“Blockchain has remarkable potential for financial institutions, changing and releasing novel abilities to transform financial institutions and banks to interact and collaborate with customers.”
- Max Di Gregorio, Financial Head of PwC, Middle East
The potential of blockchain has piqued the interest of the financial sector in particular. Its distinct functionalities have enabled financial institutions to operate more promptly and inexpensively—reducing their error rate, lowering their capital requirements, and at the most, their vulnerability to cyber-attacks. A survey by Gartner of 251 CFOs and other finance leaders in November 2021 revealed that 47% of businesses were ready to assess blockchain technology in 2022.
An interesting study by Santander FinTech reveals that distributed ledger technology (blockchain services) can reduce costs by approximately $15 billion to $20 billion per annum by 2022, primarily by reducing IT costs.
Businesses looking for ways to cut costs must understand the core mechanisms of blockchain to encourage the next generation of financial innovations.
Blockchain Driving Value in Financial Services
The current enthusiasm for blockchain and the subsequent years of rapid development have provided the finance industry with opportunities to reflect on its successful operations worldwide. Moreover, blockchain has also provided banks with the ability to identify viable and valuable developments in the widespread and growing financial services landscape. Let’s identify some areas in which blockchain technology is revolutionizing banking services:
Claim Management
The benefits of blockchain technology are mostly reducing, not eliminating, fraud in claim management. Also, blockchain is highly recommended for storing historical claims data on the ledger technology. This enables insurers to detect suspicious activity and improve fraud detection easily.
Claim management data controlled under blockchain technology is registered and administered by smart contacts in a particular network.
The potential areas of claim management to benefit from blockchain services are:
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Interpreting incidents claimed in banks
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Soliciting excessive claims cover
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Uncovering the process of delayed pay-out
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Diminished profitability from excessive or lower pay-outs
Due to these unfortunate instances in the claim management process, the FBI studies that over 700 insurance companies in the U.S. receive over $1 trillion annually in premiums. The estimate of the total cost of insurance falls under the heading of fraud, valued at more than $40 billion annually.
This indicates how critical it is to promptly develop an intellectual capacity to recognize fraud in the banking system.
Financial Institutions
Blockchain in financial services eliminates untrusted parties in financial institutions and banks. Based on its efficient database, it has removed the status of a middleman.
At the same time, blockchain facilitates the use of “smart contracts,” which are self-executing contact systems for automating manual processes. The technology covers everything from compiling claim data to providing relevant claims to customers. In this way, businesses can reduce the costs of manual processes that require multiple employees, assets, and infrastructural needs.
Apart from this, blockchain in finance has massive opportunities by transforming some of the essential traditional services of banks, including:
Legal Management and Regulatory Reporting
With blockchain, data accumulation can be stored and protected simultaneously while removing asynchronous reporting cycles across regulatory, statutory, and
management reporting.
Fundraising
A blockchain-based initial coin offering (ICO) has garnered popularity as a new financing model in fundraising. In this model, smart contacts are generated, which results in reduced costs that stay in demand and encourage non-stop trading globally.
Trade Finance
Blockchain technology has simplified trading by storing transaction-related documents in a database. As a result, it eliminates the need for multiple copies of documents, plummeting operational costs to a bare minimum. The
technology consolidates all data into a single sizeable digital document that can be modernized in real-time and accessed by all network users.
Ornua, an Irish dairy product manufacturer, partnered with Barclays to accomplish the world's first blockchain and banking trade transaction in 2019. Similarly, IBM and Maersk teamed up in 2020 to develop the first cross-border, blockchain-based supply chain system.
Digitalized Assets
Digital assets can be distributed more quickly than paper-based or physical assets. Their electronic format assists in streamlining the transaction process and reducing administrative and physical storage costs.
Digitized assets such as stocks, shares, and funds can be managed end-to-end on a blockchain or existing systems through application programming interfaces (API). Keeping digital assets reduces substantial business costs and allows CFOs to invest in other costs to improve business ROI.
Where does Blockchain Fit in Finance?
According to a recent Deloitte 2020 Global Blockchain Survey, 84% of financial experts responded that blockchain will eventually reach mainstream adoption in the finance sector by 2023.
However, other financial experts also mentioned that 29% of businesses are still skeptical of blockchain implementation. They are considering a “wait and see” strategy. According to them, blockchain services are not among the top five strategic priorities for their businesses. At the same time, 21% of businesses are clueless about where to begin with blockchain technology implementation in their businesses.
Therefore, CFOs should consider implementing blockchain services that will provide a better understanding of the technology. They can then identify and prioritize the financial pain points that the technology can potentially address. To begin with, here are some ways to better understand blockchain usage.
Radical Transformation
Blockchain mainly benefits financial businesses in terms of
crowdfunding projects and security generation. With built-in authentication keys and distributed networks, blockchain addresses some of the most critical vulnerabilities in the IT infrastructure of banks today. This mostly refers to the centralized systems that prevent hackers from hacking and controlling a bank's network.
Facilitating Faster and More Affordable Transactions Internationally
Ripple, a blockchain services company provider, is the most notable player operating in international transactions. Even so, the company is best known for its cryptocurrency platform because it uses blockchain-based global solutions for affordable money transactions.
The centralized blockchain network enables the transaction process seamlessly, popularly using SWIFT mode. That means, instead of relying on a network of complicated services and correspondent banks, international transactions can be settled directly on a public blockchain. Again, this helps alleviate the high cost of maintaining a global network of correspondent banks.
“SMBC lately initiated live transactions on the Marco Polo platform in Japan with major Japanese exporters. We hope to provide effective blockchain-based finance solutions to our customers globally by collaborating with Marco Polo Network.”
- Mr. Kazuo Yoshimura, Managing Director & General Manager, Global Trade Finance Department
In a nutshell, blockchain has the potential to revolutionize the finance function. It will provide CFOs with the tools and capabilities necessary to become key business partners in the strategic planning process while running a highly efficient and trustworthy operation.
Frequently Asked Question
Why is blockchain essential in finance?
Blockchain technology provides better capital optimization by reducing high operational costs. When banks share a blockchain, the entire functionality of the banking system reduces the initial individual costs required for managing transactions at a bank.
What is blockchain used for in banks?
Blockchain in banks is used for both public and private networks. It can be implemented in the financial cores by adding new services, transactions, accounting, and other features. It allows customers to do faster, more secure, and cost-effective transactions.
How does blockchain benefit banking and financial systems?
Blockchain technology improves payment transparency, trust, efficiency, and security and reduces costs for financial services firms and users. Now, payments from one bank to another can be made instantly.