they set a limit on the banks ability to cope with the technological change (Baker, 2012; Collins, Hage & Hull, 1988). Lastly, the costs incurred when implementing blockchain are expected to be a reason for internal resistance. Hereby, the initial investment of the implementation of the technology is seen as a stumbling block (Accenture, 2016; Deloitte, 2017).

The second dimension is the organizational context. This part of the conceptual model covers the factors organizational structure, top management support, direct and indirect benefits related to blockchain. Previous research on organizational structure indicates that the structure can influence the adoption of technology. Zaltman et al. (1973) argued that organic, decentralized structures are more beneficial to the adoption phase of innovation than mechanistic and centralized structures. In addition, Tushman and Nadler (as cited in Baker, 2012) state that top management can drive innovation by creating an organizational culture that supports innovations and continues in the firm’s mission and vision. Furthermore, the perceived direct and indirect benefits are of importance because they are the main reason why banks consider implementing blockchain technology.

The external environment dimension includes the customer pressure and the government regulation. The first factor customer pressure, could contribute to the decision of adopting. As mentioned before, customers are demanding for a more customer-centric organization (KPMG, 2017). The new blockchain technology could be a response to this desire. Finally, government regulation is expected to drive the adoption decision. The governmental regulations can have both a beneficial and unfavorable effect on innovation. For example; environmental restrictions, most of the time encourage firms to be more creative and innovative to modify

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technology (OECD, 1996). In contrast, the government could set privacy requirements that may restrain banks in developing new ways for customers to access their account information. Thus, government regulations can either encourage or discourage innovation (Baker, 2012).

Summarizing, the technological, organizational, and external environment, present both constraints and opportunities for technological innovation and are expected to influence the banks level of technological innovation (Tornatzky & Fleischer 1990).

Figure 2. Conceptual model: Adoption decisions of blockchain technology.

External environment dimension Customer pressure Government regulation Technology dimension Characteristics Availability Compatibility Cost structure Organization dimension Organizational structure Top management support Direct & indirect benefits

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4 Methodology

This paper conducts an explorative literature study for analysing the factors for the adoption decision of blockchain. The choice for using a literature study lays in the fact that blockchain is still an inexperienced field where gathering quantitative and qualitative data is hard. This study is conducted in the Netherlands; therefore it is most convenient to get data from Dutch banks. However, there are not much employees, especially in Dutch banks, who are familiar and have expertise in this particular technology, which makes it difficult to conduct questionnaires and get reliable and valid outcomes. In addition, banks are currently exploring the applications for implementing blockchain technology, thus, hard data of this process is also scarce. Finally, for taking in-depth interviews, banks are reserved when it comes to blockchain. For this reason, a literature study seems to be the best option because it is able to explore all the factors that may influence the adoption decision of blockchain.

4.1 Research design and method

This research makes use of a literature study and is primarily gathering data from academic literature for providing a theoretical foundation. These academic journals include studies which gathered data through both qualitative and quantitative research. De databases used for this research are Yahoo, Google, Google Scholar and Science Direct. Besides using academic literature, this study conducts a complementary online search for gathering information such as banking outlooks from banks worldwide, online articles and reviews. This approach provides the most up-to-date news of what is currently happening around blockchain. Considering that blockchain technology is a quite new topic, new reports on this area are constantly being posted online.

This study will first analyse reports and articles that investigated factors leading to resistance and factors that stimulate the implementation of blockchain. By doing this, it is possible to validate if the factors of the proposed conceptual model are relevant in the

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decision-making process for implementing blockchain. Finally, the gathered data and information is summarized in chapter 6, where the importance of all factors will be determined to see if it is possible to investigate whether there are any factors more important for the adoption of blockchain compared to other factors.

4.2 Reliability and validity

Reliability and validity are difficult to measure when doing a literature study. In this research different academic journals are used to achieve reliability and validity. This research uses articles that were referenced often and written by acknowledged authors. This shows the high quality of the articles and the usefulness of this study. Furthermore, the non-academic articles and reports that are used for this literature study are mostly written by high prestige and acknowledged professional services networks such as, Deloitte, KMPG, and Accenture.

