6 min readMany financial companies have already invested in, or are planning to invest in, exploring blockchain. On the one hand, blockchain offers numerous opportunities to transform the way we exchange value forever. On the other hand, it is perceived as a threat to the existing trade model. Change can often be difficult, especially on a global scale. However, blockchain’s transformative potential ensures that this transformation is inevitable.
Many leading enterprises, such as Deutsche Bank, the US Federal Reserve, Barclays Bank, and Citigroup, have already adopted blockchain, possibly due to so-called 'blockchain FOMO' (fear of missing out) around leadership positions. However, this technology has not yet been fully deployed at a massive scale. In fact, many banks and insurance companies have been unsatisfied with the results and have put their solutions on hold. The question remains: Will these companies go back to implementing blockchain? Recent developments in financial services suggest they likely will.
WHY BLOCKCHAIN?
Blockchain’s appeal largely stems from its transparent nature. It is a peer-to-peer network of computers that validate and secure transactions. Its data structure retains cryptographic information about transactions, agreements, and contracts. These networks can be either public or private. In a public blockchain, users create and share transactions that can be immediately verified without the need for a central authority. In a private blockchain, the permission to verify transactions is restricted within the organization. Blockchain provides all business members with equal access to the overall transaction history, which cannot be altered after confirmation. This technology simplifies many traditional banking processes, reducing processing time and minimizing costs and rule exceptions.
Transaction solutions based on blockchain offer four major benefits: reliability, transparency, high speed, and reduced costs. While blockchain is not a universal solution for every problem, it effectively addresses four major business challenges.
Fraud reduction
The banking sector faces increasing fraud and cyberattacks. The primary vulnerability lies in centralized databases, which serve as single points of storage for all data. Unauthorized access to these databases poses significant risks. Blockchain mitigates these risks by utilizing decentralized data storage. With blockchain, fraud and cyberattacks become significantly more challenging, as they would require compromising multiple nodes instead of a single database.
Know your customer (KYC)
The term "Know Your Customer" (KYC) is widely used in the banking sector to describe the process of verifying a client’s identity and assessing potential risks.
According to a Thomson Reuters survey, financial institutions spend an average of over $60 million annually on KYC and due diligence. This includes tracking bank clientele to prevent financial terrorism, money laundering, and ensuring regulatory compliance.
Blockchain can enhance compliance efficiency and reduce operational costs by storing verified client information on blockchain nodes. This approach allows other banks, insurance providers, and accredited organizations to access and utilize the data. In essence, blockchain eliminates the need to repeatedly restart the KYC process.
Trading platforms without intermediaries
Blockchain-based trading platforms eliminate the need for centralized identification or intermediaries. They also reduce the risk of double spending within the securities trading supply chain. These platforms operate using digital tokens, which are transparently tracked and traded on blockchain-based exchanges. Each digital token serves as a certificate of authenticity, making the forgery of securities significantly more difficult compared to traditional paper documents.
Instant payments
Blockchain technology enables payments between banking institutions or customers, significantly optimizing costs while improving the safety and speed of both domestic and cross-border transactions.
The blockchain-based global trade finance platform Batavia (jointly developed by UBS and IBM) successfully completed its first real cross-border transactions. The initial pilot transactions included the trading of cars from Germany to Spain and raw textile materials for furniture production from Austria to Spain. During the process, a connection was established among all parties—suppliers, buyers, and financial institutions — involved in the transactions.
CHALLENGES ON THE WAY
The adoption of blockchain technology does not automatically guarantee the successful implementation or resolution of the business problems mentioned above. When building a solution, financial services companies may encounter various environmental factors that can impact the system in unpredictable ways. These factors include, but are not limited to, market conditions, the number of financiers and finance requests on the trading platform, regulatory changes, and edge cases that could destabilize the system.
FINANCIAL SECTOR TRANSFORMATION
What will the financial sector look like with blockchain? There are many reasons to anticipate a revolution that could completely transform the industry. Outdated processes and stacks of paper documents will be replaced by digital innovations built on mutual cooperation and trust. Fraud may become a thing of the past, thanks to highly secure systems.
The potential and opportunities that blockchain holds make it clear that change is inevitable. Building this new global infrastructure is simply a matter of time and effective collaboration among financial institutions.
Interested in learning more about blockchain and distributed ledger technology? Check out our blog, “DLT 2.0: It’s All About Scalability.”
Turn to SoftServe for expert guidance in implementing practical and effective solutions tailored to your financial needs.
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