How crypto and blockchain are disrupting banking and financial services

Industry

While blockchain technology hasn’t yet become a part of daily business life, “it is getting closer to its breakout moment every day,” according to Deloitte’s 2018 global blockchain survey. And many believe financial services is one of the industries most likely to be disrupted by the technology – the Deloitte survey had finance in fourth place, just behind automotive, oil and gas, and life sciences.

Blockchain proponents say the tech has potential to improve a number of inefficiencies in how banks and financial service providers currently operate.
One long-time bottleneck in financial services, for example, has been in cross-border payments. Completing financial transactions between different countries has generally been a time-consuming process, with most international transfers taking between one and four days, according to Fexco. While the payment network SWIFT says it’s recently speeded up many such transactions, simple mistakes can still cause considerable delays.

“All too often, funds are delayed in the international banking system due to incorrect account details preventing funds from being applied to the beneficiary account,” Fexco notes. “This can potentially delay a transfer by weeks due to the recall and re-sending of funds with amended correct details.”

Blockchain has already shown signs it can help reduce such friction in the sector.
“The banking sector has seen years of overhype and experimentation surrounding distributed ledger technology, but one project led by JPMorgan Chase, the Interbank Information Network (IIN), is quietly producing results at scale,” the Financial Times reported in November. “The IIN is essentially a more efficient way for participating banks to transfer US dollars across borders and institutions. Its elevator pitch is that problematic payments, which are currently being held up for as much as two days for compliance issues or to resolve errors, could go through almost instantly under the new system.”

Another area where blockchain could produce benefits is in trade finance.
“Trade finance is currently full of inefficiencies,” Fintechnews Singapore noted. “According to GTReview, a trade finance deal for a single commodities cargo by sea can require up to 36 original documents and 240 copies from as many as 27 parties. It can often take weeks, if not months, to complete.”

According to the article, blockchain could streamline international trade transactions by enabling “real-time monitoring by multiple parties and the exchange of documents in a digital, secure and decentralised manner”.
A recent report from Bain & Co noted that trade finance experiments with blockchain have to date “fallen short because each project has focused only on a narrow slice of the entire process”.

Done right, however, blockchain pilots have shown they can dramatically streamline trade finance. For instance, the report describes how HSBC and ING last year used the technology for a soybean shipment from Argentina to Malaysia. With everything handled on a single blockchain platform, the trade finance transaction took less than a day to complete, compared to between five and 10 days using conventional paper-based methods.

Blockchain, the Bain report said, “could increase global trade volumes by $1.1tn by 2026, from the current base of $16tn”. However, it added, successful deployment will require organisations to “heed the lessons of why previous attempts to digitalise documentary trade have had limited impact”. Doing that will require industry participants to “agree on networks with common standards and business rules”. So-called “superconnectors” – trusted third parties such as large banks or government agencies – will also be needed to act as bridges for sharing information on the networks.

Other areas where blockchain shows promise for improving financial processes include share trading, syndicated lending, digital identity verification, smart contracts and reducing payments fraud. However, recent research by Greenwich Associates finds that paving the way for greater blockchain adoption in finance will require further improvements in scalability, digital currencies, privacy and transparency. And a survey of financial professionals by TD Bank found the industry itself needs to build greater familiarity with blockchain technology.

“Blockchain technology has broad implications for the commercial payments space, from speeding up settlements to securing cross-border transactions,” TD Bank’s Rick Burke said in a news announcement about the survey. “Even though much of the industry has a baseline understanding that blockchain can evolve and improve payments, the varied responses indicate that the technology’s specific capabilities and implications are still a great unknown for many finance professionals.”

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