Blockchain technology is perhaps one of the most talked-about topics in the financial services industry today. If fully adopted, it will enable banks to process payments more quickly and more accurately while reducing transaction processing costs and the requirement for exceptions. How well-equipped are Indian banks to leverage this technology?
DCB Bank is one such organization that has been experimenting with this technology for the past two years.
R Venkattesh, President and Head of Operations, Technology and Human Resources, DCB Bank, shares his views on the benefits of implementation of Blockchain in the banking sector and the importance of collaboration among industry players.
Q. Blockchain has been heralded as a transformative technology that will reform banking in a big way. What are your thoughts?
A: The impact of Blockchain technology may be greater than any of us realize -- it has the potential to change economics, business models and society, and we’re just beginning to explore the surface of what’s possible.
Blockchain has the potential to transform our lives through its benefits viz. faster settlement times that are user-optimized, lower collateral requirements and counterparty risk, improved contractual term performance, greater transparency for regulatory reporting, better capital optimization, reduction of operating cost and it is incorruptible. And, Gartner says that 90% of the current enterprise blockchain solution will need to be replaced by 2021!
The financial services infrastructure will be radically changed by blockchain technology. Collaboration among competing financial institutions will be required to overcome early challenges associated with the technology and ensure that full economic and social benefits are realized.
Recent trend is towards collaboration i.e. partnerships between banks, technology companies, fintech and regulators will bring benefits to consumers and the financial system.
Q. What are some of the key use cases of Blockchain emerging in the banking sector today?
A: Blockchain is a disruptive technology platform that uses cryptography and a distributed messaging protocol to create a shared ledger between trading counterparties to execute simple transfer of asset ownership or more complex transactions using ‘smart contracts’. The data on the ledger is pervasive and persistent and creates a reliable ‘transaction cloud’ as that transaction data cannot be lost or corrupted by any of the participants.
There are many possible applications of blockchain technology in banking domain. Suggested use cases in testing mode include Know Your Customer/Anti Money Laundering (KYC/AML) data sharing, trade surveillance, regulatory reporting, collateral management, trade finance, settlement and clearing. This transformation has the potential to make trade finance processes far more efficient, improve regulatory control and eliminate unnecessary intermediaries.
One of the main elements of blockchain is decentralization. It removes centralised bodies from the process and enables a level of trust between two parties who have never done business together. While blockchain will eventually change the core of a business, in the next five years it will mostly affect how an organization executes its business. A decentralized ledger can simplify payments in retail banks, particularly international payments that involve high fees and several days to complete. Blockchain can also be used to verify customers' identities in retail banking. Once a customer’s personal data is verified by an authorized agency, they can be issued private and public keys for the blockchain. The ledger then functions as a decentralized and common mechanism to authenticate a customer's identity across banks.
Q. Tell us about the adoption of Blockchain within DCB Bank. What are some of the key challenges that you’re facing at this stage?
A: DCB Bank is experimenting ways to implement blockchain for relevant use cases.
For DCB Bank, blockchain is a tool than a catalyst – not a one-size-fits-all, but a new foundation underpinning everyday tasks. We feel that it offers industries a techno-driven facelift with its ability to increase productivity, ensure transparency, and reduce wastage, time and paperwork.
The banking industry is regulated by RBI and we shall be guided by banking regulator in this regard.
For adoption of blockchain, awareness needs to be created within and outside of the bank as well. DCB Bank is a part of the journey and from 2017, the bank has participated in various conferences and forums on blockchain in India.
In 2017, DCB Bank started a unique Innovation program “DCB Bank Innovation carnival” to collaborate with blockchain relevant fintech organisations. As part of next steps, we have done multiple Proof of Concepts since 2018 in various areas such as Cross Border Remittances, Secure Document, Invoice Discounting, Trade Finance, Digital Identity, Insurance Issuance.
DCB Bank is working on a blockchain pilot with Infosys on reconciliation of Tax Deducted at Source (TDS) exemptions based on forms 15G/H. Tax payers submit form 15 G/H to avail tax waiver at multiple financial institutions leading to potential tax pilferage due to the absence of real time reconciliation amongst financial institutions. Blockchain based system brings in efficiency and transparency due to near real-time reconciliation, gradually leading to better tax compliance.
Some of the key challenges we face include:
* Skillset - Availability of skilled developers and resource is challenge today
* People’s Mindset/Adoption - The technology has potential, but the adoption rate needs a push
* Implementation - Establishing standard tools or administration interfaces
* Governance - Redefining the “new normal” threat matrix for shared ledgers among large banks
* Regulation - The regulation on blockchain technology, particularly in financial services, needs to emerge before we see large-scale adoption by banks
* Interoperability/Integration with existing production environment systems - One of the risks for deploying blockchain systems in a live production environment is the fact it doesn’t really work with other existing (non-blockchain) systems.
* Speed/Scalability - One of the problems currently slowing the adoption of blockchain systems is the inherent inability to handle large volumes of transactions and system activity. The technical concepts behind blockchains are fairly advanced (cryptography) and there’s limited knowledge/ expertise, thus there are lots of experiments with the technology, to explore and better understand all the strengths / weaknesses of the system.