As a centralised, tamper-proof ledger, a well-designed blockchain not only eliminates intermediaries, reduces costs and improves efficiency but also offers greater transparency and traceability for businesses.
Blockchain has been generating a lot of interest predominantly from the technology community of late. Businesses across verticals have already started to wake up to this phenomenon.
Gartner predicts that the enterprise-ready blockchain solutions will be ready by 2023 and by 2025 blockchain will incorporate complementary technologies such as AI and IoT, decentralised digital identity for delivering the full value proposition of blockchain.
Blockchain’s role in transforming the financial industry
While enterprises in various industries have already started looking into blockchain implementation in the form of pilots to test the technology against their specific business challenges; the financial services industry has the most compelling reason and use cases for blockchain. We expect to see a significant increase in blockchain adoption in 2020 and beyond. As a centralised, tamper-proof ledger, a well-designed blockchain not only eliminates intermediaries, reduces costs and improves efficiency but also offers greater transparency and traceability for businesses.
The prevailing view in most banks is that blockchain will cause two main shifts in the way they do business today. The first one is in its broad potential to drive global collaboration by bringing financial institutions closer together. And, the second, creating real efficiencies in the way the banks process data.
The first shift around industry collaboration is already happening, to a certain extent. This partly took place because the initial hype around blockchain created the fear of missing out, but mainly because of the need to create an industry system for global collaborators which has even been positioned in the form of compliances and mandates like PSD2, Open Banking, etc.
The second shift is in product and process innovation which has led to some interesting uses for blockchain including--simplification of payments infrastructure, use of smart contracts to standardise post-trade processes, and efficiently linking of trade finance and syndicated lending.
Blockchain adoption in financial sector
Royal Bank of Canada introduced its blockchain-based system to store credit score records that will allow users to understand how they are measured. Their main objectives were increased transparency and immutability. Mizuho, Sumitomo Mitsui, and Mitsubishi UFJ Financial, in Japan have joined forces to create a cloud based DLT platform for money transfers between individuals that can be used by each of these banks. State Bank of India has tied up with PrimeChain, a startup and created a consortium of leading Indian banks called “BankChain” to research the potential of blockchain in banking. By 2030, SBI is planning to put all the core transaction-related processes on a blockchain.
What does the future hold for blockchain in financial services?
According to the International Data Corporation (IDC), global investment in blockchain solutions is forecasted to reach $11.7 Billion in 2022. Meanwhile in a recent Deloitte survey of over 1,000 senior executives, almost half the respondents said their organisations are aiming to bring blockchain into service in the coming year, while more than 30% said are running on blockchain.
Few of the key blockchain solutions that are disrupting the financial domain today includes –
1. Digital identity
Traditional identity systems have been highly vulnerable, with single points of failure, attracting continuous attempts to gain access to the complete repository of high value data. Blockchain has facilitated digital identity which is inherently unalterable and more secure than traditional identity systems. This has the potential to completely change the way we use identities to connect to various online services. Solutions like Global Id provides individuals total privacy and control over their personal information, while making data shareable on a trusted network, and ensuring security of identity transactions.
Digital identity further simplifies Know Your Customer (KYC) processes. KYC is a mandate that every bank and financial institution performs by validating the documents and storing a digitised version. By storing data in blocks and using a tamperproof hash format, banks can improve the security of the stored identity, improving data portability and reduce the time taken for KYC efforts.
2. Cross border payments
Sending an international payment across existing banking networks is a complex, multistep process involving multiple intermediaries. With cross border payments amounting to $600B annually, having a growth of around 3% a year, driven by international trade, the cost of processing these payments is extremely high. Fees range from 2 to 3 % of transaction value and can be as high as 10%. Blockchain addresses these challenges by streamlining the process and storing every transaction in a secure distributed ledger. The moment a transaction is recorded, the receiving party has access to the payment without any intervention of middlemen, no delays and no unnecessary fees. Once payment is entered, it can’t be reversed or changed in the ledger, resulting in greater overall accountability and security.
3. Trading Platform
Today, several trades are going through a settlement process that spans days, due to multiple intermediaries. Setting up a trading platform on blockchain offers a new mechanism, for the exchange of assets without centralised trusts or intermediaries — and without the risk of double-spending. All the key stakeholders involved in a transaction can be onboarded on a blockchain network and the information can be shared on one common distributed ledger. Once certain specified terms and conditions of the agreement have been met, the smart contracts will automatically be executed, and all actions carried out by the parties concerned can be viewed
The Way Ahead
Blockchain technology has immense potential to bring value in core areas of banking and financial institutions’ business model. But to succeed in implementing blockchain, the financial institutions should collaborate with the ecosystem before they launch any blockchain solutions. The operational effort to drive the ecosystem’s acceptance of the new system would be significantly higher and hence, thoughtful effort needs to be planned to convince the ecosystem for a decentralised solution.The author is Chief Architect - Advanced Technology Group, Brillio.