When we talk about the innovations in Financial services industry Blockchain Technology appears at the top of the list. Blockchain is considered as second generation of Internet that promises to bring transparency, trust, privacy and security to the global economy. According to the 2016 report by World Economic Forum(WEF) on future infrastructure of banking, 80% of banks will initiate blockchain projects by the end of 2017. Furthermore, it is estimated that blockchain investments will surpass $3 billion mark by end of this year. We can safely conclude that time is right for financial institutions to embrace and unleash blockchain potential.
What is BlockChain?
Blockchain is a distributed ledger that stores the information or transactions performed by millions of computers every day. The data in distributed ledger is stored with consensus of participating nodes and is replicated across the network. Such distributed ledgers are useful for real time and secure data sharing.
What makes blockchain unique is that transactions can’t be modified after they are committed, which make the records immutable and secure. Most people use trusted middleman such as bank to make a transaction. However, blockchain facilitates peer-to- peer secure exchange of any type of value – money, goods or property across the globe without the need of third party.
There are two types of ledgers – public and private. Public ledgers allow anyone to add or read the data without the approval of any authority. Bitcoin and Ethereum are examples of public blockchains. Private ledgers, on the other hand, is restricted to limited number of participants and need permission to join the group. Considering the data security and regulatory environment, banks and financial institutions are exploring this type of blockchain.
Impact of BlockChain on the industry?
Blockchain is revamping the financial services industry for speed and inclusion. Since data is stored in encrypted form on the shared ledger and is single source of truth, all the authorized stakeholders in the value chain can fetch the information directly from the blockchain without having dependency on each other. This can help in achieving faster processing speed and significant reduction in cost.
Using blockchain, billions of people who are excluded from the economy will be connected and will contribute to the global economy. Global remittances that take days will now be completed in a few seconds and at much lower cost. Bureaucracy and corruption will be eliminated from the financial systems as blockchain holds all the transacting parties accountable for their actions.
BlockChain Use Cases
Blockchain will soon transform banks and financial institutions the way they operate. Some of the use-cases which are being worked upon actively are:
When the customer opts for multiple bank accounts, he is required to provide his identification details to every bank. Present financial system doesn’t allow banks to share that client information with each other as the information is stored in their central repository.
Blockchain can be used by banks for know-your-customer(KYC) requirements. Once the customer registers his identity, he is not required to register with every bank provided banks are connected to the blockchain. Using single source of client identification, blockchain can help banks not only in reducing costs, but also in optimizing resources while maintaining the data security.
Traditionally, cross-border payments are facilitated by multiple trusted intermediaries such as banks and remittance centers. Such third parties usually take 3-5 business days for transfers and charge heavy fee on remittances.
With Blockchain technology, payment transactions could be simplified by eliminating the need of middlemen while reducing the processing time and the costs of remittance substantially. Moreover, Blockchain maintains an audit trail of every transaction, which means that source and destination of any illegal transaction could easily be traced. This is a significant development for the financial institutions and regulators worldwide.
One such example is Ripple, a blockchain based payment system for banks that can be used to make secure real time payments globally at a reasonable cost.
Clearing and Settlement
The post-trade settlement and clearing stages are important stages of equity trading process. After receiving the trade confirmations, trade settlement usually takes 3 days during which investors can’t take any action on the securities. Various intermediaries such as custodians, depositories, clearing houses, exchanges and brokers are involved and transaction records are stored in centralized database.
Blockchain or distributed ledger technology can automate the post trade process using smart contracts and improve efficiency of the clearing system, thereby reducing the trading cost. Furthermore, trade settlement could happen real-time and with better governance and collaboration among all the market participants.
NASDAQ has been at the forefront of the blockchain revolution and has built Linq blockchain ledger to complete and record the securities transactions at its exchange.
Currently, we rely on third parties such as our judicial system, lawyers or notary for the enforcement of the paper contracts such as property agreement, employer-employee contract, partnership contract, vendor agreement etc. Smart contracts on blockchain are transforming the way we look at the standard paper contracts.
Smart contracts are computer programmed for facilitating, verifying and executing paper- less contractual instruments between the parties. Since smart contracts are self- executing, they can eliminate the need of middlemen and can be programmed to execute under certain conditions and rules. The involved parties can access contracts anywhere and approve them faster, resulting in improved speed and efficiency of the whole contracting process
How does the future look?
The financial services industry has moved past the awareness stage and banks and financial institutions globally are investing in conducting Proof of Concept(POCs) to explore blockchain capabilities. Improved efficiencies, transparency, faster payments, security and immutability are the key benefits that organizations will reap by adopting the technology.
Considering its rising popularity, adoption rate of blockchain will continue to increase and we expect it to become mainstream technology in the next few years. Blockchain is our gateway to future of finance and will become part of critical financial infrastructure for providing better, cheaper, secure and faster financial services to the customers
Xebia, a niche agile software development and digital consulting firm, is an active member of Blockchain Special Interest Group (SIG) setup by NASSCOM for developing and collaborating on blockchain implementations. Our mission is to not only help our global clients in blockchain implementations but also assist them in navigating complex blockchain landscape while at the same time creating awareness in academia and the industry
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