The financial institutions (FI) that find ways to adapt and apply blockchain technology will gain the competitive advantages of delivering solutions with a faster time-to-market at a reduced cost.
The future of ‘real’ cash, as we know it, has been subject to constant scrutiny in the past decade. There is little doubt in our minds that cash and currency transactions in physical form are on their way out, very soon. Think about it: how often do we really use cash?
Smartphones have made it easy to pay for regular items that were earlier bought only for cash. And that’s not all; instead of a variety of payment methods we use on an everyday basis, which also provide for high transaction costs and are controlled by third-party providers, it’s easier to use blockchain to transact. The participants creating these cryptocurrency applications do not need permission to innovate; they are free to create new applications and they will immediately work. There is no central control. This does not mean that a user is powerless; it’s that the power is shared by all of the participants.
Blockchain will continue to transform the financial services industry because of the benefits and features it can provide, some of these being faster throughput, reduced costs, less room for error, transparency, and combination of quality, reliability, simplicity, and traceability. The financial institutions that find ways to adapt and apply blockchain technology will gain the competitive advantages of delivering solutions with a faster time-to-market at a reduced cost.
Let us look at some of the use cases that display how blockchain can be applied to real-world challenges in the financial services industry.
As many of us know, Know Your Customer (KYC) is a process by which a financial institution procures crucial information about a consumer, which is then used for verifying the identity of the individual. The main purpose of this process is to ensure that the services of institutions are not misused. This process usually takes place when a customer opens an account. The process typically requires the passing of documents back and forth between the customer and financial institution. Though KYC services were automated by many financial service providers (such as Paytm, Pockets, etc.), after the Supreme Court decision in 2018, it has become difficult to conduct KYC processes effortlessly only through Aadhaar.
You might ask- how does blockchain help here? The customer’s personal information, KYC documentation, and data are encrypted and added as a block in the blockchain. The customer’s block is then validated using a consensus model running on the network. When the customer wants to open an account with a bank or financial institution (FI) for the first time, the FI directs them to their block and authorises them with access. The FI can access all of the validated KYC information and move the customer along the on-boarding process.
The single source of KYC data that can easily be shared between financial institutions and external agencies with the help of blockchain will eventually result in reduced resources, much faster account opening and, therefore, lower transaction costs. This can all be done while maintaining the privacy of data, because the owner of the data (the customer) strictly controls its access. Initially, there would still be a role for a third party (eg, the initial bank) and they might be rewarded for doing the initial physical work of adding information to the blockchain. This would happen at least until a decentralised attestation system was created as the process evolved.
Trade processing and settlement methods in the usual course of business can normally be risky and time-consuming, especially when manual steps are involved. In such cases, every entity in the value chain keeps its own record of the transactions that have taken place. These processes continue to get more complicated as new instruments are being developed and traded. In short, mistakes and associated costs are rising in proportion to the complexity of the tasks and involvement of resources to deal with them.
The transactions can be stored in a blockchain and made available to all parties. A major advantage of this would be that the process would be drastically simplified and streamlined and would also lead to automation of the trade cycle, thereby facilitating simpler and easier management of data and higher transparency and substantial reduction of resource usage. Such improvements will ultimately result in minimum reconciliation and faster processing times. While all of the transactions may be visible to everyone, it is possible to arrange and set up so that only certain parties are privy to this information.
Let’s go through a simple claim process - the process is lengthy and complex and insurance contracts typically difficult to understand with a complex web of legal language in reaction to prior unfavourable outcomes. Sounds problematic, isn’t it?
Insurance companies are composed of many separate department silos, such as underwriting, policy issue and administration, claims, actuarial and statistical, accounting, investment, legal, and audit. When you add manual processes, legacy models, and disjointed data elements to the daily onslaught of fraudulent claims, it stands to reason that “speedy” is not the word typically associated with customer outcomes. Creating insurance policies using a smart contract on the blockchain (having qualities such as control, transparency, and traceability) would allow for much more automation, and provide the customer and insurer with the ability to manage claims in an open, speedy, and indisputable way. Similarly, claims are then uploaded to the blockchain and applied to the smart contract.
In the common parlance, trade finance includes those financial transactions (domestically or internationally) that relate to trade receivables finance and global trade. It is a core business function for a majority of global banks. Given its importance, it still lags in the application of technology, and resorts to using manual processes for its document-centric flows. This might lead to an interruption in business cycles, and the lack of transparency also leaves the door open to financial crime. Supply chains between parties could, therefore, be complicated, distributed, and lack trust.
Blockchain can hold all of the necessary information in a smart contract, updated instantly and viewable by all members on the network. The smart contract can also be used to automate the transfer of title to goods and money. This automation and network validation remove the need for third-party facilities, such as letters of credit (LCs), and will help to streamline the whole process and measurably reduce costs by eliminating the third parties and their associated fees. The use of smart contracts would result in faster cycle time and reduced cost and fees and lesser possibility of fraud.
While blockchain development companies are at the heart of cryptocurrencies like Bitcoin and Ethereum because of what they can do as decentralised, stateless currency and payment platforms, blockchain clearly is a technology with widespread applicability in many sectors of business. The above uses will ultimately lead to faster throughput, reduced costs, improved accuracy, greater transparency, and quality, reliability, simplicity and traceability.
The major trade and receivables finance blockchain consortiums such as we.trade, Marco Polo, Komgo and Voltron, will gather at BCR's conference "Consortia 2019" in London this May. For more info on this event, please click here.