Banking’s great disruptor: Why blockchain is the way forward

Technology and banking have always been closely intertwined. Financial institutions have generally played leading roles in the evaluation of new disruptive technologies. Will the new disruptor cause pain, will it change our business and revenue model; will it be detrimental or beneficial to the market? How viable is it?

In the case of blockchain, banks are still trying to understand its optimal applications. However, while more research is ongoing, the verdict is clear: blockchain is a positive disruptor with the potential to redefine and reimagine the financial sector.

The technology, simply defined, is a digital ledger of transactions. Ledgers are fundamental to any party that participates in a transaction in any capacity – including consumers, industry, logistics, banking, and governments. By allowing participants to connect directly, it cuts out the need for middlemen and can’t be tampered with. As a result, blockchain has huge potential in the financial sector.

“A new disruptive force of digital technology is changing the business models and increasingly becoming a crucial factor around the world," says Rajarshi Sengupta, chief innovation officer, Deloitte Touche Tohmatsu India, in the foreword to a report on blockchain in India.

The disruptive potential of blockchain, with its decentralised ownership, immutability, and cryptographic security, is now catching the attention of top executives across industries, says the Deloitte-Assocham report, published in April 2017.

Blockchain has myriad uses in the financial sector, from issuing commercial papers and facilitating faster transfer of securities and payments to reducing trading costs by removing intermediaries and improving customer experience. The technology also shortens and streamlines the trade finance process with minimal third-party interference.

For cross-border payments, blockchain enables real-time settlement while reducing liquidity and operational costs, as well checking fraudulent transactions.

The technology has the potential to eliminate 99% of the time and risk involved in issuing international letters of credit and processing documentation. As a result, it opens up avenues for innovative financing solutions for a wider range of clients including global startups.

The technology can also help improve regulatory reporting and compliance by storing financial information to eliminate errors associated with manual audit activities, while reducing reporting costs.

In addition, blockchain helps improve “Know Your Customer" initiatives as secure, distributed databases of client information shared between institutions helps reduce duplicative efforts in customer onboarding.

Underwriting activities can also be automated, leveraging financial details stored on the distributed ledger, while KYC requirements can be enforced in real-time.

In insurance, blockchain can improve the underwriting process to verify identities, ensure applications are complete, and evaluate risk. It also helps improve claims processing.

Global scenario

With more than 90 central banks engaged in blockchain discussions globally, more than 2500 patents filed over the last three years, and 80% of the banks predicted to initiate blockchain and distributed ledger technology projects by 2017, the technology is on its course to become the new normal in the world of financial services, says the Deloitte-Assocham report.

A study by the World Economic Forum predicts banks and regulators around the world are poised to experiment with multiple blockchain prototypes in 2017, as they seek a better understanding of the best uses of the technology.

Blockchain technology could give rise to what IT research firm Gartner calls “the programmable economy", powered by machine networks that engage in economic activity and entirely new business models that eliminate middlemen, as well as “smart assets" that can be traded to programmable-or artificial intelligence-based rules.

Gartner predicts that blockchain will add $176 billion in business value by 2025, and $3.1 trillion by 2030.

Blockchain business value growth shows the typical “double hump" growth pattern of an emerging technology: Growth in 2020 will reach 120% before slipping to a low of 27% in 2023 and then reaching its second growth peak at 104% in 2026.

The roadmap in India

Top banks in India are increasingly recognising the immense potential of blockchain. Some of them, such as ICICI Bank, YES Bank, Kotak Mahindra Bank, and Axis Bank, have used it for vendor financing and international trade finance. Others are in different levels of discussions to understand the technology and its potential uses.

Most of them are expected to adopt blockchain in some part of their businesses in the next three to five years. According to a PwC report, 56% of the players in the financial services sector seek to engage with blockchain in some form and eventually make it a part of their core business, compared with 77% globally.

The Reserve Bank of India’s research arm Institute for Development and Research in Banking Technology (IDRBT) notes that “time is ripe" for the adoption of the technology in India, citing the sound basis underlying the technology, its many advantages, and the variety of its applications. In a recent announcement, RBI informed that they will be providing a model blockchain platform to encourage adoption within the industry.

Blockchain can help the financial sector move away from its heavy reliance on cash-based transactions. “From a technological perspective, we feel that blockchain technology has matured enough and there is sufficient awareness among the stakeholders which makes this an appropriate time for initiating suitable efforts towards digitising the Indian Rupee through blockchain technology," says an IDRBT white paper on the applications of blockchain technology to the banking and financial sector in India.

Some blockchain critics, however, question whether the technology is ready for widespread adoption and whether it truly offers benefits that cannot be achieved using more conventional means. It is also unclear, some say, how the financial services industry would shift from the present regulatory regime to a quasi-autonomous setup that takes full advantage of blockchain. Other issues include the need for updates, while addressing scalability, regulatory and security concerns.

The IDRBT report concludes the benefits of the technology far outweigh potential concerns, which it examines carefully in its report. While promise of blockchain technology is great, it is still in its nascent stages. That said, it has emerged as a crucial technology, capable of changing the landscape of global finance, and the financial sector needs to get on board.

As a founding member of the open-source Linux Foundation Hyperledger project, and a driver of global blockchain collaboration and innovation, IBM is working to reimagine business networks across various industries. Presently, IBM helps businesses help build, run, and manage production-ready blockchains at scale and across industries including FMCG, financial services, logistics, shipping,and industrial.

Find out more about how your business can benefit from blockchain technology and the unique solutions powered by IBM.