5 Literature study

This chapter covers the technological, organizational and the external environment dimensions by analysing factors that can lead to internal resistance of adopting the new technology in banks and analysing factors that highlight the importance of adopting, including perceived benefits, as well as governmental and customer pressures.

5.1 Technological context

In this section the technological dimension of blockchain is analysed. At first, the key characteristics of blockchain are being identified, focusing on how technology characteristics can influence the adoption process. Accordingly, these key characteristics made it possible to identify some key application areas in the banking industry. Afterwards, other factors, availability and compatibility, which have proved to be important factors in the decision-making process, are

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is discussed. When implementing a new technology, there can be resistance because the initial investment could be high. Thus, there must be a consideration of the costs before implementing new technologies.

5.1.1 Characteristics and applications of blockchain

The key characteristics of blockchain are: it is a distributed ledger technology, information is stored digital, it is chronological and time-stamped, cryptographically sealed and irreversible. Moreover, the blockchain operates ‘trustless’ and fewer trusted third parties are needed because they are becoming irrelevant (Deloitte, 2017). Blockchain technology is a distributed ledger technology, meaning that copies of all information stored, is shared in the blockchain. All participants validate the information without a centralized authority. Thus, no disruption will take place because when a node is failing, the remaining nodes will continue to operate. All the information stored in the blockchain is digitized. Due to this digitization no manual documentation is needed anymore (Deloitte, 2017; Loeys & Chang, 2018).

Next to that, it is chronological and time-stamped; all the blocks are added into the chain in a chronological order. All blocks store information that is connected to a transaction, which is also linked to a transaction in the previous block (Crosby et al., 2016; Deloitte, 2017).

Furthermore, blockchain is cryptographically sealed and irreversible, meaning that it becomes impossible to remove, adjust or copy already created blocks and add them into the blockchain (Deloitte, 2017; Loeys & Chang, 2018). This results in true digital assets and secures great robustness and trust. The fact that this storage process is decentralized makes the blockchain failure-resistant. Moreover, this feature eliminates the single point of failure resulting in the immutability of the data stored in a blockchain (Ream, Chu & Schatsky, 2016).

Besides, the blockchain is operating trustless (Deloitte, 2017). The amount of trust required from nodes participating in the system is

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minimized by blockchain. This leads to the last characteristic, need of fewer third parties. Due to the fact that transactions can be executed peer-to-peer (P2P), between two contractual parties, and that information can be stored online, third parties who were used to document everything are becoming irrelevant (Crosby et al., 2016; Holotiuk et al., 2017).

All these characteristics of blockchain technology are relevant because they lead to different applications for which blockchain can be used in the banking industry. However, this study only names four potential application areas for banks because this study has a broader focus than only identifying the potential applications areas. In the past few years, research has been done on the application areas of blockchain, which made it easy to identify application areas for banks.

The first application area of blockchain is the implementation for payments. An inter-bank payment today needs to be processed by several institutions such as central banks and clearing houses (Pilkington, 2016; Triathlon Group, 2016). For instance, cross-border payments are inefficient, as the clearing procedures for all countries are different. It can take up to three days for the transactions to arrive (Guo & Liang, 2016). Whereas, payments processes of electronic cash containing blockchain technology will simplify faster payments for a number of parties, such as consumers, organizations and institutions. This electronic cash, often called ‘crypto currency’ such as Bitcoin, Ripple and Ethereum, assures that online payments are being sent directly from one party to another without going through several financial institutions (Crosby et al., 2016). This will increase the speed of international payments.

The second application area is trade finance. The issuance and trading process of securities is regulated by the government. This trading process is depending only on physical documents. These physical documents include stock documents and bonds notes, which will be controlled using traditional accounting systems. When the share is issued, the purchase or acquisition and the following exchange of these security documents are managed via securities

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exchanges3 (Vakta, Maheswari & Mohanan, 2016). Afterwards, the related financial transactions will be handled by clearing systems. Likewise, this existing process for issuing and trading stocks still involves third parties, which makes this process slow and inefficient. When using blockchain it enables companies that have a desire for going public to issue their shares directly. Subsequently, these issued shares can be traded in a secondary market (Triathlon Group, 2016).

