Our financial system is broken. Harvard Business Review describes it as “antiquated, a kludge of industrial technologies and paper-based processes dressed up in a digital wrapper,” “resistant to change and vulnerable to systems failures and attacks,” and “exclusionary, denying billions of people access to basic financial tools.” Fortunately, distributed ledger technology, or blockchain, could change all of that.
This isn’t just speculation or wishful thinking. Numerous financial services industry firms are investing in blockchain and exploring how it can improve their businesses. Through partnering with IBM, the Depository Trust & Clearing Corporation, CLS Group, and the London Stock Exchange have built blockchain platforms and frameworks to stay secure, trustworthy, and innovative. In an effort to simplify international trading opportunities, IBM partnered with additional banks – Deutsche Bank, HSBC, KBC, Natixis, Rabobank, Societe Generale and UniCredit, and more – to develop we.trade.
Blockchain finance innovation does not end there. Santander InnoVentures, a multimillion-dollar fintech investment fund, thinks blockchain technology could reduce banking costs by $15–$20 billionper year by 2022. In 2019, eleven Indian banks formed a consortium to develop a blockchain-based loan system for small businesses. Applying distributed ledger technology provides more efficiency, transparency, and security for supply-chain lending transactions.
Financial Services Industry Challenges Blockchain Can Help Solve
- Financial intermediaries are frequent targets of fraud and crime
- Reporting obligations are time consuming
- Much of trade finance is still paper based
- Private information is stored insecurely
- International payments are slow and expensive
- Settling securities transactions takes days, weeks, or even months, depending on the asset class
- Each involved party uses its own database, and each database costs money to maintain
- All participants lose money on transaction fees
- Back-end banking services are slow and seriously outdated
- Time and money are wasted cross-referencing and double-checking records for accuracy
The Ripple platform is one example of a promising, blockchain-based solution to one of the finance industry’s biggest challenges: the slow speed and high cost of sending money overseas. It allows users to make real-time global payments among 27 countries. Banks can use RippleNet to save several dollars per transaction, adding up to hundreds of thousands or millions of dollars in savings each year depending on transaction size and volume.
Besides banks, small- to medium-sized enterprises are also impacted significantly by the cost of cross-border payments. Reducing the need for intermediaries, reducing transaction errors, and getting payments to suppliers faster thanks to blockchain could help make their businesses more profitable. Cost savings and increased speed in international payments could also be game-changing for workers in developed countries who send a portion of each paycheck to relatives in less-developed countries.
How Blockchain May Disrupt the Financial Services Industry
According to this Fintech Paper, with blockchain we can:
- Use smart contracts to enable automated trade clearing
- Increase transparency and ensure that all parties have access to the same information
- Slash transaction times down to minutes, seconds, or hours instead of days or weeks
- Minimize intermediaries, thereby cutting costs and reducing risk
How It May Impact Consumers
Shifting financial services to a blockchain could:
- Save consumers up to $16 billion annually in banking and insurance fees
- Allow speedier settlement of transactions, from bank transfers to stock sales
- Make it easier, faster, and less expensive to borrow money
- Make it easier, faster, and less expensive to send money internationally
- Get dividend payments to investors faster
- Increase access to financial markets and financial services for underserved populations
How It May Impact Employment
Integrating blockchain into the financial services industry may:
- Reduce jobs for loan officers as borrowing becomes more streamlined
- Cut jobs for investment banking professionals involved in initial public offerings as initial coin offerings become a preferred way to raise funds
- Lower employment at custodian banks such as State Street, BNY Mellon, Citi, and JP Morgan that act as intermediaries in securities transactions
- Increase job opportunities for innovative thinkers and computer programmers eager to help financial institutions implement blockchain-based solutions
- Overall, reduce employment at financial services companies unwilling to adapt this new technology, if it proves successful