Blockchain Technology – The Future “Beating Heart” of the Financial Sector

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Blockchain Technology – The Future “Beating Heart” of the Financial Sector


Financial institutions around the world find themselves continually challenged by the emergence of innovative digital financial technologies that demonstrate new ways to deliver value across the entire financial value chain. Blockchain is just such a disruptive innovation. This technology that first became known as the core innovation behind Bitcoin, is still in an early stage of development and deployment. Yet it is widely thought to have the game-changing impact on the transfer of value. Recent World Economic Forum report predicts that by 2025 10% of GDP will be stored on Blockchains or Blockchain-related technologies. 2017 McKinsey survey found that the global banking industry is expected to spend $400 million on Blockchain related projects by 2019. 70% of the financial organizations are in the early stages of experimentation and most executives expect to see the material impact in mainstreaming it in the next five years. A first rough estimate of limited applications, driven mostly from a cost reduction perspective, suggests significant value creation on the order of $70 to $85 billion. Increasing number of the financial institutions attempt to broaden the implementation of Blockchain beyond its use as a digital fiat. These range from relatively straightforward solutions, such as money transfers, to more complex financial instruments enabled by the introduction of smart contracts, such as trade clearance and settlement. Blockchain promises to change how the finance industry operates.

Major Interests behind Exploring Blockchain

Banks and financial institutions are exploring the technology in a number of ways, including through partnerships with Fintech companies, memberships in the global consortia or through building their own in-house solutions. The studies undertaken by IBM unveiled that the strong motivation behind banks and financial institutions to successfully implement the Blockchain technology results from their vision of unifying most of the bank’s services and platforms into one single channel. Considering that the finance and data-reliant sectors such as reference data, retail payments and consumer lending are normally overseen in a segregated structure within the conventional models, a Blockchain-based unified platform could lead to more cost-efficient and secure operations. 9 out of 10 banking executives interviewed by Accenture back in 2015 had outlined that they were exploring the use of Blockchain or distributed ledger technologies in payments. A year after, number of banks and major financial institutions indicated in the IBM survey that they were working on Blockchain solutions that would be fully implemented and deployed by the end of 2018. One of such promising initiatives is the application of Blockchain to the challenges of regulatory data management by UBS, Barclays, Credit Suisse and Thomson Reuters, which was born out of the need to improve data quality as part of the impending implementation of the MiFID II/MiFIR regulation this year.

The strong interest from the major banks and financial institutions to implement Blockchain-based solutions derives from several major factors:

  • Cost savings and efficiency – Blockchain technology is highly attractive to banks, which are dealing with increasing economic instability, rising costs for maintaining or replacing their ageing infrastructure, ensuring compliance with heavy regulatory burdens. To that end, Blockchain-based solutions could generate cost savings of up to $20 billion per year according to Santander Bank.
  • Competing with innovative start-ups – Fintech companies are already implementing Blockchain to offer services (such as remittances and international payments) at reduced costs with greater speed and more user-friendly interfaces than the major banks do. As a result the traditional financial industry players are facing a need to start constructing their own Blockchain-based solutions in order to be able to compete with these up-and-comers.
  • Brand new governance and operation models – While Blockchain-based systems can be used to eliminate the need of an expensive infrastructure and reduce central entities’ involvement in the process, this could lead the financial institutions to the development of brand new, much more efficient governance and operation models.
  • Simply a self-defence mechanism – By adjusting to the new reality, they are defending their role. They are aware of the need to reinvent themselves in order to stay relevant.

Blockchain Technology Use Cases

How can banks and financial institutions benefit from this technology? Following are some of the major use cases of Blockchain in the financial sector:

  • Clearing and Settlement – A complicated web that records loans and securities costs banks billions of dollars to run. It is estimated that the biggest banks could save $10bn by using Blockchain technology to improve the efficiency of clearing and settlement.
  • Fraud Reduction –  45% of financial intermediaries, such as stock exchanges and money transfer services, suffer from the economic crime every year. Use of Blockchain would eliminate some of the current crimes against the financial institutions as with this technology the information can be shared in real time and the ledger can only be updated when all parties agree. Therefore, the opportunity to commit fraud is materially reduced.
  • Know your Customer (KYC) – Financial institutions spend from $60 up to $500 million per year to keep up with KYC and due diligence regulations. These requirements are intended to help reduce money laundering and terrorism activities. Blockchain would allow the independent verification of a client by one organization to be accessed by others so as there is no need to duplicate efforts while undertaking the KYC process.
  • Equity Swaps and a peer-to-peer Blockchain infrastructure – Last year a group of major banks including Goldman Sachs, Citi and JPMorgan announced the successful completion of a pilot project to manage equity swap transactions and related post-trade lifecycle events while employing smart contracts on Blockchain. By having both sides of a swap transaction on the same ledger the counterparties are able to simultaneously view and share data during the entire lifecycle of the swap from the proposal to the termination.
  • Payments – Blockchain disruption could be highly transformative in the payments processing as it enables higher security and lower costs for the financial institutions to process payment between organizations, their clients and between banks themselves.
  • Syndicated loans – Currently when a US-based company raises money via a syndicated loan, it takes on average 19 days for the transaction to be settled by the banks. Much of the communication is still done by fax. By putting syndicated loans on Blockchain each agent bank could provide a “golden source record” of the loans they administer for the simultaneous assessment by the other lenders in a digital format.

Positive Long-Term Impacts on the Financial Sector

Blockchain technology shows a tremendous potential to reshape and redefine the financial sector. This disruptive technology offers a possibility of re-engineering economic models and enabling the development of markets and products that were previously unavailable or unprofitable. Yet traditional financial institutions are more prone to use Blockchain for intra-organizational purposes intended to reduce organizational complexity, improve efficiency and reduce costs. The intelligent Blockchain strategies will become a competitive advantage for the financial institutions in order to stay relevant. Therefore, choosing to leverage Blockchain technology has become not just a technology question, but an essential prerequisite for the transformation and survival.


BY  Tamar Menteshashvili

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