Blockchain in Banking & Finance

Finance in Blockchain

Many bankers already know what Bitcoin and Cryptocurrencies are but most of them still do not appreciate that all these run on the Blockchain platform. Not all bankers are readers therefore they remain in ignorance of what lies in the future of banking. One of my brothers works in a major bank in Kenya’s capital, Nairobi. It took him time to appreciate the impacts that Blockchain will create in the Banking sector. If I use him as a sample, in my approximation, about nine out of ten bankers still do not know anything about Blockchain. Banking is a very wide and rich industry that has experienced continuous growth over the past few years. A report in 2011 by McKinsey Global Institute stated that the global banking and financial services industry was valued at $11 trillion. Although this may only be an average, especially because the industry has experienced more growth since 2011, it reveals the largeness of the share of cake of global GDP that the industry controls.

Organization of Economic Cooperation and Development (OECD) mentioned in a report that the financial services sector accounts for between 20% and 30% of the total revenues from the services industries, and approximately 20% of the gross domestic product of the developed countries. With the International Monetary Fund stating that the global economy had a value of $77.7 trillion in 2014, the $11 trillion accounts for a large size of the overall world economy. Whatever will affect this industry will therefore greatly influence the world because it will somehow influence the other industries. I guess now you can see why I chose to handle this industry first before I proceed to the others. I want to help you appreciate the fact that the future of banking may soon be transformed by Blockchain Technology.

“Whether it’s payments, settlements or compliance, blockchain’s key properties of decentralisation, immutability, efficiency, cost-effectiveness and security are leading to a growing chorus of support for the technology’s adoption across the entire spectrum of financial services; as such, the industry is now expected to undergo substantial disruption over the coming years.” — John Manning, International Banker.

I have already mentioned that the use of Blockchain will help banks slash the time spent to complete one transaction and the cost of those transactions thus increases transaction efficiency. There are many ways through which Blockchain will be adopted in Banking and Financial Services Industry and some of them include:

Blockchain in speeding up and simplifying cross-border payments

Cross-border payments are a major earnings generator for banks and payment services companies such as Western Union, PayPal, Mastercard, Visa and Dahabshil. However, contemporary cross-border payment processes have always been slow and expensive across the world. International remittances account for billions of dollars transferred from the developed parts of the world to other countries. Payments for products and services, donor funds and others make the bucket to even overflow. However, transaction costs remain high and unfriendly for seamless business across borders.

If you want to send money to Charles who lives in London, UK and you are in Johannesburg, South Africa, it is prudent to find out which payment service offers cheaper rates and a more secure channel before entrusting them with your money. Some payment services companies charge so high to send money that it only makes sense to send very large amounts via them. Imagine if the cost of using these payment processors could be lowered to a standard fee of 2% or less, it would be so insignificant that you wouldn’t mind using it, yea? Blockchain is expected to reduce the crossborder transaction fees to 2–3% from the current 5–20%, and also guarantee real-time and more secure cross border transactions. You might want to revisit the features of Blockchain such as immutability and efficiency and learn how they will help achieve these milestones in the Banking sector. The fact that Blockchain is a distributed public ledger rather than a centralized private ledger makes it more secure and cheaper because it eliminates the traditional intermediaries and enhances transparency. Trade finance will therefore be significantly impacted by Blockchain in the next few years. Trade finance refers to the process of financing a trade such as export and import. This is one area that bankers should really pay attention to because it greatly influences the stability of an economy.

“Trade finance is an obvious area for blockchain technology. It is so old it’s done with fax machines and you need a physical stamp on a piece of paper.” — Charley Cooper, Managing Director, R3 — A Fintech Company

Cross-border payments via Blockchain technology has already been proved to work. In a bid to test the proof of concept of the speed of cross-border transactions, ATB Financial, Ripple and SAP collaborated to send a Blockchain payment for the first time ever from Alberta — Canada to ReiseBank in Germany. In a traditional system, the payment of an amount such as CAD 1000 would be expected to take 2 to 6 business days to be completely processed but when Blockchain was used to make the payment it took only 20 seconds to be complete. The team went ahead to enhance the Blockchain payment system and reduced the time taken for the payment from 20 seconds to 10 seconds. This is a good proof that the future of trade finance is very bright. Banks that will adopt the Blockchain systems will increase their business efficiencies to a great extent and this will result in large reductions in the cost of doing business. Lower costs of transactions will make such Banks more competitive because customers like lower costs, and reduced costs of doing business will guarantee growth in profits.

