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In my last blog, we discussed the potential of blockchain and some of the interesting partnerships cropping up to explore the variety of uses within financial services. This blog will discuss the many ways that financial institutions can plan for and capitalize on blockchain. As we discussed, blockchain represents a significant shift in the way financial transactions are executed, and it will likely take time for financial institutions to fully account for the benefits and risks that blockchain has in store. But, the motivation is real — blockchain technology could save financial institutions tremendous amounts of money and time!
As Capgemeni stated in a recent report, “Blockchain is no longer a fad. It is now critical for financial institutions to determine how to adopt and apply it to the right areas of the business.” Let’s look at 5 areas of financial services where we are seeing great potential for financial institutions to embrace blockchain and win:
- Insurance — Claims Processing: Let’s first restate our definition of blockchain, from our earlier blog, “a distributed, decentralized transaction ledger saved by each node in the network, a peer-to-peer system with no central authority or database which manages the transaction flow.” By this definition, blockchain is uniquely positioned to be a powerful weapon in the fight against insurance fraud, due to the immutable nature of the transaction, ensuring that records can never be removed or changed. The Coalition Against Insurance Fraud conservatively estimates that fraud steals $80 billion a year across all lines of insurance. Blockchain systems could create a direct link between the customer and their insurance provider, offering greater simplicity in the claims process by providing insurers with improved access to reliable data records. Leveraging blockchain for information about insured goods and events could revolutionize the way insurance companies do business and provide a significant weapon in the fight against fraud. Companies like Everledger and SafeShare are examples of insurers who are already leveraging the power of blockchain.
- Remittance — Money Transfer: This space is no longer just for Western Union and MoneyGram. There is a real opportunity for blockchain to solve for many of the issues associated with money transfer, such as high transfer cost and limited money distribution methods. Blockchain has widened the possibilities and may show significant promise, especially for the world's unbanked population, because typically, the user is not required to have a bank account to use these services. The user can send funds instantly to anyone with a smartphone. There are many companies already in this space — for example; Volabit, from Mexico, Rebit, from the Philippines, Bitpesa, from Africa, are just a few of the new remittance companies leveraging blockchain.
- Asset Management — Settlements: Asset managers and investors have good reason to be excited about blockchain technology. Blockchain’s promise of instantaneous settlement reduces the threat of counterparty risk and could improve overall stability. Real time settlement may also help asset managers meet redemption requests more easily, reducing liquidity risk and lowering the amount of cash that must be held to meet potential redemption spikes. Blockchain technology’s ability to create a single source of truth and fully track asset ownership on a shared record could slash reconciliation costs. These cost-savings and added efficiencies could enable them to become leaner and more focused. This is definitely a space to watch as the World Economic Forum estimates that by 2027, assets equivalent to 10 per cent of global GDP could be held on a blockchain.
- Trade Finance — Smart Contracts: A smart contract is a computer program or protocol that facilitates, verifies or executes the terms of a contract. Smart contracts could be used for a variety of financial documents including investments, insurance policies, bank accounts, credit histories, tax filings, and income statements. This is another area which has enormous potential to extend blockchain’s utility from simply keeping a record of financial transaction entries to implementing the terms of multiparty agreements automatically. Because smart contracts use software code to automate tasks that are typically accomplished manually, they can increase the speed of these business processes. Automated transactions are not only faster, but less prone to error. The decentralized process of execution virtually eliminates the risk of manipulation, nonperformance, or errors, since execution is managed automatically by the network rather than an individual party. Smart contracts can reduce or eliminate reliance on third-party intermediaries that provide “trust” services such as escrow between counterparties. Relying less on third parting and human intervention could also help to reduce costs. Because smart contracts could provide a low-cost way of ensuring that the transactions are reliably performed as agreed upon, they could enable new kinds of businesses, from peer-to-peer renewable energy trading to automated access to vehicles and storage units.
- Compliance – Know Your Customer (KYC): KYC can be an expensive part of onboarding new clients because it often involves complex manual processes that are prone to error and challenged to stay current with ever-changing regulations. The penalties for non-compliance can be painful both from a reputation and financial point of view for financial institutions. All of these complexities can create longer onboarding times, longer time to revenue, greater costs, and higher customer dissatisfaction. Blockchain holds the promise of simplifying and streamlining the KYC process by removing the need to trust a third party by trusting the network-agreed dataset. Blockchain’s digital efficiency, distributed nature and improved security make it uniquely positioned to be a reliable source of truth for KYC and other identity-related events.
The most successful financial institutions will be those that move with speed and agility to harness fintech and the blockchain revolution. Until now, proving the advantages of, and testing this technology in a secure enterprise-ready environment has been costly, as they were built on proprietary software which was difficult to use. Flexible solutions, built on open source technologies, will allow financial institutions to gain efficiency, transparency and security, while reducing costs and preparing for the future using solutions that scale according to demand, variances, compliance requirements, and economic fluctuation.
In our third and final blog of this series, we’ll look at how financial institutions can look to leverage the possibilities of Blockchain-as-a Service (BaaS).