Another application is the smart contract. A smart contract can be described as a computer program that is able to self-execute the terms of a contract automatically (Crosby et al., 2016; Triathlon Group, 2016). These contracts will increase speed and efficiency by meeting conditions that were configured in advance among the participating entities. The parties involved in a contractual agreement can automatically make payments safely and transparent without making use of a third party intermediary (Crosby et al., 2016). Hence, smart contracts can be used for securely hold and release funds since it is assured from interferences through decentralized storage and execution. The generation of the blockchain is necessarily for smart contracts’ further development since a blockchain is the designated place to store such contracts thanks to its cryptographic security and immutability (Deloitte, 2017). Finally, those smart contracts can be used to form a smart property. Those smart properties can control the ownership of a property or asset whereby a physical property becomes a smart property (Crosby et al., 2016). Once the object is connected to the blockchain using a unique identifier, the object can be controlled or exchanged. Additionally, the entire history of transactions is traceable (Triathlon Group, 2016). This property can be both physical in the shape of a house or car and non-physical such as shares of a company. It allows for trading properties ‘trustless’ while reducing fraud, mediation and settlement fees and moreover it allows trades that would have never been possible beforehand (Mizrahi, 2015). These smart contracts and properties are mainly used in settlement/clearing and collateral management and insurance processes.

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Some possible financial applications of blockchain in banks are shown in figure 3 below. The figure provides gives a brief summary of several processes that are going to change when implementing blockchain (Loeys & Chang, 2018; Ream, Chu & Schatsky, 2016)

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Figure 3. Application areas of blockchain in the financial industry.

Financial services in banks What can it change?

Payments Blockchain will enable faster inter-bank payments between individuals, businesses and institutions.

Trade finance Reduces the extensive documentation and the complexity of document flows. Furthermore, the transparency could minimize the risk of document fraud and lower the transaction costs of reconciliation between institutions.

Settlement/clearing/collateral management

(using smart contract and properties)

Trade clearing and settlements

Allows speed calculation of trade settlement amounts, and the transfer of funds can be done automatically.

Coupon payments

Allows the automatic calculation and payment of periodic coupon payments and immediately returns the principal when the bond expires.

Collateral management

Using smart properties; the origin of assets can be assessed, transactions can be tracked and the ownership can be determined.

Insurance

(using smart contract and properties)

Insurance claim processing

Contracts enable finding errors, routing, approve workflows.

Afterwards it determines the pay-out which is based on the type of claim and its underlying policy.

Micro-insurance

Allows for speed calculation and transfer of micropayments based on data of customers using Internet of Things-enabled devices.

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5.1.2 Availability and compatibility of blockchain

One of the reasons for internal resistance in banks to blockchain is the availability and compatibility (Accenture, 2016). Both are related to the employees and the banks’ resources. For instance, does the bank have the specific technology experienced employees or is it able to employ those experts? And are the existing processes and technologies compatible with the new technology? These existing technologies are important in the adoption process because they set a limit on the banks’ ability to cope with the technological change (Baker, 2012; Collins et al., 1988).

Currently, banks worldwide are already struggling to understand how they can benefit from integrating blockchain technology into their current business routines (Boroujerdi & Wolf, 2015; Loeys & Chang, 2018). Banks will soon need to make their business processes and databases compatible with the crypto-space in order to avoid obsolescence of these practices and for optimizing the value of this new blockchain technology (Verdon, 2015). This section outlines the availability and the compatibility of the novel technology. When looking at the availability and compatibility of blockchain, today’s systems rely on legacy infrastructure and are not able to interact directly with blockchain, subsequently a blockchain application can only be created by users with a high level of technical expertise (Verdon, 2015). This lack of information regarding how the implementation can be done is a problem banks face (Accenture, 2016). The technology requires unique skills in software development. Each programmer working on blockchain will need to be familiar with concepts such as cryptography, the operation of decentralized P2P networks, and organizations that are creating smart contract like Stellar and Ethereum4.

