Why the financial services industry is banking on blockchain

Bitcoin made the world sit up and take notice of digital currencies.

Its stratospheric rise was one of 2017’s biggest stories. Now, as governments start regulating, attention is turning to blockchain – the technical infrastructure underpinning it all.

Think back to how the internet comprehensively disrupted, transformed, and remodelled the music industry. Blockchain has the potential to do the same within financial services. Across every aspect – from transactions and settlements, to risk and governance.

What is blockchain anyway?

The technology may be complex, but the concept isn’t.

A distributed network or database, open to anyone. The ‘distributed’ is key – it means there’s no ‘master’ version requiring a central authority’s validation.

Instead, every transaction is broadcast in real-time. Viewable across the blockchain, ensuring transparency and trust. And, perhaps most crucially for financial services, within an ecosystem that fulfils authentication and authorisation requirements.

Agent of change

Of course, Industry 4.0 has always posed unique challenges for banks, insurers, and related companies. Balancing demands for agility and enabling new ways of working, with the need to ensure security and satisfy compliance. However, blockchain appears to be a catalyst for change on multiple levels.

highrise banks
57% of the world’s large corporations are evauating blockchain (source: Juniper Research)

First, on an economic level. Accenture expect blockchain-adopting investment banks to realise savings of up to $12 billion a year by 2025. McKinsey forecasts potential savings of $80–110 billion (pdf) within the insurance sector. Then there’s the amount of time saved in areas such as settlements. Rather than waiting days, as is the current norm, a digital method offers near-instant reconciliation. Along with a much reduced chain of command, helping to minimise risk, vulnerabilities and human error.

Second, on a cultural level. Blockchain is a key reason why 39% of financial institutions expect to undergo major digital transformation within two years. From a customer perspective, trust in financial transactions will be redefined, as Gartner highlights: ‘the information recorded in the ledger is immutable, tamperproof, uncensorable and therefore, trusted’.

Crypto-consortiums

It’s therefore of little surprise that the industry is exploring blockchain’s potential.

Indeed, for some institutions the blockchain discussion has already moved from potential to reality. Barclays, HSBC, UBS, and Credit Suisse are among a consortium which has set up a Utility Settlement Coin. This is a blockchain-ready form of digital cash for banks to use among each other. The goal is to harness the advantages of blockchain, to improve efficiency and reduce costs of end-to-end transactions.

bitcoin and ethereum coins on laptop
By the end of 2020, the banking industry will derive $1 billion in business value from the use of blockchain-based cryptocurrencies (source: Gartner)

‘It may well inform the way central banks choose to move things forward. We see it as a stepping stone to a future where central banks issue their own [cryptocurrency] at some point’, says Hyder Jaffrey, UBS director of strategic investment and fintech innovation.

Adapt to survive

Naturally, there are still profound questions still to be answered. Can and should the financial services industry be incentivised to develop the blockchain in some way? How will new financial regulations such as GDPR have an impact? What role will banks and insurers play in transactions that are largely intermediary-free?

Although if you operate in financial services, everything points towards one conclusion. It’s not a matter of ‘if’ blockchain will affect your business. It’s ‘when’. Senior executives need to be implementing a strategy to take advantage. The alternative is being left behind, and becoming another corporate casualty of Industry 4.0’s disruption.

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Creating blockchain-driven financial services and business models

Discover ways of linking blockchain technology with the IoT and other industries to create new services and businesses