Blockchain — Practical application in financial services
In my last blog, we defined blockchain at a high level, looked at the differences between private and public blockchains and explored some of the different consortia. In today’s blog, we’ll look at some of the ways financial institutions can plan for and capitalize on blockchain and the potential for the technology to save financial institutions tremendous amounts of money and time.
Blockchain as Transformative Technology
Leading financial services institutions understand that to develop new business opportunities they need to embrace technologies that simplify, automate and accelerate innovation. Blockchain has the promise of being that transformative technology and could represent a significant shift in the way financial transactions are executed, although it will take time for financial institutions to fully account for the benefits and risks that blockchain has in store.
“…the sense of scale inside the blockchain industry is that the changes coming will be “as large as the original invention of the internet.” – Harvard Business Review
Within the financial services industry, there is a wide variety of potential applications. Let’s look at 5 areas of financial services where we are seeing great potential for financial institutions to embrace blockchain and win:
Clearing and Settlement
Clearing and settlement is an important space to watch as the World Economic Forum estimates that by 2027, assets equivalent to 10 percent of global GDP could be held on a blockchain. Today, the settlement process (depending on asset class) can be expensive and slow, often taking two days or longer to process through several intermediaries. With distribution ledger technology, transactions can be immutable, and clearing and settlement can be programmed to be near-instantaneous, reducing the threat of counterparty risk and improving overall stability. 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.
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. Since smart contracts use software code to automate tasks that are typically accomplished manually, they can increase the speed of these business processes. The decentralized system between all permitted parties, reduces 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 — saving money, time, and conflict. Accenture estimates that investment banks alone could save up to $12 billion per year by adopting blockchain and smart contracts.
There is a real opportunity for blockchain to solve many of the issues associated with money transfer, such as the transfer processing time associated with ACH, exorbitant processing fees, and limited money distribution methods. Remittances are an important source of income for millions of families in developing countries. According to the World Bank, more than $429 billion was transferred from developed to developing countries in 2016 alone. Thanks to declining hardware costs, the world’s unbanked population is more likely to own a smartphone and can leverage blockchain to send funds instantly to anyone via that mobile device. There are many companies already in this space — for example; Bitpesa, from Africa, CoinPip from Singapore, Volabit from Mexico, are just a few of the new remittance companies leveraging blockchain.
Blockchain could provide greater visibility into lending environments, and when coupled with powerful analytics tools, financial services institutions will be able to turn that transparency into actionable decision-making. Digital ID through blockchain could contain a borrower’s mortgage history, outstanding balances, credit score, income, etc. When applying for a loan, this unique ID could be used at multiple lenders and even for cross-checking with credit agencies and employment verification, which could considerably boost the processing times. Blockchain technology could make loan servicing more efficient and streamlined and could help revive peer-to-peer lending practices. According to Capgemini, the mortgage loan industry will benefit significantly by adopting smart contracts. Consumers could potentially expect savings of $480 to $960 per loan and banks would be able to cut costs in the range of $3 billion to $11 billion annually by lowering processing costs in the origination process in the U.S. and European markets. There are already companies using blockchain for lending, for example: SALT, ETHLend, and Ripio Credit Network.
The very nature of blockchain means that data is shared and there is a permanent audit trail. In this shared data environment, regulators wouldn’t need to gather, store, reconcile and aggregate the information themselves. Having access to one shared record could reduce the duplication of records between regulators and financial institutions and could result in significant industry-wide cost savings. It would also improve the speed and quality of the regulatory review process as it would eliminate the need for reconciliation. One example where blockchain could simplify and streamline processes is with KYC (Know Your Customer), as it removes 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. Established financial institutions are investing in blockchain solutions to solve for compliance issues. One project of note — Massive Autonomous Distributed Reconciliation (Madrec) brings together UBS, Barclays, Credit Suisse, KBC, SIX and Thomson Reuters, to test a blockchain platform to help them comply with the MiFID II regulatory requirements.
“This use of blockchain to solve real-world regulatory requirements in a cost effective way is very appealing,” Emmanuel Aidoo, Credit Suisse
These are just some of the examples of the way blockchain could transform financial services. Blockchain has the transformative potential to break down traditional barriers in financial services and remove friction from the value chain.
In our third and final blog of this series, we’ll look at how Appian can help. The power and simplicity of the Appian platform means that when you’re ready to start building blockchain applications, we’re ready to help.