There is no arguing that the emergence of blockchain technology has massively disrupted and is changing the financial services industry. Many believe that blockchain developments will revolutionize the economy and globally impact the financial services industry.
Business executives are recognizing the power of blockchain technology and over 50 percent of them believe that blockchain technology is pertinent to the success of their enterprise. A Deloitte survey of over 1,000 executives globally revealed that 43% of them have placed blockchain technology in their top-five strategic priorities.
With this knowledge, let’s look at 5 areas where financial services firms can embrace and capitalize on blockchain:
1. Money Transfer
Western Union and Money Gram, are the names we’re familiar with when it comes to international money transfer. Each year, individuals and businesses transfer hundreds of billions of funds internationally. Usually, the costs for these services are astronomical.
This small sub-sector of the financial services industry is ripe for change, blockchain technology offers a unique opportunity to solve many of the issues associated with money transfer. Paramount transfer costs and limited money distribution methods are just some issues that blockchain technology can erase.
2. Asset Management — Instant Settlements
The current financial system can take up a week to settle payments. With blockchain technology, instantaneous settlement can occur in less than a minute. This is exciting news as this could reduce the threat of counterparty risk and improve overall stability.
As transactions settle instantly, a lot of middle offices and back-office staff at financial services firms can be eliminated. This will result in a significant cost reduction. In addition, with blockchain technology, one could easily create a single source of truth and fully track asset ownership on a shared record.
3. Trade Finance — Smart Contracts
Financial services firms would benefit from smart contracts. With smart contracts, commercial agreements and transactions can be executed automatically, they also shorten the time needed to process business transactions.
Business transactions done with smart contracts are less prone to errors. Smart contracts virtually eliminate the risk of manipulation as execution is managed automatically by the network rather than an individual party. Another benefit of smart contracts is that they eliminate reliance intervention from third-party intermediaries. Financial documents including investments, insurance policies, bank accounts, credit histories, tax filings, and income statements would benefit from the use of smart contracts.
4. Compliance – The KYC Regulations
The KYC or Know Your Customer regulation enables financial institutions and banks to identify their customers. The KYC was created to minimize and possibly eliminate money laundering activities and financial crimes.
The KYC, however, is not free of challenges as it involves complex manual processes that are prone to error, accumulates greater costs, and higher customer dissatisfaction. Due to this, the KYC can be an expensive part of onboarding new clients. Financial institutions must adhere to this regulation as the penalties for non-compliance might significantly damage their reputation and profit.
Blockchain technology can simplify the KYC process by removing the third party. With blockchain technology, each customer’s identity can be made available to other financial institutions. This will eliminate the need for customers to go through the KYC process every time they do business with a financial institution and save the financial services firms and banks a lot of money.
5. Better Financial Products
The inclusion of blockchain into the crowdfunding sphere has spawned various unique types of fundraising and crowdfunding.
The improvement of money circles, also called “rotating savings and credit association” (ROSCA), is a noteworthy example. A money circle is a common fund that allows a group of people to save and borrow money together. Each member of the group can repeatedly contribute and withdraw to and from the common fund.
Money circles often involve a lot of distrust, but blockchain technology can eradicate this distrust. All parameters of the money circle are set in a smart contract that handles the transactions, thus adding trust and stability to the fund.
6. Reduced Fraud Via Self Sovereign Identity
Financial services firms and other financial institutions run on a centralized system. Blockchain, on the other hand, runs on a decentralized system, this makes it incredibly difficult for the system to be impacted by cyber-attacks. It can also potentially eliminate fraud relating to financial transactions.
This is great because as we know, financial services firms and other financial institutions have for the longest been prone to fraudulent activities as they often have many intermediaries. With blockchain technology, financial services firms can create a digital ID that enables easy and quick identification of individuals. This will result in less fraud, improvement of business operations, and a decrease in costs.
Blockchain technology is vital for the financial services industry. Many financial services firms are already innovating with this technology. The decentralized networks can eradicate and eliminate fraudulent activities and solve issues relating to protection, privacy, and dispute resolution. These obvious reasons prove that in the near future blockchain technology might dominate the financial services industry.