Trust 2.O Series : Blockchain in Finance

As mentioned in yesterday’s post, here is the first article of the Trust 2.0 series — a string of articles on Blockchain’s application in individual sectors. The first sector we explore is the world of Finance, which has been one of the earliest adopters of the blockchain technology.

The finance industry giants have been actively investing (please refer to the below image) in blockchain start-ups over the last 2 years, for example — Goldman Sachs has invested US$50 million in Circle Inc; Visa, Citi, Nasdaq, Capital One, Fiserv and French telecom Orange invested $30 million in Chain.com; Standard Chartered, Siam Commercial Bank have invested $55 million in Ripple. We also see several sponsored start-up accelerators and innovation hubs being launched e.g. Barclays Accelerator, UBS Blockchain innovation labs in Mumbai, London, Singapore and Zurich.

Lets explore how blockchain aims to transform the following sub-sectors -

1. Banking — According at reports, blockchain technology could reduce banks’ infrastructure costs attributable to cross-border payments, securities trading and regulatory compliance by between $15-$20 billion per annum by 2022. Also, the technology could reduce transaction fees, transaction settlement period, FX risks, down times or payment fault, need for duplication of documentation and it could also facilitate audit trails. In an encouraging sequence of events last week saw Axis Bank & Kotak Mahindra successfully conduct their first pilot transactions, following close on the heels of ICICI bank, for cross-border remittances and trade settlements using Blockchains. According to their pilot, the time for a cross-border remittance was reduced from 2 days to a few minutes. All the 3 banks believe that ‘Blockchain is the way ahead, but they still have to figure out the practical use of the technology at scale’.
2. Insurance — While the insurance industry (in terms of technology adoption) lags behind banking, it is nevertheless uniquely positioned to benefit from blockchain technology. Blockchain can address the competitive challenges many incumbents face, including poor customer engagement, limited growth in mature markets, and the trends of digitisation. The most promising insurance-related use cases are : a) Enabling growth — by speeding up and simplifying customer onboarding/KYC process without compromising the personal data of the customer; b) Increasing effectiveness — by improving customer engagement by providing a greater degree of transparency, perceived fairness of tariffs and claims handling through smart contracts. For example, in case of a flight insurance, these smart contracts initiate payouts for insured flight tickets when cancellations or delays are reported from verified flight data sources ; c) Reducing cost by automation — Blockchain-based smart contracts can automate the underwriting of policies and claims handling — combined with approvals/verifications from other policyholders, who serve the role of evaluators to prevent fraudulent claims.
3. Remittance — Blockchain has a fitting case for financial inclusion to provide better, faster and cheaper financial services to those who are outside or heavily burdened by their local formal financial systems. Daily wage earners in foreign countries have to pay high transaction fees (close to 8%) when they send their hard earned money (smaller ticket size transactions) back to families in India. We see a major opportunity for blockchain-based remittance startups to reduce the transaction costs of the incumbent players like Visa through collaborations or to build new remittance systems like Transferwise.
4. Regulations — The finance industry has come under a lot of regulatory scrutiny over the last decade or so and continues to be. Banks, trading firms are under constant scrutiny for any any non-compliant/fraudulent behavior. Blockchain is a more transparent, immutable alternative to traditional compliance databases owing to its decentralised and tamper-proof nature. For example, blockchain based RegTech (regulation technology) can enable a hedge fund to collate and submit its data, on time, to the indicated regulatory authority — while consuming as little man-hours and cash as possible in a tamper-proof, easily verifiable manner. RegTech (a less buzzier subset of FinTech) is a fast growing market with central banks like BoE and authorities like FCA pushing for faster adoption.

Investor conclusion : A lot of strategic interest into the blockchain based financial services startups is highly promising for the sector, as it increases the investor chances of a good exit and is a huge validation of the technology’s application in Finance. Yet, the concerns surrounding how the technology performs at scale (1000s of transactions/second) and the choppy regulatory environment in India (and elsewhere) remain key concerns. Don’t see the ‘cost of switching to blockchain’ as a huge deterrent as the costs — in terms of money, time and effort — required to switch will come down upon greater adoption, awareness and development of the platform.