Let’s start with a quick recap of what exactly blockchain is and its benefits. Pinching a definition from the Financial Times:
'A blockchain is a shared digital ledger that allows transactions to be recorded and verified electronically over a network of computers without a central ledger. Cryptography is used to protect the data from fraud or hackers.'
So why is everyone, including us of course, so excited? Because the benefits are extensive - decentralisation, reliability, simplification, transparency, traceability, cost saving, reduced room for error, faster transactions and improved data quality… just to mention a few!
So let’s take a look at some specific ways blockchain will transform the Financial Services industry – ultimately creating a much more satisfying customer experience for us all.
1. Asset Management
Use case: Settlements
Traditional trade processes within asset management can be slow, manual, cumbersome and filled with risk when reconciling and matching – and they’re getting more complex with cross-border transaction and for non-standard investment products, e.g. loans. Each party in the trade lifecycle (e.g. broker dealers, intermediaries, custodians, clearing and settlement teams) currently keeps their own copy of the same record of a transaction, creating significant inefficiencies and room for error.
Blockchain technology would simplify and streamline this entire process, providing an automated trade lifecycle where all parties in the transaction would have access to the exact same data about a trade. This would lead to substantial infrastructural cost savings, effective data management and transparency, faster processing cycles, minimal reconciliation and the potential removal of brokers and intermediaries altogether.
Use case: Claims Processing
Fraudulent claims, manual processes, fragmented data sources, policies for one user sitting in silo and legacy underwriting models are some of the biggest challenges experienced in the insurance sector today – all causing low customer satisfaction.
Creating policies as smart contracts on the blockchain is an ideal use case for insurance. It offers complete control, transparency, and traceability for each claim and could lead to automatic pay-outs. Blockchain technology would also improve risk modelling for the sector, break down the existing silos and significantly reduce fraudulent claims by capturing the origin and ownership of diamonds, paintings, homes, cars, and other assets to be insured.
3. Supply Chain
Use case: Trade Finance
Digital transformation of the supply chain and trade finance is one of the most exciting opportunities for smart contracts and blockchain.
Existing supply chains are complex, slow, distributed, involve many parties across the world, and they usually don’t even trust each other (hence the need for trusted third parties such as banks and clearing houses to mediate). Automatically executing Smart Contracts on the blockchain to transfer titles to goods and money removes the need for banks to provide products such as Letters of Credit, drastically reduces costs by cutting out the middlemen (and their fees) and creates a trusted network of assured authenticity and origin of products being supplied.
Use case: International Payments
Why does it still take days or longer to transfer money to another country!? The global payments sector is gigantic, yet slow, costly, error-prone and not completely traceable (resulting in money-laundering). It’s desperately in need of a shake-up and blockchain is already providing solutions here.
Just recently we saw the news that Santander became one of the first banks to apply blockchain to a newly released payments app, enabling customers to make international payments 24 hours a day, clearing the next day. It’s only the first step, but blockchain will eventually enable banks to provide real-time payments whilst reducing operational costs, human error, and fraud.
Sigga Sigurdardottir, head of customer and innovation at Santander, said blockchain is key to future services, noting: 'We believe new blockchain technology will play a transformational role in the way we achieve our goals and better serve our customers, adding value by creating more choice and convenience.'
Use case: KYC
Financial institutions across the world are responsible for complying and reporting on a number of requirements from their local regulator. Know Your Customer (KYC) is a key requirement here but the process can be incredibly time-consuming and lack the automated customer identification technology and integration needed by teams to efficiently carry out their work.
Blockchain technology could provide a digital single source of ID information allowing for the seamless exchange of documents between banks and external agencies. This would likely result in automated account opening, reduced resource and cost, all whilst maintaining the privacy of data that is legally required.
The biggest challenge for many is where to start with blockchain adoption. With our own clients, we always begin with defining the business strategy and specific use cases before selecting and implementing any technology. Adopting an agile approach also means business value is delivered often and you can prepare yourself for inevitable changes along the way.