In addition, the top management of bank fears that the initial cost of implementation is too high and will lead to start-up problems when they choose for integrating blockchain. These concerns are understandable but unfounded because the implementation of

4

‘Open-source, public, blockchain-based distributed computing and operating systems that are featuring smart contracts’ functionality’ (Pulikkottil, 2017).

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blockchain for businesses of all sizes does not have to be expensive (Davies, 2018). Nowadays, there exist companies, which are aiming to make sure that blockchain is compatible with the existing traditional business models by integrating a blockchain layer into established enterprise systems. One of these companies is Proxeus, established in 2015. In order to build document-centered blockchain applications compatible with former technologies they developed a functioning technology and focus on three specific areas: logistics & trade finance, tokenization of assets and regulatory tools (Verdon, 2015).

To summarize, it is going to take time before blockchain is fully integrated due to the fact that the majority of the bank’s infrastructure needs to be rebuilt. Today, the core bank systems are still very robust and secure which in turn leads to a sacrificed flexibility and an unfriendly communication with other technologies. Banks should incorporate experienced blockchain developers, or hire companies like Proxeus, who have the appropriate skills to enable blockchain development. All software developers working on blockchain and smart contracts should be familiar with current platforms offered by blockchain companies, such as Ethereum and Stellar. These platforms can solve the scalability problems of blockchain and enable the creation of private permission only blockchains, which are most useful for internal banking systems.

5.1.3 Cost structure

Banks need to evaluate the cost structure of blockchain (Deloitte, 2017). First they have to choose which blockchain model they will be using, the private, public or the consortium blockchain. Then, as mentioned in the previous section, they need to determine the cost incurred in different scenarios. For instance, choosing for a specialized firm to implement the blockchain or developing the technology in-house. In addition, this new technology needs to be tested and processes need to be standardized. Accordingly, the costs of this tests and standardization processes need to be determined (Deloitte, 2017).

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On the one hand, blockchain can save money when it comes to the transaction costs. However, the initial cost of investment might be high resulting in a long payback period. Henceforward, banks need to see blockchain as a long-term investment and consider if the investment is in line with their vision statement and a must-have technology to stay in business over time.

5.2 Organizational context

In this section, an analysis of the organizational context is provided. In former empirical research important factors influencing the adoption of new technologies included the organizational structure and the top management support (Hoti, 2015; Tornatzky & Fleischer, 1990). A research of Accenture (2016) highlights the important of the organizational structure and the support of the management and employees. In addition, the benefits blockchain will entail can be important factors for the decision to implement blockchain (Zheng, et al., 2016). The benefits are being identified in this section to see if some benefits are more important than others.

5.2.1 Organizational structure

A factor that banks have designated as a reason for resistance to adoption of blockchain is the compatibility of the organizational structure (Accenture, 2016). Previous research has shown that the organizational structure can be a decision-making factor when adopting innovations (Tornatzky & Fleischer, 1990). For this reason, banks should analyse their organizational structure to see if the innovative technology suits the organizational structure and if this structure is ready for implementing blockchain.

According to former research, decentralized organic organizations are more innovative than mechanistic and centralized structures and furthermore they are more beneficial to the adoption phase of innovation (Aiken & Hage, 1971; Zaltman et al. 1973). In addition, organizations which have an organic structure provide a greater stimulus to initiate innovation (Pierce & Delbecq, 1977). This

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lays in the fact that organic structures can generate new ideas and development. However, Pierce and Delbecq (1977) stated that the adoption of a new technology still requires some centralized decision-making to decrease the amount of conflicts. The implementation process could benefit from this functional authority that assists the organization through innovation. Finally, they conclude that the organization structure does not directly determine innovation, but only stimulates organizational decision-makers to stimulate innovation (Pierce & Delbecq, 1977).

