There’s a lot of buzz about blockchain technology in the financial services sector. According to a recent research by Marketforce and Pegasystems Inc and Cognizant, 60 percent of the global financial services retailers who have some understanding of blockchain technology believe it will prove to be the most significant technological development since the Internet.
So why this excitement about blockchain? It is a distributed public ledger that can securely record any information and the ownership of any asset. Transactions on a blockchain can be completed within minutes or even seconds. Blockchain technology first became known because of the virtual currency Bitcoin. Between the years 2011 and 2013 the virtual currency took off in a big way, while the value of Bitcoin may have fallen and stabilised over the years, but the blockchain technology on which it worked has caught the imagination of the financial services sector.
Graham Lloyd, Director and Industry Principal of Financial Services at Pegasystems, said, “For many, the jury is still out on whether or not blockchain will be a force for good or not. However, we do know there’s no longer room to be complacent about such a potentially significant source of disruption. Banks and insurers must prepare themselves for the day when they might have to manage blockchain-stored customer data – whether it is their personal information, details of their assets, or even real-time data from virtual currencies.”
The current market scenario is much divided about this technology. It was quite evident in the Marketforce study that surveyed 500 financial services and insurance industry executives across 56 countries to examine the challenges and opportunities they face in a time of rapid technological change. It highlighted the fact that although the overwhelming majority of those who had an understanding of blockchain see it as a potential game-changer across the global financial services landscape, there are still a significant number of organizations – around 35 percent – that risk being left behind as a result of their own lack of knowledge or understanding.
A recent World Economic Forum report predicts that by 2025 10 percent of GDP will be stored on blockchains or blockchain related technology. This means that not only banks and financial institutions but also other businesses need to take notice of this technology and start working on ways to adopt this. “To do this, they will need to take the time to understand blockchain and how this emerging technology could affect them moving forward. The earlier this technology is understood at the highest levels of the business, the sooner organizations will be able to develop strategies to mitigate risk and harness the power of digital transformation,” explained Lloyd.
Why it will become important is simply because blockchain will remove the need of the middleman in the world of online financial transactions. Today we are quite open to using the online platform that is the Internet to share information and the platform is quite decentralised. However when we use this platform for financial transactions, we cannot be so open or work in that decentralised manner. We need our banks, payment gateways, payment partners etc to make any online payment. But with blockchain technology this structure can be disrupted. The technology itself can be used to record the transactions, establish identity, and establish various financial contracts that is done currently by the financial services providers. Blockchain technology will enable peer-to-peer transactions with the financial services players. This can mean a major industry disruption, and even bring in better efficiencies.
According to the Marketforce study, 53 percent of respondents said the technology would have a significantly disruptive impact in clearing and settlement markets, while 36 percent also expect to see significant disruption from blockchain on the checking accounts market. Meanwhile, 45 percent of respondents agreed the combination of blockchain wallets and Peer-to-Peer lending could even herald the “end of banking as we know it.”
“The smart players are those who already have teams dedicated to exploring this new technology,” added Pegasystems’ Lloyd. In fact, some banks are already taking notice of this technology. According to a recent Reuter’s report, the British bank Santander has started using blockchain technology to record its international payments. It is the first bank in Britain to do so. The bank said that in its pilot program about 6,000 staff in Britain would be eligible to begin using the technology internally. The program aims to make the transfer of money faster, more accurate and more transparent. According to Ed Metzger, head of innovation, technology and operations at Santander UK, the bank may even start rolling out the service to customers by next year.
In fact, banks like Citi, BNP Paribas and Goldman Sachs are already working on adopting this technology in a big way. It is expected that blockchain will allow the banks to settle the estimated annual $26 trillion of international transactions almost instantaneously. The benefits to customers are expected to be considerable as they get the certainty of timing and the certainty of value of the payment when it arrives.