Deutsche Bank Headquarters Frankfurt Germany
Deutsche Bank's headquarters in Frankfurt, Germany.Reuters

Big banks like Deutsche Bank are caught between the devil of their own antiquated IT systems, and a deep blue sea of disruptive technology, the like of which has never before been visited upon the financial sector.

Most banks are not really conversant in the language of the internet, and will never be fluent in it like Google or Facebook are. They also see an approaching tsunami of fintech start-ups: firms that perform maybe just the one task, but do it very well.

In order to compete, banks must first address what Deutsche Bank Research analyst Thomas F Dapp calls their "homework" - solving their legacy problem.

Dapp recently authored a report for Deutsche Bank entitled "Blockchain – attack is probably the best form of defence", which received a lot of attention within the crypto-community.

Dapp, a digital sector analyst, made it clear to IBTimes that his role as an economist at the bank is to produce independent research, and as such his views do not represent strategy within Deutsche's operational departments.

Dapp said: "I think blockchain is a really disruptive development and banks have a lot of fear concerning this technology because in the pure theory of blockchain a lot of processes within a traditional bank would be obsolete.

"I'm not a data scientist, I'm not an information technology scientist, I'm an economist, but I see what could happen if more and more people use a peer-to-peer mechanism.

"I'm pretty sure at the end of the day it's not a question of technology, it's a question of a political will of the regulators; these people don't want to implement a pure blockchain theory because they would lose their jobs.

"I think that what traditional banks should do, and I emphasise this, they should experiment with all these new kinds of technology without prejudice.

"But on the other side I see huge legacy problems because traditional banks have such old systems and procedures in the back end of their infrastructure. Traditional banks cannot offer an API to implement new technologies very fast.

"They have to solve their legacy problem, and we are talking here about a process that could last maybe five years, ten years, I don't know. It's a huge hindrance at the moment."

IBTimes asked Dapp what mark out of 10 he would give Deutsche's existing IT backbone. He said: "I don't know in comparison to other traditional banks. I think every traditional bank is sitting in the same boat; they have the same problem. It costs a lot of money, takes a lot of resources, and maybe it's a process of more than five years."

Dapp lamented the so-called silo problem regarding IT at banks, whereby every department addresses its own digitisation problems but don't work together.

Apparently, big banks collectively burn through about $20bn a year in wasted tech spend, more than is poured into global fintech several times over.

Perhaps it's time big banks opened up a bit more. One radical proposal IBTimes encountered involved adopting a netco/servco model, similar to the way big telecoms firms opened up their systems to virtual operators; something which could be enabled by - wait for it - blockchains.

Victor Basta, founder of Magister Advisors, a Silicon Valley and London-based M&A advisor to the technology industry, breaks down the banking/payments space into three layers.

Basta told IBTimes: "There's a clearer distinction developing. First is the customer layer - acquiring and managing customers, which is essentially a marketing and product innovation effort.

"The second is the wholesale layer, which is essentially interbank transfers, forex dealing, matching assets and liabilities etc. Further, underneath, there is the clearing and settlement layer – what we might describe as the payments and transfer plumbing."

"Some might take the view that there is risk that retreating to being 'netcos', to use the telecom analogy, would restrict revenue generation and growth opportunities for banks.

"Our view is the opposite. Banks would be strengthened by this and could see margin opportunities from upgrading clearing and settlement as customer-facing innovation accelerates and expands rather than acquiring and managing customers badly.

"There's a much bigger marketplace rapidly developing at the customer layer – and expanding markets are great if you're selling shovels to the gold rush."

"The big value to banks is in running the plumbing beneath their infrastructure. It isn't eye-catching. It isn't customer-facing. But it's fundamental. It's much bigger and much, much more important and candidly that's where bank resources will probably be best and most profitably deployed."

Of course there is a fundamental difference between holding customers' money and billing them monthly for mobile use. There is a huge value to holding cash, not to mention all the risk and security issues that come with it.

That said, consumers' attitudes appear to be changing, evidenced by all the challengers entering the space, and the advent of things like peer-to-peer lending.

Deutsche's Dapp has a less radical, more bank-centric view of where value inheres. He believes that in the face of new technology banks do have one really big comparative advantage: "I think it is a kind of trust. I don't mean the trust concerning the scandals or the banking crisis, I mean trust in data security.

"When it comes to financial services people have a different understanding of trust. Google might lose 50,000 pieces of customer data and face maybe a three day s**t storm.

"If a traditional bank loses 50,000 customer accounts or maybe just their emails - these people are never coming back.

"And this is an asset for traditional banks. People trust their bank; they are pretty sure their bank does not monetise their personal data or give it to third parties. I'm not sure whether the digital ecosystem does this. But people want to know their personal data is safe and secure."

Within a new blockchain ordered world, Dapp said banks could become the "custodians of cryptographic keys".

He said: "I think at the moment its very important for banks to offer products and services that are faster. It's quicker for me to board and plane and bring you $10,000 in cash than it is to transfer it using a traditional banking clearing system. So that's a huge problem.

"The bitcoin or the cryptocurrency or the blockchain technology is very fast - we are talking about an average transaction time of ten minutes.

"I think banks should implement the advantages of these new technologies and become more efficient, more cost efficient and optimise their legacy problem, to be fast and so survive in the competition."

Theoretically speaking, Dapp said certain attributes of cryptocurrency could be very attractive to banks – aspects like anonymity, a non-negotiable no-go zone as far as regulators are concerned.

He said: "In the analogue world we have cash, and cash is 100% anonymous. And since the Snowden papers were published everybody knows that the internet is under surveillance, so maybe it could be interesting for a bank to offer a product which you can use to pay in an anonymous way.

"But the question in the end is - do regulators want this? No. They often invoke prevention of terrorism and Silk Road for instance. I think in theory it is very attractive."