‘Machine bureaucracies’, is a common name for large and powerful organizations such as banks. Banks are characterized by their mechanistic design features. In those mechanistic organizations, the organization is seen too rigid and centralized, resulting in employees that are constrained by a set of rules and an organization that is not able to adjust to new technologies (French, Rayner, Rees & Rumbles, 2011). Banks may feel that they need to change this mechanistic structure or try to focus on stimulating an innovative organizational culture. This solution connects to the next factor, top management support of blockchain.

5.2.2 Top management support

Tushman and Nadler (as cited in Baker, 2012) research outcomes’ showed that the top management ability to drive innovation by creating an organizational culture that supports innovations and continues in the organization’s mission and vision is important for the adoption of a new technology.

Therefore, it is necessarily that the top management fully supports blockchain because then they are able to transfer their enthusiasm upon the rest of the stakeholders for creating a supportive culture that boosts innovation. For instance, by educating them on blockchain’s potentials and positive impacts (Accenture, 2016). This can be done through workshops organized for stakeholders, which can educate them about the usefulness of blockchain systems (Deloitte, 2017).

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5.2.3 Direct and indirect benefits

Important factors for banks to implement the new blockchain technology are the advantages it entails (Figure 4). The four major benefits of blockchain technology discussed in this section include increased speed and lower costs, reduced falsification, ensured anonymity and better auditability (Accenture, 2016).

The first advantage when implementing blockchain is increased speed and thereby lower costs, which the decentralization of the technology enables. In traditional centralized transaction systems transactions still need to be validated by central trusted agencies, which inevitably results in high costs and central services dealing with performance bottlenecks (Zheng, et al., 2016). Nevertheless, blockchain technology allows transactions to be registered without utilizing a third party or expensive infrastructure to maintain the ledger. The technology will be a replacement for the traditional back-office processes and can significantly increase the speed of processes and reduce the server costs. Additionally, it is able to diminish the performance bottlenecks at the central server (Pastor, 2015; Zheng, et al., 2016).

Second, the persistency of the technology reduces the falsification. It is hard to commit fraud due to the fact that each of the transactions in the network needs to be confirmed and recorded via blocks participating in the whole network. Besides, each block needs to be validated by all the other nodes, so that all the transactions are being checked. In this manner, it is easy to detect falsification (Zheng, et al., 2016). However, there are limitations when it comes to the verification (Natoli & Gramoli, 2016). If only 51 per cent of the nodes verify the transaction, the transaction will be verified. There is a chance of groups working together to approve illegal transactions. Therefore, mining pools need to be monitored for preventing them from gaining unfair percentage of the network.

Third, the anonymity. Individual users can interact with the blockchain network with their own generated address. In fact, users could generate as many addresses as they want to avoid exposure of their identity (Zheng, et al., 2016). Since there no longer is a central party involved which manages private information of users

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participating, the new software secures a better privacy on the transactions included in the blockchain. However, it must be noted that even blockchain cannot promise perfect privacy protection since the values of all transactions and balances of each public key are publicly visible (Crosby et al., 2016).

The last benefit is the auditability. After the validation of each of the transactions on the blockchain, the transaction will be recorded with a timestamp. This timestamp enables users to easily verify and trace previous records by accessing any node in the distributed network. For instance, in Bitcoin blockchain it is possible to trace transactions via previous transactions. In this way, the traceability and the transparency of data stored in the blockchain, is being improved (Zheng, et al., 2016).

All these benefits could be important factors for banks to implement the new blockchain technology. However, research has shown that the high speed and lower costs due to decentralization is considered the most important benefit for banks (Accenture, 2016; Holotiuk et al., 2017). During a research conducted by Accenture (2016), banks were asked to rank perceived benefits. The outcome was that speed and costs were significantly ranked highest.

Benefits Enablers

Lower costs and increased speed Enabled by the decentralization of the technology.

Reduced falsification Enabled by its persistency characteristic.

Anonymity There is no longer a central party involved, who manages private information.

Better auditability Enabled by the timestamp that is added.

