Blockchain Adoption Will Impact Financial Services

Over the last few years, blockchain technology has elicited a lot of attention. Propelling beyond the vaunt of Bitcoin enthusiasts into the realm of financial services, the technology is disrupting every sector. 

In the financial services industry, from banking to insurance, every entity is in a race to adopt this revolutionary technology. The sector is projected to hit approximately $26.5 trillion by 2022, meaning that it is a significant sector in the economy. Therefore, the adoption of blockchain technology will significantly impact it. 

Already, several use cases have yielded immense benefits to companies in the industry. However, the adoption of blockchain technology is not widespread yet. So, Let’s look at how the mass adoption of Blockchain will impact financial services.

1. Eliminating Fraud

In February 2016, hackers infiltrated a central bank and used SWIFT’s messaging service to send authenticated messages from Bangladesh central bank to the New York Federal Reserve Bank (NY Fed). The messages authorized the transfer of funds via Fedwire Payment System to various recipients in the process, a cool $81 million was lost.

Could things have been different if the bank was using blockchain technology? Certainly yes. As a distributed ledger technology, all transactions have a copy of the record held on multiple computers, preventing any alterations. Furthermore, with a blockchain-based SWIFT, all members of the society would have accessed the message, and the fraud couldn’t occur

In the Insurance Industry, the distributed ledger technology can be used to facilitate an effective and fraud-free claims management process. The technology can enable smart contracts, centralized customer authentication, and access to customer history, which will enhance claims efficiencies. 

Blockchain will also help actuaries to access contextual data that will significantly enhance risk models and estimations. Moreover, due to its potential to facilitate real-time transaction settlements, the technology will enable product innovations. The global insurer, Allianz, has developed a blockchain-enabled prototype for the captive insurance market.

2. Improved Compliance Processes

After the 2008 financial crisis, the regulatory framework in the banking industry was reinforced, increasing the cost of compliance by banks. Consequently, banks were forced to exit certain markets and segments in a de-risking initiative. 

For financial institutions, especially banks, Know Your Customer (KYC) is a regulatory procedure meant to help in detecting suspicious activities such as money laundering. Despite its significance, it is not only tedious to implement but also ineffective.

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Blockchain could be the panacea to the hurdles of implementation. It can provide a single, digital source of identification that facilitates a seamless exchange of information among banks and other interested agencies. Ultimately, this will lead to an automated account opening. 

Several startups have already taken the concept of decentralised ledger for KYC to the market. Notably, U.S.-based UPort has a digital identity product that delivers ‘self-sovereign identity’ to both end-users and enterprises. 

Additionally, Cambridge Blockchain has a portal that helps financial institutions to streamline digital identity. Investment Platform KYCK, through a partnership with IBM, has also developed an onboarding blockchain solution that enhances identification validation.

3. Synchronized Administration of Trade Finance

Using blockchain, all documents relating to trade finance can be recorded in a centralized repository for easy access by the concerned parties. Therefore, everyone in the deal can track transactions in real-time with ease. 

Moreover, the approval of finance documents, ownership proof, transparent factoring, reduced counterparty risk, disintermediation, and contract execution can all be done in real-time. Above all, through the use of smart contracts, the transaction fees will be minimal. 

In 2016, Barclays and Wave, an Israeli start-up, used distributed ledger technology to execute a trade transaction. The process reduced processing times from the initial 7-10 days to less than 4 hours. 

4. Faster Settlements And Clearance

The fact that on average, a bank takes three days to settle is global money transfers is quite unsettling for customers. SWIFT is plagued by dependence on Nostro accounts, deferred settlement procedures, multiple intermediaries, manual reports, and screening procedures. Eventually, the transaction takes time, and costs accumulate.

Blockchain can expedite the process. Through the use of distributed ledger, the SWIFT will no longer be required to reconcile each financial institution’s ledger. Instead, an interbank decentralised ledger tracks all transactions transparently. 

Ripple’s xRapid is already making cross border payments faster. Instead of relying on correspondent banks that require pre-funded Nostro accounts, the blockchain sources for XRP from different exchanges across the globe. The tokens are then sent to the target bank, which sells them to buy local fiat. Eventually, the process only takes seconds. 

5. Efficient Capital Markets

To trade in the capital markets, you need to keep track of who owns what. Currently, the task is accomplished through an intricate web of brokers, clearinghouses, exchanges, and central security depositories. Unfortunately, the entire system is anchored on an old method of paper ownership. 

The system is not only inefficient but also inaccurate. Security transactions can take up to three days to settle due to the reconciliations that take place by the parties involved. Moreover, the transactions have to be validated manually, with each party charging a fee.

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Blockchain technology will revolutionize the capital markets by establishing a decentralized database. It will remove all the intermediaries and enable trading to take place on computers across the world. It will also facilitate the transfer rights of a real-world asset using cryptographic tokens. Currently, some blockchain companies are working towards tokenizing assets such as gold and stocks.

6. Harmonized Loan And Credit Approval

The mass adoption of blockchain in the banking sector has a significant impact on how loans are dispensed. The current system uses a system that relies on your credit history as evaluated by credit bureaus. The agencies assess you and give a credit score that determines whether you qualify for a loan, and the amount you are eligible for, if any.

However, the outdated method of loan approval is laden with a lot of loopholes. Not everyone has a credit history, meaning that most people are locked out from accessing the credit facilities. Moreover, the credit bureaus are susceptible to hacking, making them unreliable. 

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Blockchain provides the solution. Mass adoption of the technology by the bank will result in an integrated system that provides a global credit score. It will synchronize your digital identity, history of payments, approved assets, tax history – all under a single platform.

7. Digital Identity Verification

Online financial transactions involve a lot of steps ranging from face-face verifications to authentication. The current approaches to sharing personal information and data with financial institutions lead to privacy vulnerabilities. Adopting blockchain allows financial services customers to have more control over their confidential information. Furthermore, the digital identity collection and management lifecycle can be coordinated to facilitate secure data sharing.

IDKeep is an onboarding blockchain-based platform that solves personal data and identity-related challenges faced by financial service providers. It was formed through a collaborative effort by Cambridge Blockchain and LuxTrust. It gives end-users full control over their personal data as well as the sharing of the data.