Blockchain Can Help Banks Reduce Risk, Save Time and Money in Core Business Areas

Financial services organizations are beginning to explore blockchain and its likely applications in their setup. While the scope is still at a very nascent stage, enthusiasm around the possibilities is steadily building up.

According to a global study conducted by IBM Institute for Business Value, 15% of banks and 14% of financial market institutions intend to implement full-scale, commercial blockchain solutions in 2017. By 2020, almost 65% of banks are expected to have blockchain solution in production, indicative of mainstream adoption.

In India, ICICI Bank conducted the country’s first blockchain-based trade payment in October 2016 as it executed transactions in international trade finance and remittance using the technology in partnership with Emirates NBD. A few months later in January 2017, Yes Bank implemented a multi-nodal blockchain transaction to fully digitize vendor financing for Bajaj Electricals. Kotak Mahindra Bank and Axis Bank are also reportedly conducting pilot transactions using blockchain.

Besides the individual pilots there is also a concerted effort underway. Economic Times recently reported that about 15 of the country’s largest banks are building a consortium to test an interbank blockchain platform, which will integrate with the banks’ existing technology systems. The platform is expected to get into production in the next six months. Meanwhile, IDRBT, the research arm of RBI, successfully concluded its first trade application test of blockchain technology.

What’s really prompting these banks to invest resources into exploring blockchain is the potential business impact. As per the IBM study, blockchain benefits are compelling and can be gained in every aspect of banking. But, the three business areas where the highest benefits can be accrued in terms of reducing risk and saving time and costs are reference data, retail payments and consumer lending.

Here is an overview from the report on how the benefits pan across these three business areas:

Reference Data:

  • Reference data automatically captured in real time, validated and shared as permitted across business divisions and institutions.
  • Data integrity is assured because of an instantaneously verifiable audit trail.
  • Banks gain a superior platform for up- to-the-minute analytics.
  • Costly and time-consuming reconciliations are all but eliminated.
Payments & Lending:
  • Transactions on blockchains eliminate the time and labor required for reconciliations.
  • Minimize errors and significantly reduce the time needed for settlement, which in turn lowers risk and capital requirements.
Consumer Lending:
  • Access to new markets for consumer lenders.
  • On blockchains, as new kinds of verifiable transaction data are captured, enhanced identity and KYC data could open up emerging markets to banks.

For the banks making an early move these potential blockchain opportunities are up for grabs in the next few years. However, the real disruption awaits the emergence of mainstream commercial applications of blockchain in the banking sector.

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