How Is Blockchain Changing Financial Services?

Posted by Kelvin Chandran on 11/5/18 5:21 PM
Kelvin Chandran
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How Is Blockchain Changing Traditional Financial Services?

In a manner of just a few years, blockchain has already begun to emerge as a technological game-changer for the financial services industry. The positive impact of this relatively new technology is only just beginning.

In this article, we’ll examine the some of the inefficiencies of current financial systems and explain how blockchain can provide vast improvements. We also list several real-world examples of how major banks have started to invest in and utilise blockchain.

Inefficiencies of Current Financial Systems

Managing Fraud in Finance- Fraud continues to be a major issue for consumers across the world. While one would expect that systems introduced in the past decade would help mitigate cases of fraud, this hasn’t been the case. Instead, fraud management has only become costlier to maintain in many cases.

Additionally, traditional fraud detection systems are not built to stop new types of fraud like synthetic identity theft that have emerged in recent years. In 2017, identity theft and fraud accounted for losses totalling $16 billion. Moreover, in an IBM study, only 16 percent of surveyed banks said that they could detect fraud as it was occurring.

Know Your Customer (KYC)- According to various laws implemented by national governments around the globe, banks have a duty to ensure that they are not knowingly or unknowingly facilitating payments for use in illegal activities. Traditionally, KYC checks have been costly for banks. According to one research report, KYC processes cost the average bank $60m annually. In 2018, the operational costs of these processes have only continued to increase. This is due largely to the fact that most financial institutions utilise manual review processes.

In essence, banks that rely upon manual KYC checks oftentimes serve as an obstacle to legitimate business/consumer transactions. However, those institutions that ignore regulations and forgo these procedures risk being complicit with criminal activity, which comes with extremely hefty fines. Thus, the inefficiency of traditional KYC checks puts banks in a catch-22 scenario.

Cross-Border Commerce Barriers- Commerce, especially e-commerce, is becoming more global than ever before. In nations of all sizes, cross-border commerce has become an integral part of national economic growth. However, the process of verifying cross-border transactions is complex. There is clearly an increasing demand for international products and services from people throughout the world.

This market is projected to grow to $994 billion in 2020, up from $401 billion in 2016. As a result, financial institutions are under more pressure to prevent illicit financial flows (IFFs). Moreover, current systems lack the standardisation and interoperability necessary to simplify regulatory compliance on an international-level.

Blockchain Applications for Finance

Better Fraud Prevention- Blockchain can fundamentally change the way businesses handle fraud detection and prevention. Not only can blockchain give privacy back to consumers, but it can also ensure that financial service companies are better prepared to secure sensitive data.

One technical solution is to allow consumers to have the authority to control which parties can view their data. By allowing only select parties to view data, consumers can greatly enhance their privacy. Meanwhile, banks and other financial institutions can spend less time and capital on older, inept detection technologies.

Universal Identity System- When we think of identification cards (i.e. passports), the first thing we might think of is access to government services. However, systems like social security numbers in the US are also used as a means of economic access. However, these systems are quite unconnected and limited in use.

A universal identity system on the blockchain can ensure that global commerce is more secure and efficient. For example, blockchain can be utilised to determine the financial risk of a particular consumer, regardless of nationality or location. Processes like KYC and AML checks can also be automated through blockchain, making regulatory compliance efforts far more scalable.

Essentially, this means that individuals would be able to access services on a global scale, rather than just limited to domestic offerings. A blockchain identity management solution could be used in a variety of scenarios where risk assessment is vital. This could impact the way in which banks issue loans, make it possible to launch new P2P lending services, and much more.

Blockchain for Banking: Innovative Use Cases in Action

Banks and other traditional financial service companies from around the world are already investing heavily in blockchain technology. This not only includes monetary funding but also the establishment of large teams focusing on research and real-world applications. Here are just a few of the many examples seen in recent years.

In 2015, Circle, a crypto-focused financial services startup, raised $50 million with support from Goldman Sachs. As of 2018, Circle is backed by $140 million in venture capital.

Since 2016, BNP Paribas has been testing out a blockchain solution for the issuance of mini-bonds. In 2017, BNP Paribas successfully completed an entire, end-to-end blockchain transaction test for the Luxembourg Stock Exchange.

In May 2017, Citigroup and Nasdaq partnered to create a “payment solution that enables straight-through payment processing and automates reconciliation by using a distributed ledger to record and transmit payment instructions”.

In April 2018, Banco Santander launched the first blockchain-based international money transfer service across four countries. This is just one of this bank’s many blockchain solutions that are projected to reduce costs by $20 billion annually by the 2022.

In July 2018, IBM and CLS announced the launch of LedgerConnect, a blockchain app store for banks. Barclays, Citigroup, as well as seven other undisclosed banking institutions are participating.

SingleSource and Financial Services

Whether you work in financial services, FinTech, or you’re someone with an interest in blockchain technology, you should learn more about SingleSource.

We are developing a protocol that exemplifies how blockchain is changing the world of finance, regulatory compliance, and identity management. You can find out more about how this works via our product page on the website.

Discover more about the SingleSource product

Topics: KYC, FinTech

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