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5.3 The external environmental context

In this section the external environment is analysed. The customer pressure and the governmental environment are being examined. During the past decennia, customers have asked for more customer-centric organizations (Accenture, 2017; KPMG, 2017). Recently, reports showed that baking customers are interested in innovation and new banking features (Accenture, 2017; Sopra Banking, 2016). Hence, the customer pressure is first analysed to see how it could potentially influence the adoption process. Here, the consumer’s perception and expectations of banking processes, and their openness towards alternative, more digitalized, banking models is discussed. Furthermore, the regulation of governments is examined because in the past organizations and institutions had to face problems resulting from those regulations (Baker, 2012).

5.3.1 Customer pressure

In the past decade, the Internet of Things (IoT) has grown, resulting in a demand for more customer-centric organizations. Xia et al. (2012) define IoT as the ‘networked interconnection of everyday objects, which are often equipped with ubiquitous intelligence’. This increased demand for more customer-centric organizations is also noticeable in the banking sector (Accenture, 2017; KPMG, 2017).

The technology firm Sopra Banking Software (2016) conducted a study about the innovativeness in the banking industry. The firm gathered data from 5000 banking customers in six European countries (France, Germany, Spain, the Netherlands, UK and Belgium). Surprisingly, research outcomes showed that the trust and the satisfaction levels that the customers experience were high, even though the sector is still recovering from the financial crisis. However, the report also mentioned that traditional banks are losing prestige as customers have the feeling that the engagement of customer has to be improved. Additionally, the respondents said they are open to change regarding to the digitalization of processes (Sopra Banking, 2016). For example, 69 per cent of the respondents find it important for their bank to be innovative and out of these respondents

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33 per cent is ready to switch to a bank which is using the latest technologies (Appendix B). Moreover, the respondents said that they are willing to share more data, as they are able to benefit from it. Other findings include that a quarter of the respondents were interested in P2P lending and crowdfunding (Sopra Banking, 2016). Another research of Accenture (2017) adds on this highlighted customer demand for digital innovation. However, this study provided a more global vision and surveyed almost 33,000 banking customers across 18 countries. It concludes that banks should find a way to establish a value proposition that includes both digital innovation and existing values to meet the new customer demand.

These findings show that the banking sector will be able to earn profit when they are engaging in finding new ways of delivering value through data in the future. The best way to facilitate this is through adopting new technologies combined with a more creative way of thinking to gain customer loyalty and attract new customers. This development will require stable digital foundations, and the capability to evolve at gradual speed. One of these digital foundations could be blockchain technology. Together with IoT, the technology has the potential to revolutionise banking practices and change customer experiences over the next decade.

5.3.2 Government regulation

Cermeño (2016) argued that one of the most important challenges that can influence the adoption decision for banks, is the way in which the new blockchain technology will be regulated (Accenture, 2016). Not the technology itself, but the use cases of the technology are objected to regulation. Today, the regulatory landscape is still in a development phase and immature. The treatment of all the components of blockchain is different. For instance, Bitcoin is facing problems such as, legality and taxation problems and avoidance of illegitimate activities. In addition, in a few countries Bitcoin is not even legal. The countries Bangladesh, Ecuador, Kyrgyzstan, Bolivia, Iceland and Vietnam already banned the crypto currency (Swan, 2015).

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The main problems blockchain is facing are regarding the territoriality and liability. Due to the fact that distributed ledgers or blockchain are not bound to specific locations, the legal territoriality is still a problem. All the nodes in the network rely on different laws, because they are participating at different locations. Thus, no central party could be held responsible and no nationality could be used as a foundation for regulation. The same applies to the liability because there is no party who has the final responsibility for the operation of the ledgers and the information that it contains (Cermeño, 2016).

Another important issue is the legal validity of financial instruments issued on the blockchain. Blockchain can be used as a platform for defining financial instruments. These financial instruments include bonds or derivatives. Yet, there is some trouble concerning the legal validity of these financial instruments. The financial instruments need to be acknowledged by the associated regulators and supervisors. Some banks are already trying to respond to this issue. For example, the Bank of France has said that they already recognize different mini-bonds, which are being directly issued on the blockchain (Cermeño, 2016).