Another example where Blockchain is already being used in trade finance is the Hyperledger Fabric Project backed by IBM which aims at providing a platform for international payments. The project is also supported by Societe Generale, Unicredit, Natixis, HSBC, KBC, Deutsche Bank and Rabobank. The Blockchain payment platform is designed to run through IBM Cloud thus allowing interconnectivity among the parties involved in a secure transaction. With the help of a Blockchain startup known as Stellar, IBM is seeking to spread the use of the Hyperledger Fabric to global levels.

Another Blockchain project that has received praise is the Utility Settlement Coin which will also increase the efficiency and effectiveness of international payment processes. The project is spearheaded by UBS and Clearmatics. Some of the world’s largest banks have voiced their support for the project including CIBC, Barclays, Credit Suisse, Deutsche Bank, HSBC, Santander, MUFG and BNY Mellon.

The increase in the number of Blockchain projects supported by the giants in the banking sector that seek to improve trade finance is a good signal to where the future of banking is headed to. Trade finance is one of the key revenue generators for banks therefore more research and development is expected in a bid to make it more convenient.

Blockchain in share trading

Buying and selling of company stocks have been known to involve middlemen such as stock brokers and stock exchanges. These middlemen make it more costly to trade because they charge fees for their services. Introducing Blockchain in share trading will accord every party to the trade a say in the validation process of a transaction hence speeding up the settlement process, allowing greater trade accuracy, and effectively eliminating or modifying the role of middlemen. Companies can use ‘colored Bitcoins’ or ‘colored coins’ to track the origin of the coins thus distinguish them from the rest. These coins can be assigned special properties and associated with ownership of assets such as arts, gems, cars, stocks or bonds. Using this concept, a variety of assets can be traded or exchanged on a Blockchain platform. Share trading could also be influenced when Blockchain decentralizes stock exchanges so that there is no central system that plays the role of bringing supply and demand together. The decentralization feature of Blockchain will also help completely eliminate brick and mortar locations and dedicated servers and replace them with a decentralized network that runs the countless computers around the world. NASDAQ already announced their plan to leverage on Blockchain technology to expand and also enhance its equity management capabilities that are offered by the Nasdaq Private Market platform. Blockchain technology may possibly take over the role of notary offices in share trading since it offers a more guaranteed security. Australian Securities Exchange is also exploring how to use Blockchain in reducing transaction costs.

It will offer “efficient, fully-electronic services that facilitate the issuance, transfer, and management of private company securities” — NASDAQ, USA

Blockchain to reduce fraud in banking Statistics according to consultancy firm PwC indicate that about 45% of financial services companies including banks, money transfer services, and stock exchanges are victims of economic crimes yearly. I have ever worked in a bank so I know how the banking systems work. Many of the banking systems in the world today are built on centralized databases making them more vulnerable to cyberattacks because they have only one point of failure which allows a single hacker to access their entire systems.

Distributed Ledger Technologies (DLTs) will help eliminate the risk of an attacker from a single point of failure thus reducing fraud in banking. One thing I can assure you, if Banks build their systems on Blockchain, hacking and pilferage of cash through other means will greatly reduce. I believe that some of the losses of money in banks through pilferage are an inside job of some dishonest employees in those companies. Such employees know how to hide behind weaknesses of a centralized database and get away unnoticed. If Blockchain is introduced in Banks, even insider-influenced pilferages will not be easy because to change any data in a Blockchain database, all nodes in the chain must be notified and the majority of them must attest to the change. The high amount of energy used by nodes in attestation especially in proof-of-work protocols makes it economically unviable to approve frequent data alterations. Blockchain adoption is the best cure for fraud. I will discuss later on how Blockchain can be used to mitigate fraud in government and public institutions.

There are many other Blockchain applications in Banking and Finance, I have just covered a few here.

I am a Certified Blockchain Expert (CBE), trainer and blogger. I follow events in the Blockchain space and actively take part in Blockchain education in Africa.