Often, Blockchain Technology is loosely compared with giant companies such as Airbnb and Uber for revolutionizing the way of transaction. The way Airbnb transformed the travel industry and Uber transformed the private transportation system globally, blockchain is deemed to take the finance industry by storm.
Stuart Haber and W. Scott Stornetta invented the first work on a chain of crypto logically linked blocks. Satoshi Nakamoto, the unknown individual (or a group) is credited for the first-ever application of blockchain, known as Bitcoin. Bitcoin is a cryptocurrency used for transactions, and it has a broad customer base. After it was invented, it was promptly accepted by a major population as a digital currency. Even if cryptocurrency has some inherent drawbacks, there are other applications of the blockchain technology which cannot be overlooked. Some of the significant benefits of blockchain include decentralization, simplification, reliability, transparency, cost saving, reduced room for error, traceability, faster transactions and improved data quality. A few ways in which blockchain is revolutionizing the Finance industry are discussed below.
Benefits of Blockchain Facility
Reduction in Fraud
Reports suggest that nearly 45% of financial institutions, like banks and stock exchanges, suffer from economic corruption annually. A majority of these institutions are mediators who operate on a centralized database. A centralized database is highly susceptible to cyber-attacks because a single bug can help the hacker in getting full access to the entire database. A survey by KPMG suggests that about 69% of the companies in India believed that ransomware such as WannaCry poses a significant threat to them. Now, you might wonder how can blockchain technology solve this problem? The answer is that a blockchain system operates through a decentralized database, which makes it nearly invincible to such attacks. Simply put, blockchain is a digitally shared ledger which approves the recording of data and electronic verification of that data over a vast network of systems, with no need of a central ledger at all! The decentralized database ensures low vulnerability and high transparency of data.
Claims Processing in the Insurance Sector
It is common knowledge that even with the most sophisticated technology, the claims procedure is usually lengthy and the contracts can be easily forged or destroyed. Every action in financial institutions is usually bonded with a contract which explicitly defines all the rights and duties of the parties involved. Blockchain smart contract is a computer protocol designed to digitally facilitate, verify, or enforce the negotiation or performance of a contract. As compared to the traditional contracts, blockchain smart contracts are considered to be a better alternative since they lower the cost by eliminating the cost of employing a mediator and are relatively less time-consuming. Through the blockchain tech, the claim amount will be issued quickly to the claimant, thereby eliminating the key issues in the insurance industry such as insurance fraud, contract complexity, human error, inefficient data flow in re-insurance, and slow processing of insurance claims.
Additionally, blockchain tech will improve the traceability of the claims for the insurance company.
Compliance — Know Your Customer
KYC is a vital part of compliance requirements for all financial institutions. In India, KYC was introduced by the RBI in December 2005. However, the policy was adopted by all financial institutions quite later. Even if KYC is an important procedure to ensure that the company is aware of the financial dealings and identity of their customers, KYC is known to be an extremely slow and expensive procedure if it operates under a centralized model. Recent reports indicate that the annual expenditure in acquiring and maintaining the financial records of their customers ranges from 60-500 million dollars. Blockchain can substantially reduce the workload and monetary burden on the institutions by providing a digital ID to all its customers, which is accessible at all times to everyone in the network. It also allows fast and low-cost sharing of documents amongst the banks and other financial agencies. The primary benefit of using the blockchain technology is that it will reduce the administrative costs borne by the companies for having compliance departments. It also supports automated account opening while maintaining a high level of data privacy.
Simplify Trading Platforms
The global trading sector is huge – it migrates tonnes of money on a daily basis. However, most of these trading institutions are costly, slow and prone to human error. Blockchain technology improves the speed and reduces friction during transfer considerably. The Australian Securities Exchange (ASE) and NASDAQ are now depending on Blockchain solutions for enhancing efficiency and reducing operational costs.
Payments will be Easier
Blockchain use could transform the payment process remarkably. Presently, the payment processing system has a large number of intermediaries. Blockchain drops all the mediators in the system; the absence of third-party saves both time and money and maintains a high level of accuracy and transparency.
The conservative trade processes within asset management can be cumbersome and involve high risk while matching and reconciling. Asset management becomes more complex with cross-border transactions and non-standard financial instruments such as loans. In the process, all the parties involved in the life cycle of trade (intermediaries such as broker-dealers, clearing and settlement departments) must keep a copy of their transaction record. This procedure has inherent inefficiencies, which can be eliminated through blockchain technology. The trading procedure can also be streamlined by using this technology. If the companies adopt blockchain to automate the trading system, then each party will have access to all the data, which will generate a faster processing cycle, thereby saving cost on the infrastructure and traditional methods of effective data management.
To encapsulate these use-cases for blockchain technology, we can say that,
The world has always moved toward simpler solutions. While it is treading into a hyper-digitized environment, blockchain technology can facilitate a less complicated, more efficient and more transparent way of dealing with assets, property and money.