Few new technologies are hotter than blockchain right now. Many industries are exploring its benefits and testing its limitations, including banks and financial services, with an eye on windfalls from efficiencies and reduced costs. Research and advisory firm Gartner projects the “business value-add” from the technology to grow to $176 billion (Rs 11.7 trillion) by 2025.
Currently, almost all banks are exploring various permissioned (private) blockchains within their innovation centres. Plus, they have also joined consortiums like R3 and Hyperledger. Moreover, as interest grows across the board, various viable implementations are being explored. In this article, we look at both the long-term potential of this technology and how it can impact the financial services industry.
Self-sovereign identity is a concept that has taken root in recent times. It’s based on the premise that users could generate their own identity and facilitate the three functions of establishing identity — claim, proof and attestation. Basically, there will be a digital wallet in which user identity information related to those three functions are stored. Claim-related and proof-related documents are stored by the user directly. Based on the service in question (like passport, bank passbook, tax-identification number, etc.), the attestation could be obtained by the relevant authority upon submission of relevant claims and proofs.
Though the self-sovereign identity itself is not directly a blockchain solution, the moment you have generated one, it’s ideally put across a distributed ledger orchestration across different entities. A bank that wants to verify the date of birth of the customer could now easily check the attestation provided by the relevant government department. Banks could make use of this to make customers’ lives easier, and gain better trust of their customers.
Loyalty programmes are a no-brainer for blockchain implementation. Putting the reward points on blockchain helps in creating a transparent and real-time loyalty solution that customers would love.
Blockchain’s main advantage is in its ability to ensure error-free processes where everything is connected to independent users instead of one central place, which is hugely useful in international payments. Currently, these are expensive and error-prone as transactions in different currencies require different intermediaries. Banks have now started piloting permissioned blockchain through hyperledger for payments. Adopting such a blockchain process to execute real-time transactions will significantly reduce settlement time.
Banks can also use blockchain in private equity areas, which are usually labour-intensive and document-intensive, to offer enhanced trade security as well as a shorter settlement process. Transactions and documents are recorded, and centralised access to fund managers is provided.
Interestingly, blockchain has also emerged as one of the top contenders to resolve a wide variety of cybersecurity issues facing the banking sector today. The end-to-end security encryption and distributed features of the blockchain technology make digital transactions impenetrable to attacks. Blockchain protects sensitive records and authenticates user identities while verifying the integrity of the transactions. As a matter of fact, the merits of the blockchain suite extend well beyond just protecting sensitive online records. They can also help create an entire trust-based ecosystem with robust applications that suit the banking sector. For example, Australia and New Zealand Banking Group (ANZ), alongside competitor Westpac, tied up with IBM and shopping centres to successfully digitise their guarantee process. This increases efficiency, reduces chances of fraud, eliminates the need for documents and systematically reduces challenges in the reporting of guarantee status through multiple changes.
Blockchain will rev up Digital India
As the government marches on with its Digital India vision, adoption of blockchain will open up enormous opportunities by digitising all physical assets in a trust-based environment. The government’s interest in blockchain was clearly seen in the Union Budget of 2018. Initiatives such as the linking of Aadhaar with financial portfolios and Jan Dhan Yojana (Scheme for People’s Wealth); demonetisation of high-value notes and the simultaneous push for digital payments with the building of Unified Payments Interface and digital lockers are all backed by Digital India vision. As the country strengthens its position as a digital-first economy, deployment of blockchain will further speed up digital financial inclusion in the country with an augmented cybersecurity mechanism.
Challenges to overcome
However, there are several key challenges that still remain as hurdles to commercialisation of blockchain.
The main problem is that the technology itself is quite nascent, and there is still a lack of governance models and standards that would form the foundation of a functioning ecosystem. Much work needs to be done towards understanding how to integrate and coordinate several blockchain platforms within a single value chain. Also, there is a shortage of blockchain skillsets, with 18% of chief information officers (CIOs) saying that blockchain skills are the most difficult to find, according to the 2018 Gartner CIO Survey.
Another key challenge is scalability of the technology. This has always been a challenge — across many crypto-currencies and various blockchain platforms. But in the past couple of years, attempts are being made to overcome it with different approaches. For example, in the crypto world, we have Lightning, which is an off-chain solution, that is, it doesn’t depend on the main blockchain network. With Lightning, it is possible to conduct unlimited transactions off chain, which could then be settled on the main blockchain network.
While blockchain may still not be “enterprise-ready”, this certainly does not absolve banks from their responsibility to identify how it will disrupt the financial world of tomorrow. The hype around blockchain may well be similar to the dot-com bubble of the late 1990s and early 2000s: While a lot of companies went bust during that time, a few gems did emerge. This time around, the ones that emerge would have the potential to one day disrupt the finance world.
Jothi Rengarajan is chief solutions architect at Aspire Systems, a technology services firm. Views are personal.