Blockchain Use Cases — Financial Services — Part 2

Blockchain made its debut in 2009 with the launch of Bitcoin. However, it was only after a few years that people started recognizing it as a technology in its own right — not necessary inseparable from the cryptocurrency. It is unfortunate that the tech is still hyphenated with crypto — its high point came in 2018 when Bitcoin and cryptocurrencies attained high valuations; the rise and fall of crypto market still dictates the level of attention the technology gets. Hence, the tech is yet to realize its true potential.

Cryptocurrencies acted as a live use case for Blockchain tech in the Financial Sector. This use case proved conclusively that money/ currency can be created in a decentralized manner, digitized, stored and transferred securely over a P2P network (public or private) without a single-point failure, or double-spending problem. Financial Sector thus became the first to adopt and apply Blockchain in a lot of their existing processes.

Financial sector is thus the most vibrant area of usage for Blockchain — a number of use cases in this sector are used live right now, and many more are in Pilot / POC stage. This space has and will see the highest number of use cases being tried out by different Banks and Financial Institutions across the globe, based on the number of pain points that the technology solves.

Some of the problems with current processes in this sector are:

1. A lot of paper work — Even when most of the bank processes are digitized, there is a lot of redundant paperwork that is to be done at the back end (either due to regulatory need, or the fact that financial institutions place more trust in paper).

2. Complicated reconciliation processes — Absence of a single view across all parties to a transaction ensures that there are multiple recon processes that each party needs to follow.

3. Long Trade/ Payment Settlements — A typical international trade finance transaction can take as long as 60–90 days to complete because of a lengthy and cumbersome, paper-heavy process. Sending money from one country to another isn’t as easy and quick as it sounds (when ideally it should be). It takes around 3–5 days to send money across.

4. Money Laundering — Tracing money is not always that easy and possible, thus leading to black money as a result. This impacts all the businesses that handle the Black money.

5. No Single Database for all — An example is the KYC process where every bank does their own KYC process despite a successful KYC of the same customer (often with same data) by another bank. This not only costs money but brings avoidable delays in downstream processes.

6. Bank Frauds — We see frauds in loans, Letter of Credits (LOC), fake currency, and many other areas where forgery is not insignificant. Banks lose $15 billion to $20 billion annually from identity fraud alone, according to Javelin research.

7. Conflicts — In most of the bank processes there are multiple parties involved, e.g., Seller, Seller’s Bank, Receiver, Receiver’s Bank, Customs in both countries, transporter, insurer, etc. are involved in any in International Trade Finance transaction. When there are so many parties involved there are bound to be conflicts, which lead to a painful and costly experience.

Blockchain with its various properties can resolve or mitigate most of these issues:

1. Blockchain maintains traceable and auditable history of data which is immutable. This eliminates use of paper, and reduces reconciliation requirements.

2. Multiple parties become part of a single network; all parties can see updates in real-time. This makes transactions faster and cheaper than the traditional processes.

3. Since all transactions can be traced to their genesis and the data is guaranteed tamper proof, source of funds and money trails can be established conclusively by regulators.

4. Multiple Banks/ financial institutes can become part of a single Blockchain network to maintain KYC data thus helping all in reducing redundancies in KYC efforts.

5. Data can be stored by banks in such a way that it is easy for regulatory authorities to audit it when required.

6. Since all parties are part of the same network, everyone can see data in real-time, and there is a trust in the data stored, conflict resolution can be easier in a Blockchain based system.

Some Use Cases:

Now these are just a few examples of how Blockchain can help Banks and Financial Organizations in general. There are many Finance Sector use cases where Blockchain can help, examples include:

Some Stats:

Global banking is currently a $122 — $124tn industry (early 2020). There are a lot of areas in which Blockchain can not only help save banks a lot money, but also help improve user experience, and reduce friction in processes.

• Accenture has estimated that the biggest investment banks could save $10bn by using Blockchain technology to improve the efficiency of clearing and settlement.
• A report by Loughborough University states that moving securities on blockchain could save $17bn to $24bn per year in global trade processing costs.

McKinsey estimates that blockchain-based solutions:

1. Applied to cross-border payments could save about $4bn a year.

2. customer onboarding can create up to $1bn of savings in operating costs for retail banks globally and reduce regulatory fines by $2bn to $3bn.

3. Can reduce annual losses from fraud by $7bn to $9bn.

Some Limitations:

Although Blockchain can be of a big help, as we mentioned earlier there are limitations to the technology at the moment. The biggest of all is throughput of transactions as measured by Transactions per Second (TPS).

You can see in below image how Bitcoin and Blockchain lag significantly behind traditional payment processes like Visa, MasterCard, or PayPal.

It is important to understand that currently the TPS capability of Blockchain networks is inversely related to the level of decentralization in the network. Which means that bigger the validating/ mining network, lower will be the throughput of that network.

Private Blockchain networks (with a limited number of parties in the network) which are using Hyperledger Fabric, or R3 Corda platforms as their Blockchain platforms can have significantly more TPS (500 to a 1000 TPS based on the configuration of the network) than Public networks like Bitcoin or Ethereum (with huge decentralized user base).

Public networks like EOS, Ripple, NEO, etc. have a higher TPS capabilities because their validation or mining process is confined to a smaller number of nodes in the network (making them less decentralized). Some Blockchain enthusiasts consider this type of centralization against the basic soul of Blockchain, where no single or set of users should have special privileges.

There are new developments in the area of improving TPS capabilities of Public Blockchain networks like Bitcoin, Ethereum, etc. Techniques like Sharding, State Channels, Lightning Networks, Sidechains, Plasma, etc. are in various stages of development and deployment. We should see significant improvements through implementations of these techniques in year 2020 on these platforms.

Finally

Blockchain is evolving even as you read this and will continue to help Financial Institutes across the world in various ways. As I said there are various new developments happening in Blockchain to mitigate its limitations. The year 2020 will encounter many use cases going live in Banks across the world (probably more than any other sector).

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For any other queries or issues you can email at: blockdigest@gmail.com