The applications and future of blockchain in financial services

The possibilities offered by distributed ledgers, or blockchain, have been sparking intense discussions everywhere from boardrooms to technology summits for the past few years. Charged with several use cases and multiple applications across industries, this technology is gaining momentum with traditional venture funding up year-over-year. According to Netscribes research, the global blockchain market in the banking and financial services industry is expected to be worth USD 4.65 billion by 2022. North America currently leads the race with the largest market share, thanks to immense industry funding for technological developments in this region. APAC is expected to account for the highest growth rate of 55.7% CAGR, owing to the spike in investments in blockchain technology solutions.

Blockchain offers a world of new opportunities to financial institutions, with benefits such as data transparency, enhanced security, reduced costs, and increased efficiency and speed.

Cross border transactions

While direct money transfers and interbank settlements across the globe have improved over the last decade, there still remain plausible gaps caused by multiple clearinghouses and lack of global standards. Blockchain is being used to overcome barriers of fragmented and fee-intensive infrastructures by building competitive marketplaces for liquidity providers offering the lowest exchange rates. By doing so, average remittance rates that currently lie between 5-20% can be slashed down to 2-3%. Establishing an international regulatory body to set laws for fair use of the technology are also crucial.

Implementing this innovation, Barclays has joined JP Morgan Chase, Bank of China, and Goldman Sachs to focus on blockchain technology application in foreign exchange and settlement. Also, the German Fidor Bank collaborated with Ripple Labs to provide customers with funds transfer services in multiple currencies at a lower rate.

Insurance

When it comes to claims management, fraud detection and risk prevention are the perennial apprehensions of any insurance firm. Reports show that about 5-10% of all claims in the US are fraudulent, amounting to a loss of more than 40 billion USD a year. Blockchain promises to reduce these numbers considerably through timely and error-free evaluation of claims. Moreover, the technology is already equipping insurance companies to access up-to-the-minute geographical information through a distributed network, thus allowing them to lower administrative costs and catalyze settlement time.

Traditional insurance institutions like AXA and Generali have already started investing in blockchain technology to ensure safe claims processing.

Trade Finance

Being plagued by delayed payments, duplication of bills, manual creation of contracts, and invoice factoring among other recurring problems, this financial realm can actually experience a tangible transformation by embracing blockchain. The technology can equip banks and financial institutions with real-time review of documentation, decentralized contract execution using smart contracts, automated payments and regulatory transparency among a gamut of other benefits. The technological competencies of delivering trust, security, risk mitigation and seamless processing can have a resounding impact in this sphere.

IBM has developed Digital Trade Chain, an open business blockchain based on distributed ledger technology (DLT) to enhance the trade finance between the seven European banks including Deutsche Bank, HSBC and a few others. Also, Singapore’s DBS Bank collaborated with Standard Chartered and Infocomm Development Authority of Singapore (IDA) to conduct a proof of concept (PoC) to reduce double financing.

Besides these major use cases, blockchain has also triggered a wave of digital transformation especially in streamlining KYC documentation and AML, tax payments, and other non-critical financial processes thus impacting both the private and public sector, and the shareholding space. To put things into perspective, NASDAQ has an alliance with Linq to help companies display their share of ownership using blockchain technology digitally.  

Market forecast

The implications of blockchain are resounding. The technology promises a slew of advantages like:

  • Increased efficiency through data immutability and transparency
  • Enhanced customer experience powered by competitive pricing and better TATs
  • Higher availability of capital through quicker processing

These overarching benefits are compelling key industry players to collaborate with top fintech vendors to envision a new operating model for finance. It is no surprise why the six largest banks of the world – Barclays, Credit Suisse, Canadian Imperial Bank of Commerce, HSBC, MUFG and State Street teamed up to create a new form of digital cash for streamlining financial transactions over blockchain.

Approximately 66% banks and 90% payment companies are expected to adopt the technology by 2020.  Private blockchain adoption is also attracting an significant interest from banks. For instance, R3 CEV is helping create private blockchain systems and has garnered the support of over 40 global financial stalwarts like UBS, Barclays, JP Morgan and Royal Bank of Scotland to name a few. Another great case in point would be the Ethereum Alliance that focuses on building private blockchain systems by acquiring huge investments from large corporates.

Fintech blockchain applications are taking the industry by a disruptive storm. Even non-banking financial services like wealth and asset management will be soon reaping the benefits of this platform. Financial institutions of varying sizes must seek the necessary guidance to integrate and leverage this emerging technology into their current business model to create their own benchmarks of cost reduction, increased productivity, and customer delight across the value chain.

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