Summarizing, the technology and its possible applications still remain in an experimental stage within the banking sector, where regulators need to coordinate and guarantee industry stability. However, for succeeding the global adoption of blockchain, changes in the current regulations of the government are required (Deloitte, 2017).

6 Results

The main characteristics of blockchain are; it is digital, chronological, time-stamped, cryptographically sealed and irreversible. Furthermore, the technology operates ‘trustless’ and less trusted third parties are needed (Deloitte, 2017). All these characteristics of blockchain technology are important to consider because they lead to new applications for which blockchain can be used in the banking industry. In the banking sector blockchain’s main use case areas are expected to include payments, trade finance,

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settlement, clearing and collateral management and insurance processes by using, smart contracts and smart properties (Crosby et al., 2016; Holotiuk et al., 2017).

Important reasons for banks to implement the new blockchain technology are the advantages it entails (Accenture, 2016). The four major benefits of blockchain technology include increased speed and lower transaction costs, reduced falsification, ensured anonymity and better auditability (Zheng, et al., 2016). All these benefits are important; however research has shown that the high speed and lower costs due to decentralization are considered most beneficial for banks (Accenture, 2016).

Another driver from the external environment is the customer pressure. Customers stated that traditional banks are becoming less attractive, as they are feeling that there is still a lack of engagement on both the customer and banks’ side. Additionally, customers are open to change regarding the digitalization of processes (Accenture, 2017; Sopra Banking, 2016).

There are several reasons why banks are still hesitating to implement blockchain (Appendix A). The first reason for internal resistance to blockchain is the availability and compatibility of the blockchain technology itself (Accenture, 2016). Today, the core bank systems are robust and secure which in turn leads to a sacrificed flexibility and an unfriendly communication with other technologies (Verdon, 2015). Banks should hire experienced blockchain developers, who have the appropriate skills to enable blockchain development. The availability and the compatibility of the existing technologies are important in the adoption process because they can set a limit on the banks’ ability to cope with the technological change (Baker, 2012; Collins et al., 1988).

Another factor that banks have designated as a reason for resistance to adoption of blockchain is the compatibility of the organizational structure (Aiken & Hage, 1971; Zaltman et al. 1973). Banks are still characterized by their mechanistic design features and may feel pressure to change this mechanistic structure or try to focus on stimulating an innovative organizational culture (French et al., 2011). That is why the support of the top management regarding the

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new technology is important (Accenture, 2016). For instance, managers can create a supportive innovation culture and educate stakeholders on blockchain’s potentials and positive impacts through workshops.

However the most important challenge that can influence the adoption decision for banks is the government regulation (Accenture, 2016; Cermeño, 2016). The main problems blockchain is facing, are regarding the territoriality and liability. Therefore, new legal changes in current regulations set by the government are required for succeeding the global adoption of banks (Deloitte, 2017).

All these drivers belonging to the technological, organizational, and external environment present both constraints and opportunities for technological innovation and are expected to influence the banks level of technological innovation (Tornatzky & Fleischer 1990). The results are summarized and presented in figure 5 below.

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Figure 5. Factors per environment and their effect on the adoption decision of blockchain.

Effect: resistance Effect: stimuli Technological

environment Availability Lack of experienced technology developers.

Compatibility

Lack of advanced and compatible technology.

Characteristics

Enables new use cases for banks.

Organizational

environment Organizational structure Structure is too mechanic and centralized.

Top management support

Lack of information on blockchain and the top management does not inform the rest of the employees

Cost structure

High initial investment.

Direct and indirect benefits

Two important benefits are increased speed and lower transaction costs.

External environment

Governmental regulations

The legal and economic laws are not ready.

Customer pressure

Customers have a desire for more innovation when it comes to banking.

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7 Discussion

This chapter discusses the limitations of the literature study, including its reliability. Next to that, it examines practical implications for bank executives and provides suggestions for future research.

