Part 1 – How Blockchain Development fuels the Digital Finance Transformation
Part 1 – How Blockchain Development fuels the Digital Finance Transformation
Digital transformation encounters everyone in their daily life. Oftentimes, people don’t even realize how many things that were part of everyday life decades ago have either disappeared or are hardly recognizable today due to digitalization.
Remember when people bought CDs at a record store? Those days are long gone – instead, songs are available online through services like Spotify or Apple Music. How could we forget about handwritten letters being replaced by email as the go-to form of communication for business purposes?
Twenty (20) years from now, our current digital progress will also be considered outdated while new technologies will dominate the life of people and how business is done. For some, this idea can be incredibly intimidating, and yet for others it represents a great opportunity.
Executives across industries are looking for the occasion to achieve the benefits of digital transformation in order to improve the efficiency and effectiveness of their organizations. Particularly within Finance, there’s a broad range of initiatives and technologies that companies are starting to adopt. In this blog post series, we’ll take a look at some of the leading innovations that are being leveraged to support digital transformation projects and their use cases. We’ll also provide examples of how these technologies improve performance across various metrics.
Leading Innovations to Support Digital Transformation
The blockchain – the technology behind Bitcoin and other cryptocurrencies – has been making waves in a number of different industries, with financial services leading as one of its biggest adopters.
A blockchain is essentially a digital ledger of all cryptocurrency transactions. It is constantly growing as ‘completed’ blocks are added to it with a new set of recordings. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data.
One of Blockchain’s greatest benefits is the level of security it can provide. In a world where data breaches have become all too common, the fact that blockchain technology makes it incredibly difficult to tamper with digital information has made it a very attractive proposition for businesses.
But how can this be used within Finance?
There are a number of different ways that blockchain development is being leveraged to serve the digital finance transformation:
The use of Blockchain in Trade Finance can help streamline the process and make it more efficient. For example, by digitizing the entire process on a blockchain platform, banks reduce the time it takes to approve a trade finance deal from days or weeks to just minutes. It also reduces the costs associated with traditional methods such as Letters of Credit.
By shorting down the time it takes for international payments to clear and settle, Blockchain can also be adapted to facilitate cross-border payments which are crucial for Trade Finance. This is particularly beneficial for small businesses that often have to wait weeks to receive payment from overseas customers.
A popular example of this use case would be the Marco Polo Network, a blockchain-based platform that was launched in 2017 to streamline Trade Finance. This Dublin-based company developed a network that now includes over 30 banks and providers of financial services, having processed more than $14 billion in financing transactions.
KYC / AML
Blockchain can also be exploited to help banks comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. By storing customer data on a blockchain, banks are able to create a digital identity for each customer that can be verified and authenticated by other financial institutions. This makes it much easier for banks to share KYC information such as name, address, date of birth, etc. between themselves and reduces the costs associated with traditional KYC processes.
Not only does this make it easier for banks to verify the identities of their customers, but it also helps to prevent fraud and money laundering as each digital identity is stored on the blockchain and is therefore tamper-proof.
In 2018, a consortium of 15 European banks, led by HSBC, announced the launch of a blockchain-based platform to streamline the KYC process. Based on IBM Blockchain Platform, the system is intended to help banks share customer data more securely and efficiently. According to HSBC, the platform has the potential to save up to $20 million per year in compliance costs.
Cambridge Blockchain provides another case of a company meeting KYC/AML compliance through this modern technology. The Massachusetts-based startup provides a digital identity management platform that uses Blockchain innovation to help financial institutions meet KYC regulations.
Blockchain may also be applied to streamline the process of issuing and trading digital assets. For instance, by using blockchain to supply digital tokens that represent shares in a company, startups can raise capital more quickly and easily than traditional methods such as venture capital or initial public offerings (IPOs).
This use case is particularly relevant for FinTech companies as it provides them with a new way to raise capital that is not subject to the same regulations as traditional financial markets.
Raising $50 million through a digital token sale the US-based startup Blockstack was enabled to fund the development of its decentralized computing platform back in 2018. The sale was conducted on the Ethereum blockchain and was open to both accredited and non-accredited investors.
Another example is a proof-of-concept our team created to develop an NFT marketplace. A leading blockchain provider asked us to construct a solution that would allow him to grant ownership of some of the most iconic moments in collegiate sports history using NFT. On a highly secure platform, our technology enables the public to purchase, sell, and trade NIL digital assets.
Its immutable nature makes Blockchain also well-suited for the insurance industry, insurers can create digital contracts with data stored on a blockchain, also known as Smart Contracts that are highly secured and cannot be modified or deleted, making it easier for insurance companies to verify the terms of a contract while nearly eliminating the likelihood of fraud.
AXA was one of the first companies to adopt this technology: Fizzy, a flight delay insurance solution that uses Ethereum smart contracts to automatically process claims and compensate consumers if their aircraft is delayed for more than two hours, was introduced in 2017. Despite this program being discontinued, the company claimed that it had helped them better grasp the technology of Smart Contracts and Blockchain, giving reason to be very optimistic about which innovative products will be produced using Blockchain and Smart Contracts in the future.
Another use case adapted by more and more insurance companies is Digital ID Management. As the digital world is continuously expanding, the number of people working remotely or online is constantly increasing which results in more opportunities for fraudsters. In order to prevent this, some insurers have started using Blockchain to store digital IDs that can verify the identity of customers when they are making an insurance claim.
The pension industry increasingly utilizes Blockchain to improve efficiency and transparency. For example, by storing data on a blockchain, Pension providers may create a digital record of each member’s pension pot that is tamper-proof, and can be accessed by both the pension provider and the member.
This scenario is particularly relevant for transparency as it enables members to see exactly how their pension is being invested and also reduces the administrative burden on pension providers.
Real-life precedence of this is provided by the UK-based pension provider Royal London. The organization announced plans to launch a blockchain platform to allow members to track their pensions in real-time. The platform will also enable members to switch between different investment options more easily.
… there are many more technologies transforming the Finance industry
In the first part of our series, we focused mostly on Blockchain and how valuable it can be for Financial service organizations. And although this innovation will massively change the working methods, processes, and requirements of companies within the industry, it is not the only one to do so. In continuing with this series, we will discuss the characteristics of AI (Artificial Intelligence), RPA (Robotic Process Automation), as well as Cloud Architecture, and their use cases in the world of Banking, Insurance, etc. in more detail. Stay tuned for the second part of our Digital Finance Transformation blog post series.