Blockchain In Financial Services: Seed Of Today, Fruits For Tomorrow

Kuljit Singh

It is said that all the fruits of tomorrow are seeds today. For some, blockchain is like a seed that has immense potential to bear fruits in the future. Just like with a seed, how and in what form the blockchain potential will manifest is still unclear and not completely understood. In spite of these uncertainties, there is a lot of interest, optimism, and hope that are leading to efforts underway by many parties to turn this potential into pragmatic reality.

Financial services is at the forefront of those hopeful parties, and the sector is not only talking about it but also putting money where its mouth is. According to IDC, global spending on blockchain is projected to move from $2.9 billion in 2019 to $12.4 billion by 2022. Of the present $2.9 billion in blockchain spending, financial services and insurance comprises the maximum share, to the tune of  $1.1 billion.

Many blockchain initiatives are being tried, tested, and implemented in financial services. For example, Santander Bank has launched a blockchain-based international money transfer service, One Pay FX, across Spain, the UK, Brazil, and Poland. And Vedanta, YES Bank, and MonetaGo have used blockchain to digitally issue commercial paper. In addition, ABN Amro has completed the first instantly financed, door-to-door transport of a container from a factory in Asia to the Netherlands on a blockchain-based platform called Deliver. There is also a pilot in which a group of Australian banks and IBM are trying to use private blockchain to store retail lease bank guarantees.

Fertile patches for germination

Seeds cannot grow on all surfaces and in all conditions. They require a perfect ecosystem where the surface and environment are conducive to growth. Similarly, after the initial euphoria, which suggested that blockchain could be used everywhere for everything, it’s now apparent that there are only a few areas where blockchain is currently practical and makes business sense. These areas are those that are complex, involve a large amount of physical documentation, and require multiple parties to have access to the same information.

The most promising areas for blockchain in financial services are process improvement and regulation and compliance.

Process improvement

Blockchain can remove myriad inefficiencies in financial sector processes. For instance:

  • In trade finance, where processes usually take weeks or months and involve multiple documents and multiple parties, blockchain can streamline the entire process, make it real-time and digital, and remove many intermediaries. Blockchain also helps fight fraud by making parties aware of the location, quality, and condition of cargo throughout its journey.
  • In securities trading, blockchain can be used as core trading infrastructure or an alternative trading system for real-time security trades. Blockchain is also useful in monitoring for underhand practices such as insider trading and spoofing.
  • In interbank settlement and cross-border payments, blockchain can play a crucial role in reducing the existing time-consuming process to one that is near real-time, more secure, and safer.

Regulation and compliance

Banks are required to collect humongous amounts of data for “know your customer” (KYC) and other processes to comply with government regulations such as Anti-Money Laundering (AML) rules, the General Data Protection Regulation (GDPR), and the California Consumer Privacy Act (CCPA). Data collection and sharing can be automated and redundancies removed with blockchain. Data held on a blockchain is more secure and easily verified than current systems. This can make the entire process of regulatory compliance and customer onboarding fast and more compliant.

Presently, customers often have to submit the same information to different banks or different departments of the same bank. By putting customer information on a blockchain, banks can directly access the information with the confidence that the information is valid and has the customer’s proper consent.

For financial audits and other requirements, regulators can collect and reconcile the required information directly from the blockchain.

Waiting for the bloom

Integrated platform players can offer financial services organizations advice and guidance on how to properly incorporate blockchain into their strategy and systems. These integrated platform players help address challenges, such as creating proofs of concept (PoCs), building innovation hubs, finding practical use cases, planning integration and interoperability with existing systems and infrastructure, and discovering real value and monetary benefits to implementing blockchain.

With the combined efforts of financial services and technology players, the seed of blockchain is beginning to show signs of germination in certain fertile areas. It has many challenges to overcome and some very hard ground to crack before it truly blossoms. But the potential benefits and opportunities outweigh these challenges. As new advancements occur, new use cases are explored, and challenges are addressed, this seed of blockchain’s potential will blossom and may eventually bloom in the near future.

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About Kuljit Singh

Kuljit Singh is a Business Insights Advisor with SAP BTS team. He has been working with technology industry since 2008. He has experience and expertise in the use of emerging technologies, latest industry trends and competitor analysis.