7.1 Limitations and future research

The reliability of this study is limited because of the fact that banking outlooks and online articles and reviews are used. Banking outlooks can be subjective because they are written by the banks themselves and are hard to generalize. Moreover, some online articles do not provide sufficient information about the authors, which makes it difficult to track the reliability. Nevertheless, as mentioned before, blockchain technology is a new topic and at this moment not that many academic articles have been published. Hence, for gathering sufficient amounts of data this study has to make use of these outlooks and online articles. For future research, it is important to include other research designs. For example, gathering data of banks on blockchain, conducting in-depth interviews with bank executives and conducting questionnaires among banking customers. Furthermore, this study only highlights the most important factors due to time constraints. Future research could examine more factors for expanding the blockchain adoption model to increase the reliability.

Secondly, the development and the future impact of blockchain are unpredictable. The technology is comparable to the Internet and the development of smartphones. In the beginning, nobody could have foreseen what influence it would have on our daily lives. This uncertainty makes it difficult to predict what factors are important for the adoption decision of blockchain. It is likely that only in a short amount of time, some factors will be more important than others or new factors will arise. Future research could examine this.

Finally, due to the novelty of the technology, the dangers are mostly unknown. As mentioned, there are some privacy issues for customers, concerns on validation processes, and jobs that are going

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to disappear. In a few years, the scope and the impact of those dangers will be revealed which gives future research the opportunity to thoroughly analyse and incorporate these disadvantages and challenges for getting a more comprehensive view.

7.2 Practical implications

The outcomes of this study provide a set of factors for bank executives to consider before implementing blockchain. These factors are presented in a conceptual model (Figure 2). The technology adoption framework can be used in combination with other frameworks to eventually make the best decision. Different from other frameworks, this model contains an environmental context. The addition of this dimension is important because it contains two important factors, the government and the customers. Both parties have a major influence on the implementation of new disruptive technologies, such as blockchain. Hence, top management should carefully considerate both.

Second, the most important factor stimulating the adoption of blockchain was the high speed and the lower transaction costs the technology is expected to foster. Banks should determine what the impact is of those benefits and consider important questions regarding the availability, compatibility and initial investment cost, such as ‘Should banks design the technology in-house or hire experts?’ These questions are helpful to see if the long-term savings outweigh the initial cost and to make the best decision if banks have the desire to adopt blockchain.

8 Conclusion

During the past years, the financial sector has been faced with far-reaching changes as a result of the move towards digitization of processes and the recent financial market crisis. However, today’s changing customer demands, global regulations, and the emerging competition of FinTech companies, require innovation if banks want

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potentially disruptive power, such as enabling P2P transactions and a decentralized record keeping of all transactions. It could foster faster processing times of business practices of all kinds. This may result in consequences for the banking industry. This study is the first of its kind to gather information on the blockchain adoption in the banking industry by providing a technology adoption model based on the TOE-framework developed by Tornatzky and Fleischer. This paper outlined the factors that may drive the decision for banks to adopt blockchain technology, which are categorized by various dimensions. First, the technology environment, considered the characteristics of blockchain and the several applications for which blockchain can be used and which are able to make current services obsolete. Moreover, the high costs of the initial investment are said to be a reason for resistance. Likewise, other technology issues including the availability and compatibility of implementing the blockchain technology are causing resistance in banks as well. Secondly, the organizational context discussed the bureaucratic and mechanic organizational structure of banks and their lack of top management support which are found to be an important obstacle in adopting blockchain. However, the organizational benefits, especially the higher speed and lower cost in the long-term were considered as the most important drivers of adoption. Thirdly, the external dimension examined that obsolete governmental regulation is leading to resistance in banks. On the other hand, banking customers demanding innovation, stimulates the decision for banks to implement this new technology.

Summarising, these findings contribute to the literature on technology adoption models by providing new insights about the impact of innovative technologies such as blockchain and has further practical implications by presenting a set of factors for bank executives when considering adopting new, disruptive technologies. Furthermore, these findings could be used to further explore the blockchain field.

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Blockchain technology adoption decision of banks : a literature study