Before we dive into how blockchain is transforming the financial services sector, it is critically important to understand what blockchain is. A simple definition of blockchain is that it is a decentralized and distributed digital ledger, used to record transactions across a series of many computers. It is also used to ensure that records cannot be altered without also altering subsequent blocks within the network.
The blockchain is driving significant transformation among businesses across the globe in multiple sectors, but especially in the financial services sector. The technology of cryptography is used to help prevent data breach and hacks. What began as a security tool for cryptocurrencies could easily become a form of protection for other things such as intellectual property and digital music.
So, why is there such buzz around blockchain? Well, blockchain is more than just a buzz word. There are tremendous benefits to the blockchain, such as decentralization, simplification of processes, transparency, reliability, and financial saving. The ultimate objective for blockchain is to create an exceptionally satisfying customer experience.
Here are five ways blockchain is transforming the financial services industry:
- Management of Assets
The traditional process for asset management is tedious and time-consuming, particularly when it involves matching and reconciling transactions and documents. The process gets even more complicated when there is a transaction that involves multiple countries. Blockchain will help to simplify this process by automating the trade lifecycle so all parties involved in a transaction have access to the same data at any given point.
A complex process in the insurance sector is the processing of claims. The multiple steps cause many customers to make frequent trips or multiple phone calls to the insurance office. By using blockchain, smart contracts can be drawn up for policies which provide complete transparency to customers and insurance companies. It also will help to track claims and subsequently will lead to automatic payouts.
- Supply Chain Management
Existing supply chain management is a slow process that involves multiple parties working in a distributed manner. Digitizing the entire supply chain process through blockchain will simplify vendor on-boarding, execution of contracts through smart contracts, and issuing Letters of Credits, all through a single platform that is accessible by all parties involved.
A critical element for many financial institutions is adherence to various regulations and compliance rules. One such example is to ensure customers are complying with KYC (Know Your Customer) norms with banks, for which banks must collect necessary information. Blockchain will generate a single source ID that will ensure the collection of all details. This also guarantees a smooth document exchange between banks and other parties.
Even today, when a payment is made through bank transfer, it takes at least two to three days for the money to reach the other party’s account. Further, the money transfer process is slow and complex that it sometimes results in malpractices like money laundering. The entire process needs a complete overhaul in which turnaround times and response times can be reduced, thereby improving the customer experience. Blockchain has already started making inroads in this area such as in the case of Banco Satander, a Spanish banking group that has already implemented blockchain. They were the first to implement this technology and have already released a new payment app that allows customers to make international payments around the clock.
The blockchain is not just a concept. It is a well-structured initiative that is already in action, specifically in the financial services sector. While many people still don’t understand the full scope of the blockchain, the anticipation exists for huge advancements in this area for both companies and individuals alike.