In the past few years, intense discussions have been happening in technology summits and boardrooms on the wide range of possibilities offered by blockchain or the distributed ledger including how it would impact the financial services sector in the days ahead. With a wide array of use cases and a sea of potential applications across businesses and industries, blockchain technology is indeed gaining significant momentum with traditional venture capitalists on a year on year basis. According to a research report from Netscribes, by 2022, the global market share for blockchain in banking and financial sector is expected to rise to $4.65 billion.
North America is presently leading the race with largest market share in the blockchain application space with significant industry funding for technology development in the region. APAC is projected to post the highest growth rate at 55.7% CAGR thanks to elevated investments in solutions based on blockchain technology. For financial institutions, blockchain brings a sea of new opportunities with benefits like enhanced security, transparency, increased efficiency, speed, and reduced costs.
Cross border payments
In the space of the last decade, interbank settlements and direct money transfers across global destinations have improved though plausible gaps on account of multiple clearing houses and absence of global standards do remain. Blockchain can effectively overcome these barriers in the form of fee-intensive an fragmented infrastructure by creating competitive marketplace for the liquidity providers with lowest exchange rates. In the process, the average rate of remittance which presently hovers between 5 and 20% can be brought down to 2 to 3%. However, it is crucial that an international body is established to regulate and set laws for the fair use of technology. Barclays has already joined Bank of China, JP Morgan Chase and Goldman Sachs to implement this innovation and focus on blockchain technology applications for settlements and foreign exchange. Similarly, Fidor Bank of Germany and Ripple Labs have collaborated to facilitate multi currency fund transfers for customers at a lower rate.
In claims management, risk prevention and fraud detection constitute perennial apprehensions for every insurance firm. Reports also indicate that about 5 to 10% of all claims arising in the US constitute fraud accounting for a loss of over $40 billion year after year. Blockchain brings the promise of bringing down these numbers significantly by evaluating claims in an error-free and timely manner. Further, insurance companies are already being equipped by the blockchain technology to gain access to real time geographical information aided by the distributed network. Consequently, these companies are able to bring down administrative costs while catalysing settlement time. Generali and AXA are among some of the traditional players in the insurance sector who have started investing in blockchain based solutions for safe processing of claims.
Trade finance is another segment that can significantly benefit from adopting blockchain technology. This is also one sector that is perennially plagued by duplication of bills, delayed payments, manually created contracts, and factoring of invoices. The technology can provide financial institutions and banks with review of documentation in real-time, execution of decentralized contract via smart contracts, regulatory transparency and automated payments, apart from a basket of other benefits. This space can also experience resounding impact from technological competency of delivering risk mitigation, security, trust and seamless processing of transactions. IBM has already developed a Digital trade chain which represents an open business blockchain built on the distributed ledger technology or DLT for enhancing trade financing between 7 European banks which include HSBC, Deutsche Bank and others. Likewise DBS Bank of Singapore has collaborated with the Infocomm Development Authority of Singapore (IDA) and Standard Chartered Bank for conducting proof of concept or PoC for reducing double financing.
Apart from the above, a series of digital transformation initiatives have been triggered by Blockchain, particularly with respect to streamlining of tax payments, KYC documentation and AML, as well as other financial processes that are non-critical thereby impacting the public and private sectors and shareholding space.
While the markets see resounding implications from the blockchain technology, the technology also promises several advantages including:-
- Enhanced efficiency enabled by transparency and data immutability
- Improved customer experience from better TATs and competitive pricing
- Enhanced capital availability through faster processing
These benefits are not only overarching but also compelling key players in the industry to collaborate with the top vendors in the fintech space to bring about an invigorating model for finance. Demonstrating this thought process, it comes as no surprise that six of the largest banks in the world, Credit Suisse, Barclays, HSBC, MUFG, Canadian Imperial Bank of Commerce and State Street have joined together to introduce a new variant of digital cash to streamline financial transactions across blockchain. The technology is also expected to be adopted by about 66% of banks and 90% of payment companies by the year 2020. Banks around the world are also showing significant interest in adopting private blockchains. For example, R3 CEV is aiding the creation of private blockchain systems with the support of more than 40 global financial giants like Barclays, UBS, Royal Bank of Scotland, and JP Morgan to name just a few. Another significant development is the Ethereum Alliance which focuses on creating private blockchain systems which has attracted sizeable investments from top line corporates.
In conclusion, blockchain applications have already arrived as a disruptive force in the Fintech space. This force is also impacting multiple non banking areas of the fintech industry like asset and wealth management and these sectors can be expected to reap rich dividends from this platform sooner than later. Financial sector players of different sizes should seek necessary guidance to leverage and integrate this emergent technology into the present business model and carve out their benchmarks for cost reduction, customer delight and enhanced productivity across the value chain.