Blockchain Can Bring Biggest and Innovative Transformation In Financial World
The financial services industry is flooded with discussions about blockchain and its use cases. It will not only disrupt the industry but will lead to the fall of many businesses and the rise of new ones with new business models.
As trillions of dollars move within the global financial system each day, the system is still largely dependent on paper which leads to increased cost, delays and fraud. Blockchain can help solve this problem.
According to a report by the World Economic Forum, approximately 10% of the world’s GDP will be stored on the blockchain.
Having said that, here are a few use cases of blockchain in the finance sector:
Cross-Border Payments and Remittances
Back in 2015, the cross-border payment flows added up to $150 trillion and has been growing ever since. Moreover, the payments industry earned over $200 billion from the services it provided to the payer and payees. In most cases, the fee in every transaction was estimated to be 10% of the total value.
The need to obtain the status of the transaction including factors such as timing and accuracy was a huge pain for customers due to the involvement of multiple banks in the system.
Talking about remittances, the opacity and high fee takes up more than 50 percent of the income of the migrants’ families.
SWIFT, which is the most widely used payment interface by financial institutions, is highly inefficient due to the presence of middlemen which include correspondent and respondent banks.
This is where DLT or Blockchain comes in. There are various factors in the traditional system which add up to the transaction costs. These include hedging done by banks to minimize foreign-exchange risks, addressing liquidity needs and end number of agents all of whom take a commission. All these factors are eliminated as blockchain can help people located anywhere in the world to transact and interact with each other without the presence of an intermediary.
Moreover, there is no central organization or a clearinghouse to approve transactions. Instead, all of this is done by the participants in the network, better known as nodes, through a consensus protocol.
It also reduces the costs and delays associated with the use of multiple currencies by introducing digital assets. Thus banks do not need to hedge against different currencies and only take care of the token, i.e. the digital asset. This improves liquidity and also enables micropayments which can almost be settled in real-time.
Ripple has formed a consortium of banks which includes Bank of America, Standard Chartered, and many other big banks, aiming to solve this problem with the use of blockchain. Stellar, another actor leveraging this technology has partnered with IBM to develop a solution for the same issue.
Back in 2015, Nasdaq announced the use of Nasdaq Linq blockchain technology to successfully record private securities and transactions. Japan’s Financial Services Agency (FSA) has approved Japan Exchange Group to use blockchain as the core trading infrastructure of the Tokyo Stock Exchange.
Securities and Exchange Board of India (SEBI), recently appointed an advisory committee known as Committee on FInancial and Regulatory Technologies (CFRT) to research on the blockchain platform and other similar technologies to find out its application in the post-trade settlement, fund-raising, and asset management.
Why are all these organizations and governments putting so much time and effort to exploit blockchain when it comes to stock market and trading?
Because blockchain has a huge potential to establish interoperability and trust by reducing opacity in the market systems.
Currently, due to the presence of intermediaries regulatory processes and operational clearances, the traders, brokers as well as other players in the market have to suffer due to cumbersome processes. These processes are much easier and transparent with the advent of blockchain due to its inherent features – decentralization and automation.
The need for a third party is also eliminated as everything will run on smart contracts. Smart contracts are self-executing contracts which can provide for faster settlement while drastically reducing risk.
In comparison to a traditional exchange, assets listed on the blockchain can provide some major benefits to investors and traders. It takes relatively less time to get listed, the assets can be traded faster and the data can be stored in a secure way.
Additional benefits include the ability to make global investments, invest easily into early-stage companies (even if you are not an accredited investor) and no restriction on day traders.
One of the most important features of blockchain which facilitate regulatory compliance is immutability – once the data is recorded on to the blockchain it is near impossible to tamper the data or change it anyway.
Sweden’s national land survey is also piloting an approach to digitize real estate properties to verify ownership. Steps taken by banks to verify the identity of new clients using tools like KYC and AML usually take weeks if not months. These processes can again be solved by the immutable property of blockchain.
If information about the client is already stored on the blockchain, the process becomes much easier as the banks are assured about the accuracy of the data. The fact that all the nodes in the network regularly monitor the changes made to this information acts as an additional layer of security for banks.
Presence of such information on the blockchain removes the need for people to repeatedly file the same information with different organizations, making the process simpler.
Loyalty and Rewards
Companies have long been advocates of loyalty programs. Almost all the loyalty programs on the market are usually of the same format. The company decides a value of the currency in terms of points and as the user makes more purchases, he accumulates more points.
These points are then spent to acquire real-money benefit. Though the process sounds very similar, it is not generating enough ROI for businesses. Many businesses in the hospitality and retail sector depend upon repeat purchases of customers and these unredeemed reward points put excessive pressure on their balance sheets.
Most consumers have to be reminded to redeem points which involve things like keeping separate cards and apps, all of which frustrates the consumer more than anything else.
By putting these loyalty programs on to the blockchain, companies can easily add more programs without increasing complexity and consumers can easily access them without the need for additional requirements.
Making loyalty points more accessible, makes a merchant more attractive to the end user and can lift the additional burden on the merchants’ balance sheets due to those unredeemed rewards.
IBM has partnered with Loyyal, a universal loyalty and rewards platform built with smart contract technology. According to its website, “It introduces interoperability to the currently fragmented industry, multi-branded coalitions, superior program liability management and dynamic issuance/redemption options customized for each unique relationship.”