Although the term “blockchain” has really grown in popular imagination in the last few years, the technology itself is just 10 years old, given that it was first conceptualized in 2008. Blockchain is the basis of the Bitcoin protocol. (see here for our post on the ABC of blockchain).
Interestingly, although blockchain is one of the most discussed topics in recent times, a vast amount of people within the industries that stand to benefit most from blockchain are also completely uninformed about it. This is amazing since blockchain technology has the potential to completely revolutionize industries like healthcare and insurance.
Another industry that blockchain stands to benefit enormously is finance. This incredible new technology stands to benefit the industry by saving them enormous amounts of money by streamlining their processes.
Why Blockchain in Financial Services?
- Many of the industry’s processes are overdue for an upgrade or in some cases complete replacement to withstand new volumes, hacks and security threats. Blockchain is far more impregnable and recoverable as no centralised version of this information exists.
- Transfers facilitated by central authorities such as banks have not changed in the last 150 years! An international transfer can still take as long as five days to settle, entailing risks like credit risk, exchange rate risk etc., and the industry needs to reduce heavy transaction fees and transaction times. Blockchain can make these transfers visible securely immediately, which other technology cannot.
- In the future, people are going to make a lot of smaller payments. That’s going to increase economic activity. That, in principle, makes a larger pie with lower fees, higher volumes and a demand for technology that supports it (such as blockchain).
- Blockchain will also enable further disruption of the traditional banks by fintech and non-bank tech players. New entrants, free of legacy problems, could utilise blockchain to create a radically cheaper platform for innovation. Banks need to start work with blockchain technology now in order not to be disintermediated by new entrants.
Areas where Blockchain can make a significant difference in the finance sector are:
Blockchain enables the near real-time point-to-point transfer of funds. This technology will have a major impact on domestic payments and international money transfers. It is crucial to understand some of the implications of this capability.
Moving towards near real-time settlement will increase profitability by reducing liquidity, operational costs and by reducing overheads. Moreover, blockchain will enable a direct interaction between sender and beneficiary banks. This has the potential to eliminate the need for correspondent banks. Blockchain will also lower money transfer costs for certain products, which will in turn become more attractive to large multi-national organisations with high frequent cross-border funding and trade finance demands.
- Trade finance
The trade finance business includes multiple trading partners and huge amounts of manual records handling, checking and paperwork. This creates delays, duplication and fraud and high levels of inefficiency. Blockchain can solve most of the problems by optimising the regulatory and operations costs of trade finance. Blockchain can disintermediate third parties (that support transaction verification/validation) and accelerate settlement. Moreover, blockchain can enable real-time multi-party tracking and management of documentation.
- KYC and Identity Management
Know your customer (KYC) requests can cause delays to banking transactions, typically taking days and sometimes weeks to complete. Current KYC processes also entail substantial duplication of effort between banks (and other third-party institutions). The KYC blockchain will enable structured information to be recorded, assessed and shared across this network using advanced cryptography. With the customer’s consent, banks will be able to collect, validate and share data efficiently and accurately.
FinTech is a long-standing process of innovation in financial markets driven primarily by technology. Blockchain is likely to disrupt financial services first by making existing processes more efficient, secure, transparent and inexpensive, then it could enable banks to provide seamless customer experience, transparency and security.